Self Insurance (and Gambling)

Self insurance is what companies (and people) do if they can’t afford insurance, or believe the chance of a catastrophic loss is small.

Example: Pet Insurance

Insurance, or the practice of sharing risk, goes back thousands of years. For most of history, if disaster struck (e.g. your house burned down), you were just out of luck.

But then insurance became a big business, because premiums (the cost of the policies) got cheap enough that most people and companies could afford coverage for the most common risks. Like health insurance, property (fire) insurance, and car insurance.

Lately however, insurance has gotten more expensive. So more people and companies are deciding to ‘self-insure:’ to not buy insurance they think they’re unlikely to ever need.

Pet and earthquake insurance are examples. People think: ‘The chance of my pet needing a $10,000 surgery, or an earthquake destroying my house, is really low… so why should I pay out all that premium money?”

Ideally, someone who self-insures would stash away the premium money they don’t spend, in case their pet does need surgery. But most people don’t do this, so they’re not really self-insured… they’re just not insured. And tragically, this is also the case for more crucial coverage like health insurance.

For individuals, the decision to buy insurance is often an emotional or gut-level one: a best guess. Whereas for businesses, it’s more numbers-driven. Companies have financial people look at statistics about risk, and weigh the cost of insurance against that risk.

Most companies end up buying insurance, because self insurance is almost never ‘cheaper.’ The exception is very large companies who can act like insurance companies themselves, buying healthcare directly for their employees rather than paying an insurance company to do it.

Decisions about insurance are complicated, so unfortunately, people and companies with more information and resources are more likely to do a better job making them.

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