The practice of an entity assuming financial responsibility for potential losses, instead of transferring that risk to a third party, constitutes a strategic approach to risk management. An organization opting for this approach self-funds a portion or all of its potential losses. For example, a company might choose to cover small property damage claims internally, using a dedicated fund rather than purchasing insurance for such incidents.
This approach provides several advantages, including potential cost savings over traditional insurance premiums. It also allows for greater control over claims management and loss prevention initiatives. Historically, organizations with a strong financial position and a demonstrated ability to manage their exposures effectively have found this a viable and often more economical alternative. The decision to employ this strategy is often based on factors such as the frequency and severity of potential losses, the organization’s risk tolerance, and its overall financial stability.
