What characterizes 'self-insurance' as a risk management strategy?

Self-insurance is a risk management strategy that requires organizations to set aside funds for potential losses. This approach allows organizations to proactively manage risks by accumulating reserves that can be used in the event of a loss, rather than transferring the risk to an insurance company. By budgeting for potential risks, organizations can maintain greater control over their financial resources and tailor their risk management strategies to their specific needs.

This method is particularly useful for risks that an organization is willing and able to retain, often because they have a predictable loss pattern or because the costs of traditional insurance are prohibitively high. Through self-insurance, organizations can also create potential savings on premium payments, improve cash flow, and invest funds that would otherwise go to insurance into other operational areas.

While self-insurance does not eliminate all insurance costs, as some risk might still be transferred to an insurance company (like excess coverage), it emphasizes internal funding and financial preparedness for risk rather than relying solely on external policies. Additionally, it is not limited to short-term risks; organizations may use self-insurance strategies for both short-term and long-term risks, making it a versatile approach to risk management.