What is self-insurance?

Self-insurance refers to a scenario where an individual or business takes on the financial risk of certain potential losses instead of purchasing an insurance policy to cover those losses. When a business decides to become self-insured, it sets aside a reserve or funds to pay for future claims and losses rather than transferring that risk to an insurance company. This can be beneficial for certain risks if the business has a good understanding of its potential losses and has the financial capacity to manage those losses internally.

By choosing to self-insure, businesses can potentially save on insurance premiums and have more control over their claims process. This approach is especially common in situations where the costs of loss are relatively predictable and manageable, allowing the business to allocate its resources more effectively.

The other options do not accurately describe self-insurance, which clarifies why they are not the correct answer. Mandatory insurance would imply a requirement for coverage that involves purchasing a policy from a provider, while a government-backed program would imply support or insurance provided by government entities, neither of which reflects the self-reliant nature of self-insurance.