One self insures by using their own money

I think that's just semantics. Many schools self insure. Obviously the cost of self insurance comes from somewhere, whether it is higher tuition or fund raisers (I'm talking about private scahools).

Would you have been happier if Joe just increased postage and not charged for insurance.

What happens when the item doesn't arrive or arrives damaged but the seller refuses to make good on his insurance

I assumed the whole point was there would be a reimbursement or replacement no questions asked.