Definition: Self insurance is an insurance method where a pool of funds are gathered to cover potential liabilities instead of hiring a regular policy from a third party. This technique is frequently employed by individuals or companies that desire to handle their own health care or automobile damage risks by themselves.
What Does Self Insurance Mean?
Insurance company’s provide coverage for clients in exchange for a premium paid, regularly on an annual basis. The main benefit of being insured by a third party is that the risks of incurring in large payments for situations such as health issues or car damages are assumed by the insurance company.
Nevertheless, there are situations where insurance policies appear to be unnecessary, since the risk of such events is very low. This is one of the scenarios where self insurance could be a potential alternative.
In such scheme, the individual or company set aside certain amount of money, frequently what they would pay for the insurance premium, to cover for potential events. The obvious risk of this arrangement is that, even though the risk might be low, such event can happen and the cost will be probably higher than the amount set aside for it.
Example
Megacable Co. is a company that provides satellite TV for 15 states within the U.S. The company employs more than 3,000 people to conduct their business activities and they offer health care insurance for all of them. Nevertheless, Megacable doesn’t deal with insurance companies since after reviewing insurance events in the last five years the annual cost of such situations was always lower than the insurance premium.
In order to establish a more profitable arrangement, the company sets aside the amount they would normally pay to insure all their workers and they use this pool to cover for any health events that may emerge during the year. Additionally, these funds will gain interest and that will also help to form a more solid basis to maintain the successfulness of its self insurance scheme.
