Large organizations sometimes decide they can finance certain losses more cheaply than an insurer can. Self-insurance is the practice of setting aside funds or relying on cash flow to pay losses that would otherwise be covered by commercial insurance.

Formal self-insurance programs often include dedicated trusts or captive insurers, claims-administration arrangements, and actuarial funding studies. Informal self-insurance is simply the decision to retain risk without special funding, which can leave the organization exposed to clustering of losses.

Self-insurance works best for high-frequency, low-to-moderate severity exposures where the organization has predictable loss experience and sufficient financial strength. Excess insurance is commonly purchased above the self-insured layer to protect against severe events. Regulatory approval may be required for certain lines such as workers’ compensation.

• Financing losses internally instead of buying insurance
• May use trusts, captives, or pure retention
• Suited to predictable loss patterns
• Often paired with excess insurance