What does "self-insurance" involve?

Self-insurance involves setting aside funds to cover potential losses independently. This means that instead of transferring the risk to an insurance company through a premium payment, an individual or organization allocates a certain amount of money, often in a reserve fund, to address any losses that may occur. This approach is commonly utilized by businesses that wish to retain certain risks rather than paying for full coverage through an insurance policy.

Self-insurance allows for greater control over funds, as the insured can decide how much to set aside and manage those resources as needed. This can be more cost-effective in certain situations, especially for predictable risks where the cost of insurance may exceed the potential losses. Additionally, entities may choose self-insurance for risks that are too minor or specialized for traditional insurance products.

In contrast, other options in the question suggest different approaches to risk management, such as purchasing full insurance coverage, relying on government aid, or only insuring minor risks. Each of these options involves transferring the financial risk to another party, which does not align with the self-insurance concept of retaining risk and managing it independently.