How is risk handled through self-insurance?

Self-insurance is a strategy where an individual or organization retains risk instead of transferring it to an insurance company. When a person or entity chooses to self-insure, they are essentially setting aside funds to cover potential losses instead of purchasing an insurance policy that would cover those risks. This means that they are taking on the financial responsibility for any losses that may occur, which falls under the concept of retention.

In this context, retention involves recognizing that certain risks exist and deciding to accept the potential financial impact by managing the risk internally. This can be a prudent choice for entities that feel confident in their ability to manage and absorb minor losses, avoiding the costs associated with premium payments to an insurance provider.

For self-insurance to be effective, it typically requires a careful analysis of risks, the establishment of an adequate reserve for future claims, and a sound financial strategy to handle any losses without compromising the overall financial stability of the individual or organization.