Self-insurance is the use of own resources to cover the costs of a claim. That is, the person or company assumes the consequences of the materialization of one or more risks to which it is exposed.
This is the opposite of acquiring a policy, where the risks are derived from a specialized third party, which is usually an insurer.
Establishing a special fund is an essential requirement for self-insurance and requires financial capacity.
These resources must be liquid, that is, they must be available immediately. Likewise, they are intended only to cover fortuitous events and not to current or common expenses such as payment of services.
Another important point is that this emergency fund must anticipate the maximum expenses that a claim would require. Therefore, the required amount must be calculated based on reliable statistics on the frequency and intensity of the anticipated contingencies.
In this sense, it is important to identify the risks to which the individual or company is exposed, as well as the probability of occurrence of each one of them.
Key aspects of self-insurance
There are several issues to consider before deciding on self-insurance:
- Fixed capital: A disadvantage of self-insurance is the freezing of resources that could be used, for example, for an investment.
- Eventual expenses: If you invest in a suitable insurance to the needs of the person or the company, it does not generate an expense but a saving. There are businesses, for example, with a constant accident rate over time. Therefore, it is reasonable to anticipate contingencies by purchasing a policy.
- Need for control : The emergency fund for self-insurance must be duly monitored and managed. This implies an investment of time and resources.
Given all that has been explained, it can be concluded that the self-insurance option is suitable only when the risk in question is infrequent (or almost nil) and of low severity. Otherwise, it is preferable to purchase coverage from a third party.
Self-insurance versus Self-assumption of risk
It is important to distinguish self-insurance from self-assumption of risk (own insurer). In both modalities there is no third insurer.
The difference is that in the first case a special economic fund is constituted only for contingencies. On the other hand, the insurer itself does not take this provision, although it is also committed to compensating the damages of a claim.