What are the risks of self-insuring?

Self-insuring is a method of managing risks by setting aside money in a reserve fund to pay for unexpected losses. When a person or business chooses to self-insure, they are taking on the responsibility of funding their own losses, rather than relying on an insurance company to cover them. The risks of self-insuring, however, can be significant. The most obvious risk is that if the unexpected loss is greater than the amount of money set aside, the person or business could be responsible for the additional costs. For example, if a business opted to self-insure its property damage and then its building was destroyed in a fire, the business would have to pay the full cost of replacing the building, minus the amount of money in its reserve fund. Another risk associated with self-insuring is that it requires a careful balancing act – setting aside too little money in the reserve fund can leave a person or business under-protected, while too much money can reduce profits. Furthermore, self-insuring also requires a great deal of discipline to remain diligent about topping up the fund regularly to keep it funded. Finally, choosing to self-insure in lieu of obtaining a traditional insurance policy can also pose significant legal risks. New Jersey insurance laws set minimum requirements for certain types of insurance, including property and liability insurance. If those requirements are not met, an individual or business could suffer legal consequences. Self-insuring can be an effective risk management strategy, but it requires a great deal of financial discipline. Furthermore, there are legal risks associated with this method of risk management that should not be taken lightly.

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