Self-insurance is Definition, basic principles, advantages and disadvantages

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Insurance is not a modern discovery at all. It has been known to people since ancient times. Moreover, its first form is self-insurance. In the article we will analyze this concept, which remains relevant today. Consider its special features and characteristics, the history of formation.

What is this?

Self-insurance is the simplest, earliest way to organize insurance protection. It was he who preceded mutual and commercial insurance. The latter are now aimed at a wider range of risks, capable of providing more reliable and cost-effective protection.

Self-insurance is an organizational and legal form of insurance, the purpose of which is the formation of a reserve reserve by an individual / business entity from its own funds. And the continued use of such a fund to compensate for damage that may be caused by adverse, unforeseen circumstances.

Self-insurance is a method of forming insurance funds in a decentralized form by any economic entity, in order to ensurecontinuity of production, subject to a variety of risky circumstances.

Features

There are two main forms of self-insurance - monetary and in-kind. The insurer independently forms and subsequently uses the monetary reserve fund and/or reserves created by him in the form of materials, raw materials, products in the event of any unfavorable economic situation. For example, a delay in payment for products by customers. The procedure for using funds from such funds is not only compiled independently by the customer, but also approved by him in the charter of the business entity.

In a market economy, the boundaries of self-insurance have expanded significantly. Today it can be called a risk fund.

The disadvantage of this system is that it does not have (or significantly limited) the damage layout. Therefore, in order to provide insurance real protection, the formed reserves should reach such a value that could be comparable to any damage expected by the insured.

Main Forms

One of the advantages of self-insurance is that the reserve fund can be formed in two forms:

• Natural. Examples: grain, raw materials, fodder. Basically, such reserves are created in case of crop failure, disasters, fires and other adverse circumstances. Common in agriculture, industry.
• Money. This form of self-insurance is more popular in the market environment. It can be used not only by business entities, but also by ordinarypopulation.

Historical Development

Self-insurance is a phenomenon that has been relevant since the early history of mankind. Then it was understood as some simple reserve funds - reserves for further use in adverse conditions. They could be grain, fresh water, food, vital products.

Self-insurance is not only an individual, but also a collective phenomenon. Reserve funds were created by members of communities (communities, families, etc.) on the basis of a common agreement. The decision to use the accumulated funds in the event of any circumstances was taken collectively, but in a hierarchical manner. That is, the elders, the leaders, had the last word.

One of the common examples of such historical self-insurance is the insurance described in the ancient Egyptian book of Genesis. This is the sanctioned policy of Pharaoh Joseph. It was aimed at ensuring that during some "fat" (fruitful) years grain was harvested in sufficient quantities to survive future lean summers.

With the further development of mankind, self-insurance methods continued to be relevant. They are currently in use. A classic example: funds are created at the state level, intended for further use only in case of natural disasters, wars, man-made disasters, etc.

Characteristics

Whatdifferent method of self-insurance risks? It stands out for the following features.

• The insured is the sole owner of the insurance fund (on the basis of property rights). He can dispose of these reserves only at his own discretion. The policyholder independently determines the procedure for using the resources of the reserve fund. The inventory owner alone decides when an insured event occurs.
• Lack, as such, of an insurer - external or attracted insurance funds.
• The insured himself is the creator of his insurance fund.
• In terms of creating insurance funds and approving insurance programs, the insured remains responsible only to himself.
• The nature of such self-insurance by a company or individual is non-commodity.

Building funds

Self-insurance of risks (insurance of force majeure situations) can be carried out by any entity - an individual or a legal entity, an individual citizen or family, a state or a municipality. The insurance fund will be formed here only on the basis of the own funds of the mentioned persons. The creator intends to use them only in the event of specific insured events.

Insurance programs are also created by him independently. They are presented in non-commodity (financial or in-kind) forms. In this case, the policyholder himself acts as his own insurer.

The formation of funds here usually occurs in the following ways.

• Individuals form savings from their own income.
• Legal entities - at the expense of their commercial profits. Or the funds included in the cost of the products they produce/sell.
• States - at the expense of the budget.

Necessity

Today, self-insurance is a decentralized way of forming insurance funds. It is included in a single interconnected system for providing insurance protection together with the state insurance centralized reserve and other insurance methods.

The objective need for self-insurance has been preserved at the present stage of development of human society due to the following circumstances:

• both the complication of technical ties and scientific and industrial progress increase the need for insurance protection (but at the same time, insurance companies are not always fully able to provide it);
• big plus of self-insurance: it allows the entity to control the placement of its reserve funds.

On this wave, the so-called insurance captive companies appeared, which are formed within an industry to manage the risks of the founders. Such an insurance fund is already getting institutionalized. And it already has features of both insurance and self-insurance.

Apparition today

Once again, we note that self-insurance remains relevant in today's reality. For example, to this day, the state forms reserve funds from the budgetary funds under its jurisdiction. In futurethey are used in the event of national adverse circumstances - major natural disasters, mass armed conflicts, man-made disasters.

Among the commercial examples, a number of foreign shipping companies can be identified. They periodically deduct certain amounts from their turnover to the reserve insurance fund. Formed by them independently, it covers the costs of repairing ships after accidents, replacing dead vehicles with new ones, and so on. But at the same time, such self-insurance does not exclude the possibility of insuring the vessel against certain risks already in third-party insurance companies.

Who benefits?

Self-insurance needs to be considered by commercial organizations that have been using the services of external insurers for more than a year. That is, they have clear statistics on risks, losses, damages relative to themselves.

Here, self-insurance of your own employees, company vehicles is an excellent option, since the probability of an insured event with the need for large payments is relatively low. Here the company itself can decide what losses should be covered. This is a definite plus of this method.

When self-insuring transport, one should not forget about the legislation in force in the country. If there is a culprit in the accident, his insurance company must compensate for the damage.

Why is it so rarely used?

Still, self-insurance in the modern world is not as common as the classical one. Why? Main downside: it's dangerous. If the loss for a specific insured event is quite large, then the prepared reserve fund may not be enough to compensate for it. The company can go into the red paying for it.

One more reason: there are no specialists, consultants of sufficient competence who could establish a self-insurance system for legal entities who want it. Their absence is easily explained: the presence of such specialists makes them serious competitors to large insurance companies that do not want to lose their customers.

Only those firms that have clear statistics on their risks decide on self-insurance. Whose reserve funds can pay for any damage resulting from an insured event. There aren't many of them, of course. Self-insurance is sometimes a negative factor for employees of such companies, as it can deprive them of their usual preferences.

Self-insurance is the very first form of insurance. Yet it remains relevant to this day. It all started with the harvesting of grain and other vital resources for a lean year. Today, almost every one of us has the experience of self-insurance, many save money for the notorious "rainy day". But in relation to legal entities, self-insurance is not yet very developed.