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What is Self-Insured Auto Insurance?: Everything You Need to Know

on 8 Jul, 2019

In most countries, it is mandatory to have an auto insurance policy before you can register or operate your vehicle.

What if you did not have to take out an auto insurance policy with an insurance company?

It may sound crazy, but there is an alternative to the rule.

Most people are not aware that they can ensure their vehicles against liabilities without the need for an insurance coverage plan from an insurance company. You can become your own insurance company and cover your vehicle.

The above insurance gets referred to as self-insured auto insurance.

Due to its rare nature, not many motorists are aware of it. However, it is applicable in most countries, and you stand to enjoy a fair amount of benefits by implementing it.

Want to learn more about what self-insuring entails? Keep reading.

How Does Self Insurance Differ From Regular Insurance

Regular insurance entails sharing your liability costs with other people via an insurance company. Insurance companies operate on a pooling basis. They pool together the liabilities of numerous individuals to ease the burden of handling claims when an obligation occurs. 

Hence, the amount you pay in premiums to the insurance company is a contribution to the pool of liabilities the company has undertaken from its clients. This is how insurance companies can provide claimed settlements that exceed the cumulative sum of premiums you have paid.

When a claim gets made, the insurance company utilizes everybody’s funds (premiums) to cover the current claims.

On the other hand, self-insurance involves an entity (individual/organization) taking up full responsibility of their liabilities. In the event of peril, the entity provides the total amount of funds required to settle the damage.

In a nutshell, regular insurance helps people who can not afford to cover their full liabilities out of their pockets. Self-insurance is for people who do not need to pool their liabilities since they can cover the liabilities by themselves.

Can I Self-Insure My Car?

Whether or not you can self insure your vehicle depend on several factors.

1) Legislation

Before you get hyped about not paying your insurance premiums, make sure the insurance laws in your country/jurisdiction allow you to self insure. In most states, auto insurance is mandatory. However, in some countries and authorities such as Singapore and New Hampshire (US), the law is not stringent on having auto insurance.

In such cases, motorists have the option of either insuring with an insurance company or creating their self-insurance auto coverage plan.

2) Your Financial Capability

Taking up self-insurance for your vehicle is a demanding financial obligation. If your vehicle needs repair, gets stolen or totaled in an accident, you will have to provide the funds necessary for the claims. The claims could be for injured persons as well as damage to other people’s property.

For this reason, self-insurance gets regarded as a wealthy person’s alternative to regular insurance.

3) How Well Can You Cover Your Vehicle Liabilities

Corporations and institutions with deep pockets, consider typical insurance as an unnecessary expense. These institutions have many vehicles, and hence, they have to pay vast amounts of money in premiums.

As an alternative, they opt to get self-insured to minimize their expenses. For this to be possible, these corporations need to register with the insurance authorities in their countries or jurisdiction. They are then provided with a Certificate of Self Insurance to indicate they have valid insurance for their vehicles.

Types of Auto Self Insurance and How They Work

Depending on where you live or are based, you can enjoy two kinds of auto self-insurance. The two models are:

  • Full self auto insurance
  • Partial self auto insurance

It is essential to note that these terms are not official, but they apply to the level of coverage you choose. 

1. Full Self Auto Insurance

As the name suggests, an entity is fully liable for its vehicle liabilities. In this type of insurance, you have to have some level of proof that you can cover any liability that your vehicle can cause. For instance, if you injure an individual or damage another person’s property with your car; you are expected to cover their medical expenses and compensation respectively.

Before you are allowed to operate a self-insured vehicle with a Certificate Of Self Insurance, you need to provide Proof of Financial Responsibility.

Depending on the laws of the land, Proof of Financial Responsibility can be either of the following:

  1. A Large bank account: In some jurisdictions, wealthy individuals or organizations are considered financially responsible for liabilities due to the vast sums of money they have in their bank accounts.
  2. Depositing Funds with A State Office: In some states, having a large bank account doesn’t cut it. Besides, you could go bankrupt and fail to meet your obligation. Hence, you are required to deposit a given minimum sum of money with a specific agency that acts as an insurance regulator.
  3. Surety Bonds: For some states, you are required to post a surety bond of a given amount. In the event of a claim, the relationship will get utilized as an insurance policy to cover for damages and expenses.

From the above description, it is evident that full self auto insurance requires sufficient funds. For this reason, the average person is not capable of this type of insurance.

2. Partial Self Auto Insurance

This type of insurance stipulates that part of your vehicles liabilities are on you.

In countries where some type of auto insurance is mandatory, partial self-insurance gets applied.

In most jurisdictions of Canada and The USA, public liability and property damage, as well as Accident Benefits Insurance (sometimes), is a must-have. However, these two types of compulsory cover are just basic in the sense that they cover third-party liabilities caused by your vehicle.

Hence, you require additional (optional) cover against liabilities such as:

  • Acts Of God
  • Theft
  • Vandalism
  • Fire
  • Arson

As far as optional cover gets concerned, you can get it from an insurance company or get self-insured. If you choose to self insure, you have to set aside sufficient funds to cover for liabilities that could affect your car. Such responsibilities include:

  • Repairs after a collision
  • The cost of a new car if you total your current vehicle
  • The cost of replacing a stolen vehicle

With partial self auto insurance, you are covering the value that you could incur to replace or repair your car. Most motorists who opt for this option are:

  1. Able to cover the cost of repairs from their own pockets without needing help
  2. They can easily afford to buy a new car if the old one gets stolen or totaled
  3. The value of their vehicles is below the minimum required auto insurance cover amount

Advantages of Auto Self Insurance

The benefits of self-insurance are as follows.

1.  Saving On Insurance Costs

Most motorists with regular insurance never get to claim their policies. If you never get involved in an accident, you will never utilize the amount of money you paid in premiums. With partial self-insurance, you can opt to have mandatory coverage alone.

Hence you get to save on the premiums you would pay for additional coverage.

2. Improved Cashflow

With rising insurance costs, paying monthly premiums takes a toll on the insured’s monthly income. Additionally, insurance companies are businesses that need to make a profit. Hence your monthly premiums include tax as well as the company’s profits.

With self-insurance, you can eliminate this expense and thus retain more of your paycheck. Imagine saving all the money you spend on auto insurance and invest it wisely. You could improve your income tremendously.

3. Faster Claim Settlements

Insurance companies have a lengthy process for settling claims. They have to investigate the allegation and follow stringent procedure before they release funds.

However, if you are self-insured, you have direct access to your policy at will. Hence, you can settle a personal or third party liability with more ease.

4. Becoming More Cautious

Unlike regular insurance, you have to cover every claim out of pocket. Hence, you feel the pain of losing your hard earned money whenever you have to settle a claim.

Considering you do not have any aid in paying for damages, you tend to become more responsible for how you utilize your vehicle.

Disadvantages of Auto Self Insurance

Despite the above benefits, there are a few downsides to self-insuring your vehicle.

1. Heavy Financial Obligation

A large sum of money gets required for an individual to acquire self-insurance auto insurance. Apart from setting aside a large amount of money; when a liability occurs, the sum gets utilized.

Because you do not have any assistance in paying a claim, you stand to lose a substantial amount of money.

2. Greater Exposure to Liability

For institutions with auto self-insurance, exposure to liabilities is greater. Reason being that the cost liability for the vehicles doesn’t lie on the drivers. Hence, drivers are not as cautious as you would wish them to be with the cars because they are not liable for damages.

Conclusion on Self-Insured Auto Insurance

Before considering self-insured auto insurance:

  • Understand what it entails to be self-insured
  • Ensure it is allowed by the law of the land
  • Determine whether you want full or partial self-insurance
  • Make sure you can afford to handle your own vehicle liabilities

If you would like to learn more about the various types of auto insurance available for you, visit our car insurance blog page

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