Risk Transfer Versus Risk Sharing in Options, Insurance, and Lending

Summary

The document distinguishes risk transfer from risk sharing using financial and business examples. Risk transfer is described as shifting a specific exposure to another party in exchange for a price. A call option is offered as a way for a stock holder to pass some downside exposure to the option writer, while insurance shifts an insured loss exposure to an insurer.

Risk sharing instead divides a common exposure among multiple participants, with both gains and potential losses distributed among them. The examples include partners in a business and banks jointly supplying a large corporate loan. These cases illustrate the conceptual difference between paying another party to assume an exposure and participating alongside others in an exposure. The explanation is introductory and does not analyze contract terms, payoff details, or how particular options and insurance policies allocate all risks in practice.

Key ideas

• Risk transfer shifts an exposure to another party, typically for a price.
• An option or insurance policy can transfer specified risks to a counterparty or insurer.
• Risk sharing divides a common exposure among multiple participants.
• Business partnerships and syndicated lending illustrate sharing both possible gains and losses.

Tags

# Difference between Risk Transfer and Risk Sharing


# Difference between Risk Transfer and Risk Sharing












There seems to be a thin line between risk transfer and risk sharing. Can someone explain with example how can this be differentiated?

## Answer by Neeraj (score 3)

https://quant.stackexchange.com/a/27999

Risk Transfer simply involves transferring "only" risk to another person for a price. For example, the downside risk of stock can be transferred by purchasing a call option. In this way, the buyer of call option transfers its risk to the writer of the call option. Another example is insurance, wherein, the buyer of insurance transfers its risk to an insurance company.

Risk Sharing is an entirely different concept. It involves sharing (dividing) common risk among two or more persons. I think the "partnership" form of business organization is the most common (and oldest) practice of risk sharing. Banks also use this practice to lend a big amount to individual large size corporation, each bank supplying a portion of the loaned funds. In these cases "both" the profits, as well as potential losses, are shared between the parties.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.