Self-Insurance
Retaining the financial risk of potential losses by setting aside funds rather than purchasing commercial insurance.
What is Self-Insurance?
Self-insurance is a risk-financing strategy in which an individual or organization deliberately chooses not to purchase a commercial insurance policy for a specific risk, instead setting aside funds in a reserve account to cover potential losses. Self-insurance is cost-effective when the risk is relatively predictable, the potential losses are manageable, and the insured can absorb variability without financial hardship. Large corporations commonly self-insure for workers' compensation, employee health benefits, and routine property damage. Formal self-insured programs are often regulated by states and may require actuarial analysis and financial guarantees. Captive insurance is a structured extension of self-insurance.
Example
A national restaurant chain with 500 locations elects to self-insure its workers' compensation exposure for claims up to $500,000 per occurrence, depositing $8 million annually into a dedicated reserve account managed by a third-party administrator. Above $500,000, a stop-loss reinsurance policy takes over. The program saves $3 million annually versus the commercial market premium while retaining direct control of the claims process.
Source: National Association of Insurance Commissioners — Self-Insurance