Self insurance

The plan by which an individual or concern sets up a private fund out of which to pay losses is termed “Self-insurance”. The person lays aside periodically certain sum to meet the losses of any contemplated risk. While it may be called “self-insurance”, it is not, as a matter of fact, insurance at all because there is no hedge, no shifting or distributing of the burden of risk among larger persons. It is merely a provision for meeting the contingency. Here the insured becomes his own insurer for the particular risk. But, it can be successfully worked only when there is wide distribution of risks subject to the same hazard. It may be lesser expensive, provided the amount of loss is tremendous. The fund, as it accumulates, belongs to the insured and he can invest it as he may deem prudent. He pays no commission to agents, no extra expense for maintaining office. So, on the one hand, the return of an investment will be higher and on the other, the cost of operation will be lesser.

The self-insurance will be successfully operated where (1) there are several properties such as, machine, motor vehicle, house, factories, etc. (2) the properties or units are widely distributed, (3) these are under the influence of varied risks, and (4) the risks are greater at one place and lesser at another place. So a shipping company owning a large number of ships can profitably employ this scheme, or an automobile firm having numerous motor vehicles can successfully operate this scheme. Certainly a concern of limited risks and resources should not attempt to operate this scheme. The self-insurance cannot be effectively utilized by those concerns where the losses cannot be easily estimated, no proper management of the accumulated funds can be practiced, and the accumulated funds prove to be inadequate at the contingency.

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