Can A Small Business Self Insure?

  • John A. Osborne
  • Apr 15, 2023
Small Business Insurance South Dakota

As a small business owner, you may be wondering if self-insurance is a viable option for your company. Self-insurance, also known as self-funding, is a way for businesses to take on the financial risk of providing their own insurance coverage instead of relying on traditional insurance companies. While self-insurance can be a cost-effective solution for some businesses, it’s important to consider the potential risks and benefits before making a decision.

In this article, we’ll explore the ins and outs of self-insurance for small businesses and help you determine if it’s the right choice for your company.

What is Self-Insurance?

Self-insurance is a risk management strategy in which a company takes on the financial responsibility of providing insurance coverage for its employees. Instead of paying premiums to an insurance company, the company sets aside funds to cover potential claims. Self-insured companies may also purchase stop-loss insurance, which provides protection against catastrophic losses that exceed a certain threshold.

Self-insurance is commonly used for health insurance, but it can also be used for other types of insurance, such as workers’ compensation, liability insurance, and property insurance.

The Benefits of Self-Insurance

There are several potential benefits to self-insurance for small businesses:

  • Cost savings: Self-insured companies may be able to save money on premiums, as they don’t have to pay for the overhead and profit margins of an insurance company.
  • More control: Self-insured companies have more control over their insurance plans and can tailor them to meet the specific needs of their employees.
  • Flexibility: Self-insurance allows companies to adjust their coverage as needed, without having to negotiate with an insurance company.

The Risks of Self-Insurance

While self-insurance can be a cost-effective solution for some businesses, it’s not without risks:

  • Financial risk: Self-insured companies are responsible for paying all claims out of pocket, which can be a significant financial burden if there are high claims or catastrophic losses.
  • Administrative burden: Self-insured companies are responsible for managing their own insurance plans, which can be time-consuming and complex.
  • Regulatory compliance: Self-insured companies must comply with state and federal regulations, which can be challenging for small businesses with limited resources.

Is Self-Insurance Right for Your Small Business?

The decision to self-insure depends on several factors, including your company’s financial resources, risk tolerance, and the needs of your employees. Before deciding to self-insure, consider the following:

  • The size of your company: Self-insurance may not be a viable option for very small businesses with limited financial resources.
  • The health of your employees: Self-insurance for health insurance may not be a good option if your employees have high healthcare needs or pre-existing conditions.
  • The potential cost savings: Consider the potential cost savings of self-insurance compared to traditional insurance premiums.
  • The administrative burden: Determine if your company has the resources to manage its own insurance plan.


Self-insurance can be a cost-effective solution for small businesses looking to take control of their insurance plans. However, it’s important to weigh the potential benefits and risks before making a decision. Consider consulting with a financial or insurance expert to determine if self-insurance is the right choice for your company.

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