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A self-funded (self-insured) plan is an alternative to the traditional transfer of risk to an insurance company. Rather than paying premiums to an insurer, the sponsor of a self-funded plan — typically an employer — sets aside its own reserves to pay covered claims directly as they occur.
Because the sponsor is directly exposed to the risk of unusually large or numerous claims, self-funded plans commonly purchase stop-loss insurance to cap the sponsor's liability. Stop-loss coverage reimburses the plan sponsor once claims exceed a specified retention level, protecting the sponsor against catastrophic losses that could otherwise threaten the plan's solvency.
Self-funded plans are funded directly by the sponsor rather than through insurance premiums, and typically rely on stop-loss insurance to limit exposure to catastrophic claims.
Under the California Insurance Code, self-insured association health plans are prohibited — an association may not self-insure the health benefits it offers to its members.