Reviewed by Sep 30, 2020| Updated on
Self-insurance is a method in risk management in which a company or person sets aside a sum of money so they can use it to mitigate an unexpected loss. By principle, one can self-insure against any type of damage, such as flood or fire. In reality, most people choose to buy insurance against potentially significant and unusual losses.
Self-insuring against certain risks may be more affordable than buying third party insurance. The more gradual and smaller the failure, the greater the likelihood of a person or firm opting to self-insure themselves.
For example, some renters prefer to take out self-insurance rather than buy renter insurance to protect their rental properties. If you do not have a mortgage loan and a considerable amount of assets, you may find life insurance self-insuring.
The theory is that since the insurance company aims at making a profit by paying premiums above the expected losses, a self-insured person should be able to save money by setting aside the money in emergency funds, which would have been paid out as insurance premiums. But if an accident or natural disaster happens, it's important to save enough funds to cover you, your family, and your belongings.
The owners of buildings situated on top of a hill adjacent to a flood-prone valley may opt-out of paying costly annual flood insurance premiums. Rather, they choose to set aside money to rebuild the house, if floodwaters rise high enough to destroy their building in the fairly unlikely event. If this happens, it would be the duty of the owners to pay from their pocket for damages caused by a natural disaster, like a flood.