Self insurance is a risk management method whereby the business itself assumes the risk directly. This means that the business does not buy insurance and saves the cost of insurance premium and pays losses from its own funds. The business set aside the funds to cover losses, should they arise. The amount set aside is calculated using actuarial valuation and theory of probability. The amount should be enough to cover the future losses. The idea of self insurance is that retaining the risk i.e by not buying insurance and paying the losses out of its own funds, is it cheaper process than buying insurance because the organisations self-insurance does not have to pay the profit component of the insurer.
The concept of self insurance may be advantages for large sized businesses as only such organisations may be able to be bear the losses.
Self-insurance does not work for small organisations as they rarely have enough money to set aside to cover a potential future losses.
Organisations going for self insurance should be more careful about loss prevention programs for example installing fire extinguisher, sprinkler system, adding burglar alarm etc. Prevention program is always desirable whether the business buys insurance policy are goes for self insurance.