What is the purpose of self-insurance?

Self-insurance serves the purpose of accumulating funds internally to cover potential losses, rather than transferring the risk to an external insurer. This approach allows individuals or businesses to set aside a certain amount of money, creating a reserve that can be utilized in case of an unforeseen event or damage. By doing so, they gain more control over their financial resources and avoid the need to pay regular premiums to an insurance company.

This strategy is often adopted by entities that are capable of predicting their potential losses with a reasonable degree of accuracy and are financially equipped to handle those losses without external assistance. Through self-insurance, the entity effectively manages its own risk, which can lead to cost savings over time, especially if the actual losses are lower than the premiums that would have been paid to a traditional insurer.