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🤝 '''Risk sharing''' is an arrangement in which two or more parties agree to distribute the financial consequences of potential [[Definition:Loss | losses]] among themselves rather than leaving the entire burden with a single entity. In insurance, risk sharing is woven into the fabric of the market at every level: [[Definition:Coinsurance | coinsurance]] panels divide a large [[Definition:Risk | risk]] among multiple [[Definition:Insurance carrier | carriers]], [[Definition:Reinsurance | reinsurance]] treaties spread volatility between [[Definition:Cedent | cedents]] and reinsurers, and [[Definition:Lloyd's syndicate | Lloyd's syndicates]] operate on a subscription model in which each syndicate takes a percentage [[Definition:Line | line]] on a slip. Even the basic relationship between insurer and [[Definition:Insured | insured]] involves risk sharing whenever a [[Definition:Deductible | deductible]], [[Definition:Coinsurance clause | coinsurance clause]], or [[Definition:Self-insured retention (SIR) | self-insured retention]] keeps a portion of the exposure with the policyholder.

⚙️ The mechanics depend on the structure. In a [[Definition:Quota share reinsurance | quota share]] treaty, the cedent and [[Definition:Reinsurer | reinsurer]] share [[Definition:Premium | premiums]] and losses in a fixed proportion — say, 70/30 — across an entire [[Definition:Book of business | book of business]]. In a subscription market like [[Definition:Lloyd's of London | Lloyd's]], a [[Definition:Insurance broker | broker]] builds a panel by securing signed lines from multiple underwriters, each committing to a stated percentage. [[Definition:Risk retention group (RRG) | Risk retention groups]] and [[Definition:Insurance pool | insurance pools]] formalize risk sharing among members facing similar exposures, such as medical malpractice or nuclear liability. More recently, [[Definition:Peer-to-peer insurance | peer-to-peer insurance]] models have introduced consumer-facing risk sharing, and [[Definition:Insurance-linked securities (ILS) | ILS]] structures share catastrophe risk with [[Definition:Capital markets | capital-markets]] investors.

🛡️ The rationale is straightforward: no single entity has unlimited capacity or appetite, and diversifying the holders of risk makes the system more resilient. Risk sharing reduces the probability that any one participant suffers a crippling loss, stabilizes earnings, and enables the market to cover exposures that would otherwise be uninsurable. For regulators, well-designed risk-sharing structures also mitigate [[Definition:Systemic risk | systemic risk]] — spreading potential failures rather than concentrating them. The challenge lies in aligning incentives: when risk is shared, each party must have enough "skin in the game" to maintain disciplined [[Definition:Underwriting | underwriting]] and [[Definition:Claims management | claims handling]]. Poorly structured risk sharing that creates [[Definition:Moral hazard | moral hazard]] can do more harm than good.

'''Related concepts'''
{{Div col|colwidth=20em}}
* [[Definition:Coinsurance]]
* [[Definition:Quota share reinsurance]]
* [[Definition:Reinsurance]]
* [[Definition:Risk transfer]]
* [[Definition:Insurance pool]]
* [[Definition:Moral hazard]]
{{Div col end}}

Definition:Risk sharing - Revision history

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