The acceptance of potential losses or exposures by an individual or organization, rather than transferring that risk to a third party such as an insurer, defines a fundamental approach to managing uncertainty. It involves acknowledging that certain risks exist and deciding to self-fund any resulting losses, often up to a pre-determined financial limit. For example, a company might choose to pay for minor vehicle repairs out of its operating budget instead of filing a claim with its insurance provider, effectively absorbing these smaller losses directly.
This strategy can be economically advantageous, particularly when the cost of external risk transfer (insurance premiums) exceeds the anticipated value of probable losses. It also allows entities greater control over claims management and avoids the potential for increased insurance premiums following claims. Historically, this practice has been employed by both large corporations capable of bearing significant financial burdens and smaller entities aiming to minimize operational expenses and foster a culture of loss prevention and responsible resource allocation.
