Self-Insurance

Self-insurance is the deliberate decision to retain risk and fund losses internally rather than buy a traditional insurance policy. Instead of paying premium to transfer risk, the business earmarks money — through reserves, a dedicated fund, or a formal program — to pay claims as they occur. It is distinct from simply going bare: a genuine self-insurance program measures expected losses, sets aside adequate funds, and administers claims, often with the help of a third-party administrator. For frequent, predictable losses, self-insuring can eliminate the insurer's expense load and profit margin, keeping investment income and unspent loss dollars with the company.

For a small-business buyer, pure self-insurance is usually reserved for larger or well-capitalized organizations, especially in workers compensation and auto, where states require self-insured employers to qualify financially and post security such as a bond or letter of credit. Most smaller firms instead use partial self-insurance embedded in ordinary policies — a deductible or a self-insured retention means you are self-insuring the first layer of every loss. Understanding this helps you weigh higher retentions (lower premium, more retained risk) against lower retentions (higher premium, more transfer).

A practical nuance: self-insurance works best for high-frequency, low-severity losses that are statistically predictable, and it should almost always be paired with excess workers compensation or excess liability coverage to cap the tail risk of a catastrophic claim. Businesses that outgrow simple retentions often graduate to a captive or group captive to formalize their self-insurance with tax and reinsurance advantages. The core discipline is the same regardless of structure: fund the expected losses honestly, administer claims professionally, and buy protection above the level you can comfortably absorb.