What is "self-insurance" in the context of risk management?

Self-insurance in the context of risk management refers to a strategy where an organization chooses to retain its own risks instead of transferring them to an insurance company. This means that instead of paying premiums to an insurer, the company sets aside funds to cover potential losses that arise from risks it faces. This approach can be beneficial for businesses, particularly when they have a solid understanding of their risk profiles and can predict potential losses accurately.

By opting for self-insurance, organizations can potentially reduce costs associated with buying insurance premiums and maintain greater control over how claims are managed and paid. However, it requires a well-defined risk management strategy and sufficient financial resources to cover the losses when they occur. The decision to implement self-insurance usually involves a careful analysis of the company’s exposure to risks, its financial capabilities, and the potential for losses.