What is the term for a method of dealing with risk for a group of individuals or businesses with the same exposure to loss, where losses are shared within the group?

What is the term for a method of dealing with risk for a group of individuals or businesses with the same exposure to loss, where losses are shared within the group?

• A. Diversification
• B. Risk sharing
• C. Hedging
• D. Adverse selection

Answer: (B)

The idea being tested is sharing risk by pooling losses among a group that faces the same exposure. When many people contribute to a common fund, losses are paid out from that pool, so no single member bears the full cost. This approach—risk sharing—lets the group spread the risk and stabilize costs for everyone. Diversification spreads risk by mixing different investments, hedging uses tools to offset risk, and adverse selection refers to the problem of high-risk individuals being more likely to participate. None of these describe the act of a group collectively sharing losses from the same exposure the way risk sharing does.

The idea being tested is sharing risk by pooling losses among a group that faces the same exposure. When many people contribute to a common fund, losses are paid out from that pool, so no single member bears the full cost. This approach—risk sharing—lets the group spread the risk and stabilize costs for everyone.

Diversification spreads risk by mixing different investments, hedging uses tools to offset risk, and adverse selection refers to the problem of high-risk individuals being more likely to participate. None of these describe the act of a group collectively sharing losses from the same exposure the way risk sharing does.