Self-insurance is when a person or business sets aside its own money to cover losses instead of buying a traditional insurance policy.
Understanding Self-Insurance in Simple Terms
Self-insurance is a risk management approach where you don’t transfer risk to an insurance company. Instead, you keep the risk and plan to pay for losses yourself. This method is commonly used for high-frequency, low-severity risks—events that happen often but usually don’t cost a lot.
Rather than paying premiums to an insurer, the individual or business creates an internal fund to cover expected losses. If something goes wrong, the money comes from that fund.
In short, self-insurance means betting on your ability to handle losses on your own.
Why Some People and Businesses Choose Self-Insurance
Self-insurance isn’t for everyone, but it can make sense in certain situations. Businesses often choose it when losses are predictable and manageable.
Some common reasons include:
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Saving money on insurance premiums
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Avoiding administrative fees and insurer profit margins
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Gaining more control over how claims are handled
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Managing risks that are small and frequent
For example, a large company may self-insure employee medical claims up to a certain amount because it knows roughly how much those claims will cost each year.
A Simple Real-Life Example
Imagine a delivery company with a large fleet of vehicles. Minor accidents like scratches or broken mirrors happen fairly often, but they’re not very expensive to fix.
Instead of buying insurance for every small repair, the company sets aside money each month to cover these costs. When damage occurs, the repair is paid from that internal fund. That’s self-insurance in action.
The company might still buy traditional insurance for major accidents, while self-insuring the smaller, more frequent ones.
Common Types of Self-Insurance
Self-insurance appears in many areas of everyday life and business.
Health Benefits
Many large employers self-insure employee health plans. They pay medical claims directly and often hire a third party to handle paperwork, but the financial risk stays with the employer.
Deductibles
Even individuals practice a form of self-insurance through deductibles. When you agree to pay the first portion of a claim, you’re self-insuring that amount.
Property and Business Risks
Some businesses self-insure small property losses, equipment damage, or minor liability claims when the costs are predictable.
Self-Insurance vs. Traditional Insurance
The biggest difference is who carries the risk.
With traditional insurance:
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You transfer risk to an insurance company
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You pay premiums
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The insurer pays covered claims
With self-insurance:
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You keep the risk
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You set aside your own funds
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You pay losses directly
Self-insurance can save money, but it also means taking responsibility if losses are higher than expected.
Risks and Challenges of Self-Insurance
While self-insurance can be cost-effective, it comes with challenges.
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Large unexpected losses can strain finances
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Poor planning can lead to insufficient funds
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Requires strong financial discipline and tracking
That’s why many organizations combine self-insurance with traditional coverage, using insurance for rare but severe events.
Who Should Consider Self-Insurance?
Self-insurance works best for:
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Large organizations with strong cash flow
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Risks that occur often but cost relatively little
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Situations where losses are predictable
For individuals, it usually makes sense only for smaller risks, not major disasters.
Final Thoughts
Self-insurance is a practical strategy for managing certain types of risk. By retaining risk internally instead of transferring it to an insurer, individuals and businesses can save money and gain control—when done carefully.
Used wisely and paired with traditional insurance when needed, self-insurance can be a smart part of a balanced risk management plan.
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