How is "sharing" defined in risk management?

In risk management, "sharing" is defined as the process of grouping individuals or entities that have similar loss exposures to collectively share the risks associated with those exposures. This approach allows for spreading the potential losses among the group, thereby reducing the financial burden on any single member. Such a method is commonly implemented in various forms, including risk pools and cooperative insurance arrangements, where members agree to support one another financially when losses occur. The essence of sharing is to create a collective safety net, fostering a sense of mutual support and reducing overall vulnerability.

The other options highlight different risk management strategies but do not accurately define sharing. Transferring risk to an insurance company relates more to risk transfer, while completely avoiding risk indicates a more extreme risk aversion tactic. Reducing potential losses through contracts involves strategies such as deductibles or liability limitations, which serve to mitigate risk rather than share it. Thus, the concept of risk sharing is distinct and essential for collaborative approaches in risk management strategies.