Risk sharing can be defined as “sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk.
The term of risk transfer is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a “transfer of risk.” Transfer techniques are used to transfer, or move, the risk from one party to another. The most common examples of transfer strategies are the use of waiver forms, hold harmless agreements, insurance policies, and contracting with others for services such as prisoner transports or lodging. Ideally, to receive maximum benefit from transfer arrangements, the organization strives to transfer both legal and financial responsibilities for an incurred loss, although this is not always possible. However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses “transferred meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage.
Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.