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The practice of an entity bearing a portion of its potential losses, rather than transferring all risk to an insurance company, is a fundamental element of risk management. This approach involves strategically deciding to cover certain losses internally, often through the establishment of a self-insurance fund or the acceptance of higher deductibles. For example, a large corporation might choose to pay for routine property damage claims itself, only purchasing insurance for catastrophic events exceeding a pre-defined threshold. This allows them to avoid paying premiums for losses they can comfortably absorb.

Employing this strategy offers several advantages. It can lead to lower overall costs compared to paying premiums that include an insurer’s administrative expenses and profit margin. Furthermore, it provides greater control over claims management, allowing organizations to tailor their response to specific incidents and potentially reduce expenses through proactive loss control measures. Historically, large businesses and governmental bodies have employed this method for managing predictable, recurring losses, demonstrating its long-term viability and potential for cost savings.

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