Why would a company want to be self-insured?


Editorial team Published on

A company chooses to self-insure (or self-fund) primarily to save money, gain financial flexibility, and take direct control over its risk and claims management.

Key Reasons Companies Self-Insure

  • Eliminating Insurer Profit and Overhead: With a traditional fully-insured plan, the insurance company charges a premium that includes built-in profit margins, administrative fees, and risk charges. If claims are lower than expected, the insurer keeps the difference. When a company self-insures, it pays actual claims directly and keeps any unused funds.
  • Improved Cash Flow: Instead of handing over large, fixed monthly or annual premiums to an insurance provider regardless of usage, self-insured companies hold onto their cash and only pay out money as actual claims occur.
  • Customization and Flexibility: Self-insured plans (especially employee health plans) are not locked into rigid, one-size-fits-all commercial packages. Companies can tailor coverage limits, deductibles, and specific benefits to fit their workforce.
  • Exemption from State Mandates (ERISA): Self-insured health plans are governed federally by the Employee Retirement Income Security Act (ERISA), which exempts them from many state-level insurance mandates and premium taxes that add costs to traditional plans.
  • Access to Data and Transparency: Traditional insurers rarely share detailed breakdowns of how healthcare or liability dollars are spent. Self-funding gives a company's leadership and CFO granular data on claims trends, allowing them to target wellness or safety programs where they are needed most.
  • Using Third-Party Administration (TPAs): Companies rarely manage the day-to-day paperwork themselves. They typically hire a Third-Party Administrator (TPA) to handle network access and claims processing while retaining the financial control of self-funding.
  • Protection via Stop-Loss Insurance: To guard against catastrophic or unexpectedly high claims, most self-insured businesses purchase stop-loss (or excess) insurance, which caps their maximum financial liability for individual or aggregate claims.