What does Mutualization of Risk mean?
Mutual sharing of costs associated with loss and risk among within a group of investors or businesses. It reduces the quantum of financial loss to any one entity.
Futures Knowledge Explains Mutualization of Risk
Though it looks similar to insurance, it used within a group of investors or companies. This is based on the principles of joint venture. Mutualization of Risk is common tool used in oil exploration, which is very capital intensive and chances of discovery is uncertain and low. Two or more companies form a joint venture and agree to mutually share costs and risk of the exploration business. The mutualization spreads risk among companies and so lowers the impact of any significant financial loss to any one entity. It divides the costs associated with risks and financial losses.