This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. But a summary of its essence is that it is a collection of insurance coverages plus retirement savings, that requires participation by all citizens. Social insurance can be many things to many people in many countries. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work.
This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles. Self-insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. Stop-loss insurance provides protection against catastrophic or unpredictable losses. In the United Kingdom,
The Crown did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. It is purchased by organizations who do not want to assume 100% of the liability for losses arising from the plans. Along the way, this inevitably becomes related to other concepts such as the justice system and the welfare state. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to.
The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles. Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike.
In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts. In the United States, the most prevalent form of self-insurance is governmental risk management pools. Since many UK government buildings have been sold to property companies and rented back, this arrangement is now less common and may have disappeared altogether. Rather than these entities independently self-insure and risk bankruptcy from a large judgment or catastrophic loss, such governmental entities form a risk pool. Although a relatively small corner of the insurance market, the annual contributions self-insured premiums to such pools have been estimated up to 17 billion dollars annually.