Self insurance is a strategy in which an individual, or a business, sets aside enough money to cover losses instead of purchasing an insurance policy. In order to make this work, an individual has to use actuarial science and have the discipline that is necessary to set aside the appropriate amount of money. When used correctly, this could save be a tremendous savings.

Uncertainty

This strategy is surrounded by a tremendous level of uncertainty. Whether you are insuring against health matters, property loss or mortality, you really do not know what is going to happen. You also do not know how large the loss could be. Because of this, there is a certain amount of risk involved. Even if you set aside a healthy amount of money every month towards self-insurance, you can still have a huge loss. 

Due to this uncertainty, individuals are advised to utilize actuarial techniques in order to estimate the likelihood of certain outcomes occurring. Most individuals are not qualified to do the necessary calculations to come up with accurate estimates, hiring an actuary is best.

Stop Loss Insurance

Many people that utilize self insurance will compromise and purchase a type of insurance policy called stop loss insurance. This is a type of insurance that is designed to pay in the case of catastrophic losses. With this approach, the individual still insures losses that are small in nature. Then, when the loss total gets to a certain amount, the insurance policy will kick in and pay the rest. By using this type of policy, an individual or a business can accurately determine how much money they need to set aside for insurance purposes. They can set aside the amount of money that it takes to trigger the policy and then they know that regardless of what happens, they have enough money to cover the loss.

Saving Money

One of the primary reasons that individuals and businesses may choose to self insure is so that they can save money. When you work with an insurance company, they insure you by collecting premiums from you on a regular basis. These premiums are priced according to how many losses they have to pay out over the course of a certain amount of time. In addition to the money for losses, they also charge you something for their overhead expenses and profit. If you handle your own insurance needs, you will not have to pay anyone for overhead, or profit. In this way, you to set aside less money for your insurance needs than you would have to pay in regular premiums to the insurance company. 

Caution

Even though this technique can be beneficial, you need to exercise caution. If you do not set aside enough money, a large loss can bankrupt you quickly. It is advisable to purchase a stop loss insurance policy to cover large losses so that you are not in a position of too much risk.

blog comments powered by Disqus