What is "self-insurance"?

Self-insurance refers to a strategy where an individual or business sets aside funds to cover potential future losses instead of purchasing an insurance policy from a third party. This involves creating a reserve or monetary fund that can be used to pay for damages or losses as they occur. This approach is often adopted when the expected losses are predictable or when the costs of traditional insurance premiums are deemed too high. By self-insuring, the individual or business assumes the risk themselves, while still preparing financially for the possibility of those losses.

The other options fail to accurately encapsulate the essence of self-insurance. For instance, a method to insure against future losses typically involves transferring risk to an insurance company through policies. Coverage provided by a third party directly refers to traditional insurance mechanisms, while legal requirements to have insurance indicate mandatory licensing and compliance, which do not pertain to self-insurance. Thus, the characterization of self-insurance as the establishment of a monetary fund captures its intent and operational structure comprehensively.