What is Self-Insure 'Self-insure'

Self-insure is a risk management technique in which a company or individual sets aside a pool of money to be used to remedy an unexpected loss. Theoretically, one can self-insure against any type of loss. In practice, however, most people choose to purchase insurance against potentially large, infrequent losses. For example, most people choose to purchase auto insurance and health insurance from an insurance company rather than self-insure against car accidents or serious illness.

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 it is that an individual or firm will choose to self-insure. 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 out as insurance premiums.

Example of the Self-Insure Method

For example, the owners of a building situated atop a hill adjacent to a floodplain may opt against paying costly annual premiums for flood insurance but instead choose to set aside money for repairs to the building in the relatively unlikely event that flood waters would ever rise high enough to damage their building.

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