What is self-insurance?

Self-insurance is a risk management strategy where an individual or organization sets aside a designated amount of money to cover potential future losses instead of purchasing an insurance policy from an external insurer. This approach allows the entity to assume its own risk and manage it internally, thereby having more control over how funds are allocated for potential losses.

The essence of self-insurance is rooted in the idea of saving against potential financial liabilities, enabling the entity to cover its own risks if they materialize. Essentially, it is a proactive financial strategy designed to address risks without relying on outside insurance and can be particularly effective for businesses that have sufficient cash flow and the ability to handle potential losses.