selfinsurance

Self-insurance is a risk management approach in which an organization finances its possible losses internally rather than transferring the risk to an insurance company. It can refer to fully self-funded programs or to partial self-insurance arrangements such as self-insured retentions within commercially issued policies. In a self-insured arrangement, the organization uses reserves, captives, or other funding mechanisms to pay for claims as they arise.

Common mechanisms include funded reserves, where an organization sets aside funds to cover anticipated losses, and self-insured retentions (SIRs) embedded in commercial policies, where the policyholder pays losses up to a specified threshold while the insurer covers higher losses. Captive insurance entities—owned by the insured—can also be used to manage and finance risks, sometimes leveraging favorable tax or regulatory treatment.

Applications and scope vary by sector. Large employers frequently self-fund employee benefits, including health insurance and workers’ compensation, often with third-party administrators and stop-loss coverage to cap catastrophic claims. Governments and some public entities use self-insurance to control costs and tailor benefit designs. Self-insurance is also used in property and casualty programs, environmental liabilities, and other lines of business where losses can be valued and funded internally.

Advantages include greater control over coverage terms, potential cost savings, faster claims handling, and retention of investment earnings on reserves. Disadvantages involve higher capital requirements, exposure to high-severity losses, regulatory and accounting complexities, and the need for robust risk management and governance structures.

Regulatory and accounting implications vary by jurisdiction and line of risk, with many areas requiring specific approvals and ongoing reporting for self-insured programs.