ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -There is a principle known as pooling. This consists of collecting numerous individual contributions (known as premiums) from various persons. These persons have similar assets which are exposed to similar risks. This pool of funds is used to compensate the few who might suffer the losses as caused by a peril.

Detailed explanation-2: -The two most common risk sharing examples are insurance policies and indemnification clauses in contracts. Insurance policies are the most common risk sharing strategy. A company or individual will purchase an insurance policy from the insurance company that ensures coverage of unexpected loss.

Detailed explanation-3: -Indemnification agreements, sometimes referred to as hold-harmless agreements, are used to transfer risk of loss, damage or liability from one party to another.

Detailed explanation-4: -Risk sharing, also known as “risk distribution, ” means that the premiums and losses of each member of a group of policyholders are allocated within the group based on a predetermined formula.

Detailed explanation-5: -To compensate the third party for bearing the risk, the individual or entity will generally provide the third party with periodic payments. The most common example of risk transfer is insurance. When an individual or entity purchases insurance, they are insuring against financial risks.