Time Value of Money in self-insurance means?

Time Value of Money in self-insurance means?

• A. It reduces the need for external funding.
• B. Credits invested internally produce higher rates.
• C. It eliminates all risk.
• D. It has no effect on cash flow.

Answer: (B)

The idea being tested is that money has a time value, meaning funds available now can be invested to earn a return, increasing their future value. In self-insurance, the company retains risk and keeps the dollars that would have gone to premiums. Those retained funds can be invested internally, generating investment income and potentially higher returns over time. This earned income from the retained funds reduces the true cost of risk and enhances cash flows as reserves grow, which is exactly what the time value of money concept captures. While reducing external funding is a real benefit of self-insurance and cash flows are affected, the distinctive point about time value is the investment return on the internally retained funds.

The idea being tested is that money has a time value, meaning funds available now can be invested to earn a return, increasing their future value. In self-insurance, the company retains risk and keeps the dollars that would have gone to premiums. Those retained funds can be invested internally, generating investment income and potentially higher returns over time. This earned income from the retained funds reduces the true cost of risk and enhances cash flows as reserves grow, which is exactly what the time value of money concept captures. While reducing external funding is a real benefit of self-insurance and cash flows are affected, the distinctive point about time value is the investment return on the internally retained funds.