What is meant by the term "self-insurance"?

The term "self-insurance" refers to a risk management strategy where individuals or entities set aside funds to cover potential future losses instead of purchasing insurance from an insurance company. This approach involves anticipating potential risks and creating a financial reserve to address those risks as they arise.

In practice, self-insurance can manifest in various ways, such as individuals saving money in a dedicated account to pay for health expenses, businesses retaining funds to cover potential liabilities instead of buying external insurance, or organizations establishing their own funds to pay for employee benefits.

Setting aside funds for losses allows for greater control over how risks are managed and can potentially lead to cost savings, as it eliminates the need for premium payments to insurance providers. This strategy is particularly common among large organizations that can absorb risks or have predictable loss patterns, enabling them to manage costs effectively.