What Is Self-Insurance?
Jul 30, 2023 By Kelly Walker

Are you considering self-insuring your business against unforeseen risks and losses? Self-insurance has become increasingly popular in recent years due to its cost savings and the ability to maintain greater control over risk management.

Understanding what self-insurance entails is crucial in deciding if it's right for your company.

This blog post will explain everything you need to know about self-insurance — from defining its advantages and disadvantages to legal considerations specific to this type of insurance option.

So read on if you want an in-depth understanding of how self-insulation could benefit or harm your business!

An Overview of Self-Insurance

Self-insurance is a business setting aside funds in reserve to cover potential losses instead of purchasing an insurance policy.

This means you are using your money, rather than paying premiums to an insurer, to cover yourself against risks such as property damage or employee injury.

Advantages and Disadvantages of Self-Insurance


- Cost Savings: Self-insuring can save your business money. By not paying premiums to an insurer, you can keep and use more of the money you would have paid in insurance premiums for other business expenses.

- Control Over Risk Management: Additionally, self-insurance provides greater control over risk management since you are the sole decision-maker in determining how much risk to assume and how much money you will set aside for potential losses.


- Risk of Financial Losses: Self-insurance carries the risk of financial losses if the amount of money set aside is insufficient to cover a claim or an unforeseen event. If this happens, your business will incur a greater financial loss than it would have with an insurance policy.

- Administrative Burden: Self-insuring also requires more administrative burden. You must determine what risks must be covered, track claims and payments, keep appropriate documentation, and adjust the reserve fund as needed — all tasks your business may not have time or resources to do.

Legal Considerations for Self-Insurance

When self-insuring, it's important to understand any relevant laws or regulations that you must comply with.

Depending on the type of business and the state in which your company is located, certain legal considerations should be taken into account before opting for self-insurance.

Additionally, additional considerations may need to be addressed if your business is part of a larger corporate structure, such as a franchise system or other multiple-entity arrangement.

It’s best to consult an attorney who specializes in insurance law if you are considering self-insuring your business.

How to Determine Your Risk Level

Self-insuring is only right for some businesses, so assessing your risk levels is important before deciding if self-insurance is the best option.

Consider the cost of potential losses or claims against your company and weigh that against what you would save from not having insurance premiums.

Additionally, look at how much money you can realistically set aside in a reserve fund — keeping in mind any legal considerations that may apply — and determine if it’s enough to cover any potential losses. Ultimately, do what works best for your business and budget.

Examples of Self-Insurance Strategies

Now that we understand the basics of self-insurance let's look into some strategies businesses use to take advantage of this type of insurance.

1. Deductibles – A deductible is an amount a business pays before its insurance coverage kicks in. When you use self-insurance, having a higher deductible means paying lower premiums and reducing the financial impact of a claim.

2. Retention – This is the amount of risk the business takes instead of being covered by insurance. A company can set its retention levels by paying up to $50,000 in claims yearly rather than buying an insurance policy with a lower limit.

3. Captives – A captive is when a business creates its own insurance company and covers its risks with this entity. This allows businesses to more effectively manage and control their overall risk exposure and access potential

tax benefits depending on structure and jurisdiction.

4. Risk Pooling – Businesses can join together in a “risk pool” where monetary contributions are made and pooled together to cover the losses of any participant. This brings down risk exposure and premiums for all members of the group.

Who Needs Self-Insurance?

Self-insurance is most suitable for companies with comparatively low risks and expecting no significant losses.

Since self-insurance requires the company to set aside a portion of its profits to cover potential losses, other viable options may exist for businesses with unstable finances or uncertain prospects.

Likewise, companies operating in highly competitive industries or areas with particularly high risk should opt for traditional insurance policies instead.

How Much Does Self-Insurance Cost?

One of the main advantages of self-insuring is cost savings. With a traditional insurance plan, you pay premiums upfront, and then if you have a claim in the future, your insurer pays out up to the amount stated in your policy.

With self-insurance, you set aside funds into an account that can be used for claims when they arise.

This eliminates much of the risk associated with traditional insurance policies and costs such as administration fees and commissions paid to agents or brokers. However, it does require creating and managing an internal trust fund, which can be costly.

The amount of money required for self-insurance depends on several factors, including the risks covered by your plan, its size (number of employees, revenue, etc.), and how potential losses are estimated.

Your business must also set aside funds into the trust fund to cover premiums, costs associated with administering the plan, and any legal fees or claims payouts.

What to Consider When Choosing a Self-Insurance Plan

When choosing a self-insurance policy, there are several key considerations to remember. First, you must understand the scope of risks you seek protection from and how much coverage is necessary for those risks.

This includes researching what events may trigger a claim and understanding if any exclusions, such as pre-existing conditions or claims related to certain weather events, might apply.

You should also look into the financial cost of self-insuring, as it may be more expensive than traditional insurance after considering the premium, administrative fees, and any owner’s equity needed for capitalization.


Is self-insurance a liability?

Self-insurance can be a liability if risks are not managed properly. Companies must ensure they have the financial resources and risk management strategies to cover potential losses. It is important to consult a qualified insurance professional for proper guidance.

Why do people self-insure?

Self-insurance is popular among businesses due to its cost savings and control over risk management. It can be used as part of an organization's overall risk strategy.

Are there any legal considerations when self-insuring?

Yes. Depending on where you do business, regulations may vary for what type of coverage is required and how it must be structured to meet requirements. It’s important to consult a qualified insurance professional to ensure compliance with applicable laws and regulations.


Self-insurance is a cost-effective option for businesses looking to maintain control over risk management but does require extensive research and understanding of the legal implications involved. With all the information in this blog post, you're sure to have an in-depth understanding of self-insuring your business - giving you the confidence to make informed decisions.