Insurance is not a discovery of our time. It has been known to people from time immemorial. Moreover, its first form is self-insurance. In the article we will analyze this concept, which remains relevant today. Consider its special features and characteristics, the history of formation.
What it is?
Self insurance is the easiest, earliest way to arrange insurance coverage. It was he who preceded mutual and commercial insurance. The latter today are aimed at a wider range of risks, capable of providing more reliable and cost-effective protection.
Self insurance is the legal form of insurance, the purpose of which is the formation by an individual / business entity of a reserve reserve from their own funds. And further use of such a fund to compensate for damage that may be caused by adverse, unforeseen circumstances.
Self-insurance refers to the method of forming insurance funds in a decentralized form by any business entity, in order to ensure uninterrupted production, subject to a variety of risky circumstances.
Features
There are two main forms of self-insurance - monetary and natural. The insurer independently forms and uses in the future the created reserve money fund and / or reserves in the form of materials, raw materials, products in the event of any adverse economic situation. For example, delayed payment for products by customers. The procedure for using funds from such funds is not only compiled independently by the customer, but is also approved by him in the charter of an economic entity.
In a market economy, the boundaries of self-insurance have expanded significantly. Today it can be called a risk fund.
The disadvantage of this system is that it does not have (or is significantly limited) the layout of the damage. Therefore, to ensure real insurance coverage, the formed reserves must reach such a value that could be comparable with any damage expected by the insured.
Main forms
One of the advantages of self-insurance is that the reserve fund can be formed in two forms:
- Natural. Examples: grain, raw materials, fodder. Basically, such reserves are created in case of crop failure, catastrophes, fires and other adverse circumstances. Distributed in agriculture, industrial sphere.
- Cash. This form of self-insurance is more popular in a market environment. It can be used not only by business facilities, but also by ordinary people.
Historical development
Self-insurance is a phenomenon that is still relevant for the early history of mankind. Then it was understood as some simple reserve funds - reserves for further use in adverse conditions. They could be grain, fresh water, food, vital products.
Self insurance is not only an individual, but also a collective phenomenon. Reserve funds were created by community members (communities, families, etc.) on the basis of a conventional arrangement. The decision to use the accumulated funds in the event of any circumstances was taken collectively, but in a hierarchical order. That is, the last word was for the elders, leaders.
One common example of such historical self-insurance is insurance, described in the ancient Egyptian book of Genesis. This is the sanctioned policy of Pharaoh Joseph. It was aimed at ensuring that during some “fat” (productive) years grain was harvested in an amount sufficient to survive in the future lean summers.
With the further development of mankind, self-insurance methods continued to be relevant. They are currently used. A classic example: at the state level, funds are created that are intended for further use only in the event of natural disasters, wars, technological disasters, etc.
Characteristic signs
What is the difference between the method of self-insurance of risks? It stands out with the following features.
- The policyholder individually owns the insurance fund (on property rights). He can dispose of these reserves only at his discretion. The policyholder shall independently determine the procedure for using the funds of the reserve fund. The stock owner alone decides when an insured event occurs.
- The absence of such an insurer - external or attracted insurance funds.
- The policyholder himself is the creator of his insurance fund.
- In terms of creating insurance funds and approving insurance programs, the policyholder remains liable only to himself.
- The nature of such self-insurance of a company or individual citizen is non-marketable.
Fund building
Any entity can engage in self-insurance of risks (insurance of force majeure situations) - individual or legal entity, individual citizen or family, state or municipality. The insurance fund will be formed here only on the basis of the own funds of the mentioned persons. The creator intends to use them only upon the occurrence of specific insured events.
Insurance programs are also created by him independently. They are presented in non-commodity (financial or in-kind) forms. In this case, the policyholder himself acts as his own insurer.
The formation of funds here usually occurs in the following ways.
- Individuals generate savings from their own income.
- Legal entities - at the expense of their commercial profits. Or funds included in the cost of production / sale of products.
- States - at the expense of the budget.
Necessity
Today, self-insurance is a decentralized way to form insurance funds. It is included in a single interconnected system of insurance coverage in conjunction with the state insurance centralized reserve and other insurance methods.
The objective need for self-insurance has survived at the modern stage of development of human society due to the following circumstances:
- both the complication of technical relations and scientific and industrial progress increase the need for insurance protection (but at the same time, insurance companies are not always fully able to provide it);
- a big plus of self-insurance: it allows the entity to control the placement of its reserve cash.
On this wave appeared the so-called captive insurance companies, which are formed within any industry to manage the founders' risks. Such an insurance fund is already receiving institutional design. And he already has the features of both insurance and self-insurance.
Phenomenon today
Once again, self-insurance remains relevant in modern reality. For example, to this day, the state forms reserve funds from subordinate budgetary funds to it. In the future, they are used in the event of nationwide adverse circumstances - major natural disasters, massive armed conflicts, technological disasters.
Among commercial examples, a number of foreign seafaring companies can be distinguished. They periodically deduct certain amounts from their turnover to the reserve insurance fund. Formed by them independently, it covers the costs of repairing ships after accidents, replacing dead transport with new ones, and so on. But at the same time, such self-insurance does not exclude the possibility of insuring the vessel against certain risks already with third-party insurance companies.
Who benefits from this?
It is necessary to think about self-insurance for commercial organizations that have been using the services of external insurers for several years. That is, they have clear statistics on risks, unprofitability, and losses relative to themselves.
Here, an excellent option is self-insurance of own workers, official vehicles, since the likelihood of an insured event with the need for large payments is relatively low. Here the company itself can decide what losses should be covered. This is a definite plus of this method.
When transport self-insurance, do not forget about the current legislation in the country. If there is a culprit in the accident, his insurance company must compensate for the damage.
Why is it so rarely used?
Nevertheless, self-insurance in the modern world is not as widespread as classical. Why? The main minus: it is dangerous. If the loss for a particular insured event is quite large, then the prepared reserve fund may not be enough to compensate for it. The company can go into the red by paying it.
Another reason: there are no specialists, consultants of sufficient competence who could establish a self-insurance system for interested legal entities. Their absence is simply explained: the presence of such specialists makes them serious competitors to large insurance companies that do not want to lose their customers.
Only those companies that have clear statistics on their risks can decide on self-insurance. Whose reserve funds can pay for any damage arising from an insured event. Of course, there are not so many of them. Self-insurance is sometimes a negative factor for employees of such companies, as it can deprive them of their usual preferences.
Self insurance is the very first form of insurance. At the same time, it still remains relevant. It all started with the harvesting of grain and other vital resources for a lean year. Today, almost every one of us has the experience of self-insurance, many save money for the notorious "rainy day". But in relation to legal entities, self-insurance is not yet very developed.