What method involves self-insuring to cover potential losses?

The method that involves self-insuring to cover potential losses is known as risk retention. This approach occurs when an individual or business decides to retain the financial responsibility for certain risks rather than transferring that risk through insurance. Essentially, this means that they are prepared to absorb the costs associated with potential losses instead of relying on an insurance policy.

Risk retention can occur for various reasons, such as the belief that the likelihood of a loss is low, the cost of insurance being prohibitive, or a desire for greater control over claims and losses. Companies often establish reserves to cover anticipated losses, demonstrating that they are consciously choosing to accept certain risks rather than transferring them to an insurer.

Understanding risk retention is crucial for businesses and individuals as it plays a significant role in risk management strategies. Proper assessment of risks helps in determining when to retain risks versus when to seek external insurance coverage.