A large employer decides to pay employee medical claims from its own funds rather than buy a traditional health insurance policy. This self-insurance approach is most feasible when:

Why A is correct

Retention — including self-insurance — works best when losses are frequent enough to be predictable and small enough to be affordable without threatening the firm's survival. A large employer can estimate its annual claims using its own experience and the law of large numbers, then budget for them. Retention is inappropriate for rare, catastrophic losses that could wipe out the firm; those are transferred to an insurer, often with stop-loss coverage. Self-insurance also requires scale to achieve predictability.

Why the other options are wrong

• B) Rare, catastrophic losses are precisely what should be transferred to an insurer; retaining them threatens solvency.
• C) A very small group lacks the scale and claims experience needed to make self-insurance predictable; small employers typically buy insured plans.
• D) Retention does not eliminate risk; it assumes the risk and pays losses from the firm's own resources.

Memory hook

Retain what you can predict; transfer what would sink you. Small predictable losses, self-fund; monsters, insure.