Question

Chapter 7: Selecting and implementing Risk Management Homework . Due in 5 days Key Concepts 7.8 Homework – Unanswered Which of the following is NOT a situation where self-insurance would normally make sense for a business? A The business has faced some financial challenges and has low cash levels The business has a relatively large number of similar exposures and the potential for simultaneous destruction is low 0 C The business has access to relatively good data on the past loss experience of its exposures Unanswered 1 attempt left

Answer 1

Appropriate response: (A)

Justification: "Self-insurance is a situation in which a business does not take out any third-party insurance. In case of such business, that is liable for some risk, chooses to bear the risk itself rather than take out insurance through an insurance company."
Therefore, in a case where self-insurance would not make sense, is when the company chooses not to bear the risk by itself, rather to outsource it.
As in the case of option (A), the company has low cash levels, therefore, it would be wise for the company to take a third-party insurance, so that in case of risk liability, it does not have to bear the expense.
Thus, it is not a situation where self-insurance would make sense.

Ruling out of other options:
(B): As the potential for simultaneous destruction is low, it would make sense for the company for to opt for self-insurance. Therefore, it is not the right answer.
(C): As the company has good data on the past loss experience, it can make provisions for potential losses and can be prepared to bear the loss. Thus, it can be self-insured. Therefore, it is not the right answer.