Why do companies use self-insurance?

• A. To fund employee group health plans, workers' compensation, and pension plans
• B. To avoid all regulation
• C. To maximize short-term profits
• D. To reduce administration cost of claims

Answer: (A)

Self-insurance is when a company funds and pays for its own employee benefit claims rather than buying insurance through a traditional policy. Large employers choose this approach to gain more control over plan design, funding, and cash flow, with the potential to lower costs if actual claims are below expectations. The main areas where this is applied are the major employee benefit programs that generate ongoing costs—health plans, workers’ compensation, and pension plans—because these are predictable, long-term obligations tied to employees. To manage the risk of very large or unpredictable claims, companies typically use stop-loss insurance to limit their worst-case losses while still handling routine claims in-house. This setup does not mean evading regulation; self-funded plans are still subject to applicable laws (like ERISA in the U.S.) and require careful fiduciary and financial management. It isn’t primarily about maximizing short-term profits or simply reducing administration costs, since self-insurance shifts and shares different kinds of costs and responsibilities depending on the organization’s claims experience and administrative structure.