Determination of distribution of risk’
Risk-sharing to split potential financial losses among several investors, businesses, organizations or people. Mutualizing risk lowers the overall potential for significant financial loss for any one organization. However, it also reduces the potential pay-off in one unit, because the reward must be distributed among other parties taking part of the risk.
Breaking down the ‘risk-sharing’
Risk-sharing can be applied in many business situations.
- Geological survey energy companies suggests that there are large deposits of natural gas in a certain place. He wants a drill, but the financial risk is too high. Therefore, the company is looking for a JV partner to take on some risk in exchange for half the potential profits needs their intelligence was successful.
- Corporate Bank has won a leading role for the implementation of a term loan to the company. Loan Bank is too big to post on his own books, so that it forms a syndicate through which few other banks are willing to extend some amount of credit for the customer. Now every member of the syndicate has some risks in term loan.
- Insurance property and liability (P & C) insurance company is interested in underwriting a policy that will cover a significant loss of property from natural disasters. He approaches a reinsurance company to share some risks. The reinsurer agrees to the transfer of risk in exchange for premium payments from the insured.
- Venture investor is considering financing a start-up. However, due to high failure rates of start-up companies do not want to invest on his own. He tries to persuade other venture capitalists to make a deal to spread the risk.
- Investment Bank looking to purchase is not a financial institution. He covets the assets of the target, but does not like the extent of its obligations. Investment Bank seeks risk-sharing with the Federal government for the obligations. The government is committed to support potential losses for the Bank.