Washington State Insurance Practice Exam

What is meant by "self-insurance"?

1. Insurance purchased from a third-party provider

2. A strategy where funds are set aside for potential losses

3. A government-backed insurance program

4. Insurance that covers only catastrophic losses

The correct answer is: A strategy where funds are set aside for potential losses

Self-insurance refers to a financial strategy where an individual, business, or organization sets aside funds to cover potential losses instead of transferring that risk to an insurance company through traditional insurance products. This approach involves estimating the potential risks and their associated costs and then reserving sufficient funds to pay for those risks if they materialize. Choosing self-insurance often allows for more control over finances related to risk management and can reduce overall insurance costs, as policyholders do not pay premiums to a third-party insurer. Additionally, businesses and individuals who use self-insurance can benefit from the investment growth of the reserves over time until those funds are needed for losses. This contrasts with other options such as purchasing insurance from a third-party provider, which involves transferring the risk to an insurer, or government-backed programs that provide specific coverages under government regulations. Self-insurance is fundamentally about retaining risk rather than transferring it.