Self-insurance is one of the forms of planned retention by which the part or full of the exposure arising due to a risk factor is retained by the firm. Self-insurance programs differ from the other programs in the sense of the formal arrangements made.
It acts as an alternative to buying insurance in the market or when a part of the clam is not insured in the commercial market it may be done by keeping aside funds to meet insurable losses.
The main reason for self-insurance is that the organization believes it has large funds to financial losses and the opportunity cost of transfer is less than the cost of insurance.
Benefits of self-insurance
1. Save transaction costs
It helps to save cost in the form of the amount payable to insured for overheads and profits, commissions and taxes and the social loading (arising from me statutory requirements) inherent in the premium.
2. Accuracy of predictions
The risk managers in the organization think that they are better judges of the adverse exposures and can estimate better than the insurers.
3. Investment of funds
Since insurance companies invest a large chunk of funds in various securities and the returns arising therefrom is not reflected in the in the rates charged by the insurers, the cost reduction becomes obvious for the insured.
4. Minimization of disputes
Self-managed funds enhance satisfaction to the insured and reduce the conflicts in claims settlements.
Also, there is a direct incentive to reduce and control the risk. Self-insurance works most when a firm is financially strong.