What does 'Self-insure' mean

Self-insure is a method of managing risk by setting aside a pool of money to be used if an unexpected loss occurs. Theoretically, one can self-insure against any type of loss. However, in practice, most people choose to buy insurance against potentially large, infrequent losses. For example, at minimum, most people carry auto insurance and health insurance.

BREAKING DOWN 'Self-insure'

Self-insuring against certain losses may be more economical than buying insurance from a third party. The more predictable and smaller the loss is, the more likely the risk is to be retained by a self-insured person. The idea is that since the insurance company aims to make a profit by charging premiums in excess of expected losses, a self insured person should be able to save money by simply setting aside the money that would have been paid as insurance premiums.

Then, if losses occur, the self-insured person can draw against these funds, and retain any excess. Generally, the more financial resources a person has, the more risks they are able to self-insure against. This is because wealthy individuals can absorb a higher level of losses before significantly impacting their lifestyle.

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