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What Is Self-Insurance?

Key Takeaways

  • Self-insurance involves businesses saving funds independently to cover potential damages or losses, bypassing third-party insurance policies.
  • Self-insured businesses benefit from cost savings, earning interest on reserved funds, and increased control over their finances.
  • Despite its benefits, the challenges associated with self-insurance include the potential for significant losses, the need for in-house administration, and inconsistent expenses. 
  • Lastly, we review the pros and cons of self-insurance and the importance of seamless COI tracking. 

Many businesses try to save money wherever they can to protect their bottom lines. Insurance premiums can add up, so it’s only logical for companies to consider self-insurance as a way to reduce expenses.

Self-insurance is when a business forgoes third-party insurance policies, and instead independently allocates funds to manage unexpected claims. While this can be used against virtually any type of potential damage or loss, this strategy is not always advisable.

The logic behind it is that providers calculate premiums based on forecasted risk. These figures are designed to profit the insurance company by bringing in more money than they are likely to pay out. Under this reasoning, a business should theoretically be able to set aside funds in case an incident occurs—protecting themselves without an insurance company taking a cut.

Some of the most prevalent types of self-insurance options for businesses include commercial vehicle and fleet coverage, general liability coverage, and property coverage with laws and restrictions varying by state and industry. 

Federal law requires any business with employees to hold unemployment, workers’ compensation and disability insurance, but state guidelines may also call for additional policies. Failure to comply with these requirements can lead to costly penalties, so decision-makers should speak to qualified insurance professionals before choosing a course of action.

To help you weigh your options, bcs has outlined the key advantages and disadvantages of pursuing self-insurance.

What Are the Pros & Cons of Self-Insurance?


  • Cost: In some cases, self-insurance may be more economical for businesses that face infrequent and/or minor losses. Since monthly premiums add up and claims may increase these expenses, maintaining a fund to cover costs as they arise may be an affordable alternative. For example, a business located in an area not prone to flooding may skip flood insurance in favor of self-insurance. The facility could still flood, and the business would have to pay for damages, but the relatively low risk may make it an appealing option.
  • Interest: The funds you earmark for can accumulate interest until they’re accessed, growing substantially if you have infrequent losses.
  • More Control: With self-insurance, you’re not bound to insurance policy fine print containing specific exclusions and stipulations. You can spend the designated funds to cover virtually any incident and don’t have to worry about using an insurance company’s preferred vendor list.


  • Potential for Significant Loss: Some types of claims can be extraordinarily costly. Even if unlikely, a business may not be able to cover such an incident through self-insurance alone. Because of this, most companies prefer to purchase third-party insurance policies to cover infrequent—though potentially significant—losses they’re unlikely to be able to pay on their own.
  • In-House Administration: You will need a staff member or third-party administrator to manage the funds, pay out claims, and maintain records, which can reduce the cost-effectiveness and convenience.
  • Inconsistent Expenses: Since claim amounts and frequency may vary, it can be difficult to anticipate how much you need to put into your self-insurance fund.
  • Government Regulations: Businesses with a certain number of employees are required to hold specific insurance policies. Failure to do so can result in hefty fines, so you’ll need to be careful to remain in compliance.

Is Self-Insurance the Right Solution for Your Business? 

All forms of insurance are essentially risk transfer strategies. 

When you purchase an insurance policy, you are paying a third party to shoulder some of the risk. If you self-insure, however, you are choosing to retain the risk yourself.

Ultimately, understanding your business' financial means, coverage needs, and the level of risk associated with your industry is crucial for making informed decisions regarding whether self-insurance is right for you, and what you can afford to cover.

For many businesses, the ideal solution will likely be a combination of third-party policies and self-insurance. Self-insuring against lower-risk claims while maintaining third-party coverage for higher-risk ones can help your business stay financially protected, and save you money in the long run. 

bcs Offers Full-Service Tracking to Meet Your Unique Needs

Every business should purchase insurance based on their specific needs and risk posture.

However, when partnering with third-party vendors, organizations must also consider their insured status to maintain compliance and mitigate liabilities.

For efficient document storage, tracking, and correction processes, consider cloud-based solutions. These platforms offer convenient access to certificates of insurance (COIs) and other vital documents, while also automatically addressing any deficiencies, ensuring a smooth path back to compliance.

It’s as easy as 1-2-3: upload the insurance documentation, store it in the secure cloud server, and let the automated technology highlight fields requiring correction.

Whether your vendors are self-insured, maintain a conventional policy, or have some combination of the two, bcs’s full-service tracking seamlessly manages all the intricate details of the COI tracking process so you can focus on running your business.

bcs is a leading vendor management solution offering full- and self-service COI tracking options designed for vendor management, onboarding, and so much more. To effortlessly manage your third-party insurance documentation, contact us today or schedule a demo.

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Learn from the pros about risk-mitigation, document tracking, and more, with expert articles from bcs.

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