Self-insuring is an example of which risk strategy?

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Question: Self-insuring is an example of which risk strategy?

Option 1: risk transfer. This would mean shifting the financial burden of a risk to another party, such as purchasing insurance or outsourcing. Self-insuring does not transfer cost to an external insurer; the organization bears the potential losses itself, so this option misidentifies the mechanism involved.

Option 2: risk reduction. Risk reduction focuses on lowering either the probability or impact of a risk through controls or preventive measures. While self-insurance might be accompanied by cost controls, the core idea of self-insuring is not primarily about reducing risk through mitigation, but about accepting and funding potential losses internally.

Option 3: risk assumption. Self-insuring is the practice of setting aside funds to cover potential losses internally, effectively assuming the risk rather than transferring or mitigating it externally. This aligns with the definition of risk assumption, where the entity bears responsibility for any losses that occur.

Option 4: risk avoidance. Risk avoidance involves changing plans or processes to eliminate the risk entirely, such as not engaging in a risky activity. Self-insuring does not eliminate the activity or risk; it prepares to cover potential losses if the risk materializes, so it is not avoidance.

In summary, the concept that best matches self-insuring is that the organization internally accepts and funds potential losses, i.e., risk assumption.

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Self-insuring is an example of which risk strategy?

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