The idea behind purchasing insurance is to safeguard yourself against a potential financial loss that you would be unable to cover on your own.
Accurate risk assessments by actuaries and underwriters are the specialties of insurance companies that help them generate revenue.
They charge premiums that enable them to pool together enough money—from all policyholders’ premiums—to save more than they pay out in claims over time.
They base these losses on the actual data of claims that have been paid.
In some way, everyone is self-insured. You are self-insured whenever you do not have an insurance policy that covers a risk.
For instance, if you’re renting and don’t have renters insurance, but you go to the store and buy a stereo without realizing it, you’re self-insuring the stereo.
Accepting full responsibility for the safeguarding of one’s assets and, consequently, the financial risks associated with potential losses, such as being robbed, is self-insurance.
