The Concept of Self-Protection
An analysis of the insured's decisions to invest in reducing the probability and the
severity of a loss has been examined by Ehrlich and Becker (1972). The
expenditure to reduce the probability of a loss is called self-protection (i.e. loss-
prevention) and the expenditure to reduce the severity or size of a loss is called
self-insurance. According to previous definitions, the term loss-reduction would
seem a better terminology.
The model of Ehrlich and Becker presents two main results: 1) self-insurance
and commercial insurance (market insurance) are substitutes; 2) If the price of
insurance depends on the level of self-protection, then insurance and self-
protection are complements or joint products.
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