Self Insurance

Self Insurance is protection against loss by setting aside one's own money. This can be done on a mathematical basis by establishing a separate fund into which funds are deposited on a periodic basis. Through self insurance it is possible to protect against high-frequency low-severity losses. To do this through an insurance company would 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.
I believe this definition is too restrictive as follows:
Many entities that self insure do not "set aside" any money at all
Separate funds are, I think, less common than separate accounts or registers
I do not believe the word "protect" is apropos. The net risk position of the entity does not change if it declares itself "Self insured."
While insurance contains the frictional costs enumerated, self insurance contains implicit costs that may be similar, e.g., administation and payment of internal claims, implicit capital charges that result where the liquidity position of the entity alters to match the volatility introduced by the decision to self insure
There is also a distinction that should be recognized between voluntary self-insurance (the entity could purchase insurance and chooses not to) and involuntary (insurance is not available in type or amount satisfactory to the entity). In some sense everyone 'self insures' because they are unable to purchase unlimited protection in areas where unlimited exposures exist (e.g., general or personal liablity)
The following would be my rewrite. Comments, please?
Formal Self Insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. 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. Self insurance is ususally 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. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.