What does 'self-insurance' involve?

Self-insurance involves setting aside funds to cover future losses, which means that instead of purchasing a traditional insurance policy from an insurance company, an individual or entity reserves their own financial resources to pay for potential claims or losses as they arise. This approach is often used by larger organizations that have the financial capacity to absorb certain risks themselves rather than transferring them to an insurer.

By self-insuring, individuals or organizations can have greater control over their funds and may save on premiums that would otherwise go to an insurance provider. However, it requires careful planning and management to ensure that adequate reserves are available to cover any potential claims. This method is particularly beneficial in cases where the expected losses are relatively predictable or manageable.

The other options describe different aspects of insurance that do not align with the concept of self-insurance. Buying insurance from multiple providers refers to diversifying insurance coverage rather than retaining risk. Purchasing an umbrella policy is a form of insurance that provides excess coverage above existing policies but does not involve self-insuring. Finally, only covering short-term risks does not encompass the broader financial strategy that self-insurance entails, as self-insurance can be applied to both short-term and long-term liabilities.