What Is Self-Insurance? And When Is It a Good Idea?

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Self-insurance is a type of system where a company or individual doesn’t buy, for instance, buildings insurance, and instead sets aside a deliberate sum of cash is set aside to use in case you suffer a possible loss or damages in the future. This pot of money is calculated to be enough to cover any sort of predictable risk that may occur.

Self-insurance is a type of risk management system used by a company or a business which would rather handle potential losses in this manner instead of investing in actual buildings insurance. The company is taking a chance and is instead calculating the possible cost of damages or destruction based on the law of averages and the likelihood that one can predict whether a certain type of loss or damage occurs or not.

Many businesses may use both regular buildings insurance and self-insurance to have the best possible coverage for their investments. If the can predict a problem that can happen, such as a broken piece of gear or stolen property, then they plan on using their self-insurance, but if it is something that isn’t predictable, or they know it isn’t possible to save up enough cash to cover the loss, such as a natural disaster like a hurricane or earthquake, they will use regular insurance.

This makes the regular insurance less expensive since they don’t have to use it to cover every little problem or issue that occurs. This way the business doesn’t have to pay high premiums and instead can pay low monthly insurance bills along with setting aside the amount of monies they can afford for the self-insurance.

This is one of the main reasons to have self-insurance, so that after calculating the risks that may occur to a business or individual and figuring out what amount of cash is needed to be saved in order to cover those risks, one can save on the cost of not having to buy buildings insurance or other commercial insurance. This saves money because most regular insurance companies charge carrying costs, which add to the actual monthly premium, while self-insurance monies can be used 100 percent to pay for a loss or damage that occurs.

Self-insurance also saves money by getting the other person’s insurance company to pay for a loss if it was caused by a specific party or individual. For instance, if anyone causes damage to one of the company’s buildings, then instead of the business having to pay for it, the person who causes the damages has to use their own insurance or monies to pay for it after it goes to court and if the damages are awarded to the company that had the loss.

Self-insurance is less risky if a large company uses it since they better afford to set aside the monies needed to fund the pot that would be used for damages and losses. All in all, self-insurance is a form of managing risk against the high cost of commercial businesses insurance.

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