Mutualization of risk,

Definition of Mutualization of risk:

1. Mutualization of risk commonly refers to spreading insurance loss risk over hundreds or thousands of individual policyholders, but the term can be broadly applied in many other business situations.

2. A system where a group of companies and investors share the cost involved in investment risk in order to reduce the percentage risk of ruin to any one organization. This should not be confused with risk participation, as it involves different components.

3. Mutualization of risk is dividing up exposure to potential financial losses among several insurance policyholders, investors, businesses, organizations or people. Mutualizing risk lowers the overall potential for significant financial loss to any one entity. However, it also lowers the potential pay-off to the single entity since the rewards must be shared among other parties taking on some of the risk.