Read more about Business
In discussing the rudiments or basics of risk-sharing in business, let’s define what risk is. Risk in business refers to the possibility of a business going south, it usually borders on the negative events; the loss. Risk sharing in business is a risk management strategy in which the mode of operation is to share the risk of a business to a third party to reduce the company’s uncertainties and increase its stability in case of a significant loss. It definitely wouldn’t play nice on a company that holds all the risk of the business. Supposing a business event doesn’t go as planned and losses are incurred, only that company would be charged with the responsibility of bearing the loss and balancing the records but when risk is shared there’s to a large extent, stability in the business owing to the outsourcing of the risks. There would hardly be any weight of loss that would plunge the company into bankruptcy. Sometimes, the third-party covers for all the losses the individual or business it shares the risk with acquired or some depending on the drafted policy surrounding the risk agreement. The risk provider is usually paid for the risk they manage. The more the risk, the more the payment. One of the strategies for risk sharing is diversification of investment. It follows the popular saying “do not put all your eggs in one basket.” Business owners share risks by investing their income little by little in different potential investments so that when one investment experiences a significant loss, it would have a minimal impact on the investor’s capital in other businesses.
Sign up to the Connect Nigeria daily newsletter
Risk sharing in government
A good government will diversify its income through different revenue-generating sources to reduce the possibility of bankruptcy should there be any economic mishap in the country, state, or constituency. But when a government holds the reverse pedal and leverage on just one investment sector, financial crises would be the answer when an unpredictable loss hits that sector.Risk sharing in insurance companies
A typical example of a risk-sharing third party is an insurance company. An individual or a business shares risks with an insurance company by paying a certain amount to the company as agreed periodically. In an event of a significant loss including even damages to the company’s physical structure, the company’s loss is covered by the insurance company to the extent of the agreement between both companies. Risk-sharing gives businesses stability. It’s also a source of income to risk-sharing providers as negative financial events do not happen often in business. Risk-sharing gives the business owners confidence to take greater business risks and if they’re successful, it’s profit all year round. Featured Image Source: 2XEGot a suggestion? Contact us: editor@connectnigeria.com