Definition
Self-Insurance
Self-insurance is the practice of setting aside one's own funds to meet potential losses instead of buying an external insurance policy.
Large organisations with predictable, frequent losses sometimes find it cheaper to fund claims internally than to pay an insurer's premium, expenses and profit margin. They build a reserve or fund earmarked for these losses, retaining the risk in a structured way.
Self-insurance works only when losses are reasonably predictable and the entity has the financial strength to absorb a bad year. For catastrophic, unpredictable risks it is dangerous, which is why even self-insurers usually buy stop-loss or excess cover. A formalised version is the captive insurer.
Related terms
- Pooling of RiskPooling of risk is the core insurance mechanism whereby premiums from many insured parties are pooled to pay the losses of the unfortunate few.
- Risk RetentionRisk retention is consciously bearing a risk oneself rather than transferring it, by paying for any losses out of one's own resources.
- Captive InsurerA captive insurer is an insurance company set up by a parent organisation to insure the risks of that parent and its group.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.