Texas Property and Casualty License Practice Exam

What is the purpose of Self-Insurance?

1. To transfer risk to an insurance company

2. To create a cooperative risk-sharing group

3. To fund claims through established savings accounts

4. To provide insurance coverage in all instances

The correct answer is: To fund claims through established savings accounts

Self-insurance serves the purpose of funding claims through established savings accounts. This approach involves individuals or businesses setting aside a dedicated pool of funds to cover potential losses instead of transferring the risk to an insurance company. Organizations that choose self-insurance typically do so because they believe they can better manage their risk and the associated costs. By building up these savings, they can effectively handle claims as they arise, ensuring that they have the financial resources available when needed while retaining control over claims management procedures. The other options reflect different insurance strategies but do not align with the concept of self-insurance, which is fundamentally about setting aside personal resources for potential claims instead of relying on external coverage. For instance, transferring risk to an insurance company is the opposite of self-insurance, as it involves paying premiums for protection against losses. A cooperative risk-sharing group implies collaboration among several parties to pool resources, distinct from holding funds individually for self-insurance. Lastly, while self-insurance can cover many instances, it does not guarantee coverage in all scenarios, which is more characteristic of traditional insurance policies.