The IRS has said that for an arrangement to be considered “insurance” for Federal income tax purposes risk shifting and risk distribution must exist. Shifting means you have moved the risk off your books and given it to a separate entity. According to the Financial Accounting Standards (FAS) a company that is has to account for liabilities. This often creates problems and confusion with many business owners. The business has to deduct these for financial reporting, but they cannot take a deduction for tax-purposes. Self-insured losses are only deductible for tax purposes when the losses are incurred and paid.
This is clearly an example of risk that is not shifted to any other entity. The more difficult discussion is the distribution of risk once it is shifted to that separate entity.