The practice of assuming financial responsibility for potential losses, rather than transferring that burden to an insurance company, constitutes a fundamental strategy in risk management. An organization might choose this approach for various reasons, such as when the cost of insurance premiums exceeds the anticipated cost of claims, or when losses are predictable and manageable within budgetary constraints. For example, a large corporation may establish a self-insurance fund to cover routine employee health claims, effectively bearing the financial risk directly.
This approach provides organizations with greater control over claims management and the opportunity to reduce costs associated with insurance premiums. By retaining more risk, entities can potentially benefit from reduced expenses and investment income earned on funds set aside to cover future claims. Historically, the increased sophistication in actuarial science and risk modeling has empowered more organizations to confidently assess and manage their exposures, leading to a wider adoption of this risk management approach. It also allows for a more tailored approach to risk mitigation, specifically addressing the unique challenges faced by the entity, rather than a one-size-fits-all insurance policy.
