Self-Insurance and the Probability of Financial Regret

The financial decision of whether a business firm should self insure a group of exposure units is a complicated but very important one. Many exposures to loss are financially inconsequential so they can be safely retained and paid out of cash flow. However, other exposures to loss which have large financial consequences cannot be retained by the firm without a detailed analysis of the financial implications of such a decision. I Due to the complexity and financial importance of this decision, risk managers have started to utilize some advanced financial and statistical tools to assess the risks involved with the retention of various loss exposures, such as workers' compensation, products liability and other liability exposures.2 Risk managers have started to rely on the loss retention method more frequently because of cash flow considerations and the high interest rates available in recent years. If there are a sufficient number of exposure units to estimate the expected losses and associated financial risks and a reserve fund