Self-insurance involves:

• A. Purchasing broad insurance coverage from multiple carriers.
• B. Designating part of earnings as a cushion against possible future losses.
• C. Outsourcing risk to a third party.
• D. Doing nothing to mitigate risk.

Answer: (B)

Self-insurance means keeping the risk inside the business and funding it with internal resources instead of paying premiums to an insurer. By designating part of earnings as a cushion, the company creates an internal fund to pay for losses when they occur. This approach gives more control over how claims are handled and can be cheaper if actual losses stay within the reserved amount, but it requires disciplined cash flow and enough reserves to cover bigger-than-expected losses.

Spending money on broad coverage from multiple carriers transfers the risk to insurers, not self-insurance. Outsourcing risk to a third party also shifts the risk away from the business. Doing nothing to mitigate risk leaves the company exposed and isn’t an active risk-management approach.