How is self-insurance characterized in terms of risk management?

Self-insurance is characterized by the retention of risks and the direct payment of losses, which aligns with the principle of risk management where an entity assumes responsibility for its own risks rather than transferring them to an external insurer. In this approach, an organization sets aside funds or reserves to cover potential losses instead of purchasing an insurance policy. This allows greater control over financial resources and potentially reduces costs associated with traditional insurance premiums.

Furthermore, self-insurance is a strategic choice for organizations that may feel confident in their ability to manage risks internally or want to avoid the costs associated with premiums and administrative fees of transferring risk to an insurer. This method is especially prevalent among larger companies that can afford to bear the upfront costs associated with potential losses.

Understanding this aspect of self-insurance is crucial for those involved in risk management or insurance practices, as it emphasizes the importance of risk assessment and financial preparedness in effectively managing organizational risks.