Insurance is a large group of individuals pooling money together to protect against the financial burden of catastrophic events. A tornado or fire can destroy a house, an accident can total a car or an injury on your property can lead to a large lawsuit. These items require insurance because it is not feasible to save up enough money in a short time period to protect yourself against them. However, in some situations it is possible to take on the risk yourself, and self-insure, rather than purchasing insurance.
To self-insure means to personally take the financial risk of potential loss rather than purchase insurance to protect against it. This is best to use in situations where the potential of loss is small enough to save up and pay for yourself. The term can be misleading, because it really means to not carry insurance at all. If you don't carry insurance on a boat or motorcycle, then you are self-insuring those items. Self-insurance can also be called self-insured retention. A deductible can also be considered self-insurance; this is the amount of risk you are willing to retain for yourself, and the insurance company will pick up the rest.
There are items that you self-insure against and might not know it. If you don't have life insurance, then you are self-insuring against the financial impact of a premature death on your family. If you only have liability insurance on your car, and not comprehensive or collision coverage, then you are self-insuring the physical damage to the car. The key to self-insurance is to calculate the financial risk and to save enough money on a regular basis to protect against it.
Insurance for businesses can be very expensive, but they also have the capabilities of saving large amounts of money faster than individuals. They might carry higher deductibles, have self-insured retention on their liability policy or not cover less expensive equipment. Some businesses are able to carry £162,500 deductibles on their workers' compensation insurance to keep the prices lower. In this situation, they are purchasing insurance, but are self-insuring against £162,500.
If an individual does not have health insurance, he is self-insured. Businesses might have self-insured health plans, in which they take on the risk for their employees' medical costs. In these plans, they might purchase stop-loss plans that cap the total amount that they pay out. High-deductible health plans are another form of self-insurance; the individual takes on a large amount of the financial risk herself, and the insurance company pays the rest.
Positives and Negatives
The primary purpose for self-insuring is to save money. There are an infinite number of risks in the world, and it is impossible to insure against everything, so everyone has some level of self-insurance. The drawback is the risk you put yourself in for not insuring against the larger known risks. It is up to each individual to determine what level of risk he can afford, and when he should buy insurance.
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