What type of insurance is typically used for high frequency but low severity risks?

Self-insurance is a strategy used by individuals or businesses to manage high-frequency but low-severity risks. This approach involves setting aside money to cover smaller, more frequent claims rather than purchasing traditional insurance policies for these types of risks. The rationale behind self-insurance is that it can be more cost-effective for organizations that experience frequent minor losses or claims, such as small damages or frequent employee-related incidents.

By utilizing self-insurance, entities can retain more control over their insurance expenses, reduce administrative costs associated with small claims, and potentially save on premium costs that would otherwise be paid to an insurance company. This method is particularly beneficial for organizations that have a strong understanding of their risk profile and financial capability to absorb minor losses, allowing them to allocate resources more effectively.

This strategy is distinct from other types of insurance options, which typically cater to different risk profiles or specific types of claims. For instance, commercial insurance can cover a range of risks but may not be tailored specifically for high-frequency, low-severity situations, while excess insurance seeks to cover losses that exceed standard policy limits. Professional liability insurance is related to the coverage of claims arising from professional services rather than frequent minor incidents.