Self-insurance means no insurance. For example, if a retailer decides to self-insure its buildings, the retailer will not have an insurance policy to pay for losses that may occur to its buildings. If a person causes a loss to one of the retailer’s buildings, the retailer will have to bring a claim against that person. In other words, the retailer will be on its own and will not be able to turn to an insurance company to take care of the problem.
Self-insurance may be feasible if a company owns a large number of buildings and each building is in a different city. For example, a retailer with 100 small stores finds that the annual cost for property insurance to cover all 100 stores is $100,000. If the total actual property damages for the stores never exceeded $40,000 in a year, the company may decide that self-insurance is a good business risk.
Generally, self-insurance is too risky for an individual and for a small business with one store. The reason is that a huge loss to its one building may be too much to recover from. Every company should review its specific situation with a professional risk management adviser before opting to self-insure.
When a company does self-insure, it will report its actual losses in the accounting period in which the losses occur. This may result in huge losses in some years and no losses in other years. (On the other hand, if a company has an insurance policy, the premiums it pays will result in a more consistent amount of insurance expense each and every year.)
