Why Self-Insurance Sounds Smart… But Usually Isn’t

Last year, Sam seriously considered cancelling home and car cover and diverting the premiums into a rainy-day fund. After months with no incidents—and Stage 6 loadshedding hovering—Sam figured it made sense to bank the cash. Then, a power surge fried the gate motor and inverter the same week a burst geyser soaked the passage. The savings pot helped, but the quotes, logistics, and cash outflows swallowed the “premium savings” fast. In the end, Sam was left weighing two paths: keep paying into a large risk pool with professional claims handling, or try to self-insure with a fund that needs time, discipline, and a lot of luck to be enough when something big (or two things at once) goes wrong.

Here’s why, for most people, the pooled option still wins.

Concentrated risk vs pooled risk

When we go a long time without claiming, it’s tempting to think self-insurance would be cheaper. But risk inside one company (or one household) is concentrated. Insurers spread that same risk across thousands of policyholders, which is why the model works.

Immediate cover beats slow accumulation

External insurance gives you cover today. Self-insurance requires time and discipline to build a fund.

About that inheritance example:
A lump sum (like an inheritance) helps with cash flow—you can pay the bill immediately—but it doesn’t make the loss go away. If you spend R80,000 of inherited money to replace a burst-geyser mess and fried electronics, you’ve reduced the value of that inheritance by R80,000. That’s not a “saving”; it’s simply using different money to absorb the loss.

Savings only show up when the source of the payout is the premiums you didn’t pay because you were self-insuring—and even then, only if those saved premiums over time exceed the losses. Until a self-insurance fund has been built (and ring-fenced) from actual premium savings, you’re just spending capital.

Simple test:
If the money you’re using didn’t come from a disciplined, dedicated “premium-savings” pot, you haven’t saved—you’ve funded the loss yourself.

For smart ways to think about resourcing and spend, see Head Count Doesn’t Count: Smarter Ways to Manage Costs.

Claims handling is a skill (and a stress reducer)

Loss events are stressful. Professional insurers—and brokers—bring claims expertise, bargaining power, and logistics support. Running your own “mini-insurer” demands time, skill, governance and discipline most people would rather invest elsewhere.

The hidden admin you’d have to run

Premium collection, investing the float, claim assessment, fraud/quality checks, and fair settlements—all of this is already baked into your premium with an external insurer.

Pricing isn’t one-size-fits-all

Assets carry different probabilities and severities of loss. A house may have a lower probability of loss than a car, but the impact of losing a house is far greater. Insurers use data to price that mix and then protect themselves with reinsurance. An individual can’t replicate that economically; trying to buy reinsurance privately is just paying for the very insurance you were avoiding.

The practical conclusion

Premiums reflect probability and exposure plus admin, distribution, and profit. Insurers win on scale, diversified risk, investment float, and reinsurance. Individuals (and even cash-rich firms) rarely match that combination. Formal insurance remains the practical, reliable way to guard against unpredictable loss.

Related learning & resources

If you want to strengthen the day-to-day financial judgement that sits alongside good risk decisions, these short, practical courses help:

• Budgeting and Cost Control — build and monitor budgets; ideal for sizing emergency funds vs. deductibles and planning cost control.
• Excel Financial Modelling Course — stress-test cash flow, reserves, and risk scenarios with robust models.
• Finance for Non-Financial Managers — read financial statements, price risk, and make confident calls without the jargon.

And for broader context on growing your financial judgement, you might also like: Adding Finance To Your Range of Competencies.

Risk and cost judgements like this one are exactly what finance training for managers and teams is built to sharpen. Ask John what would fit.