Abstract
The concept of self-insurance for large organizations is well-developed in risk management literature. In recent years, progress has been made in the theory and utilization of quantitative methods for risk management decisions. Cummins [2] utilizes the capital asset pricing model to specify proper retention amounts. Moffet [31 further analyzes deductible selection within the framework of consumption theory. These and other works assume in varying degrees that some risks can be retained, and some should be insured or transferred. This paper extends this discussion to firms which may not have multiple exposures to similar risks. The basic premise developed here is that, from the investor's point of view, even small firms may find it unnecessary to purchase insurance because risk exposures can be effectively eliminated through portfolio diversification without payment of an insurance premium.
Published Version
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