What is an Alternative Risk Transfer Market?

Alternative risk transfer (ART), also known as structured insurance, is a form of coverage or protection used by risk-bearing organizations other than by conventional insurance and reinsurance. In simple terms, alternative risk transfer, or ART, is an alternative to insurance where a corporation can transfer risk without the use of a conventional form of business insurance. Its solutions are particularly useful where traditional insurance is not effective in unique and challenging situations. It provides unique ways of managing risks that are increasingly complex to businesses that can not be covered by conventional insurance and have led to increased use of the risk transfer form. The alternative market for risk transfer includes Risk Retention Groups (RRGs), insurance bins, and captive insurers.

How does the Alternative Risk Transfer (ART) Market Work? 

The area of alternative risk transfer grew out of a series of insurance capability crises in the 1970s through the 1990s that forced conventional coverage purchasers to search for more flexible forms of purchasing security. Across two key categories, the alternative risk transfer market is broken down into risk transfer via alternative products and risk transfer via alternative carriers. Most of these approaches enable investors in capital markets to play a more direct role in insurance and reinsurance security, thus increasing convergence between insurance and financial markets in the wider field of alternative risk transfers. The alternative market for risk management offers an organization multiple forms of policy-making options, giving it a customized existence.

Options for Companies when choosing Alternative Carriers

The main market for alternative risk transfer is self-insurance, where businesses are still government-regulated, but allowing a company to have flexibility through cost reduction and faster demand procedures. The combination of risk transfer and retention provides client security at low cost, for the benefit of both the insured and insurance companies. The following coverages are common to self-insurers:

• insurance for employees
• general liability
• vehicle liability
• physical injury

Regardless of the fact that the various States have strongly regulated compensation and automotive liability of employees, the growth of self-insurance has continued in these two sections; as cost-effective and improved risk protection are typically associated with self-insurance.

Alternative Risk Transfer Market Options

Unusual mediums used for common risk include:

• Risk Retention Groups (RRG): self-insurance (money) contributed by several small to medium-sized enterprises.
• Self-Insured Retentions (SIR): an option of setting aside the capital (money) to be used in cases of losses.
• Earnings Protection: policies available during a certain financial period through a common loss of income.
• Captives: a secondary (subsidiary) insurance company that insures only the parent company.
• Rent-a-Captives: captives exchanged by several firms that are not the parent company but the parent company manages the funds.
• Finite Insurance: multi-year policies on insurance.
• Multi-Trigger Policies: policies caused by a different timeframe by separate events.
• Integrated risk: policies covering a range of different risks (some of which are not regular insurance risks).

Other Alternative Risk Transfer Market Options

Capital market-based mediums include: Securitization: this is a procedure for combining risks into debt/equity securities that can be exchanged on financial markets. Insurance-linked bonds: this option includes bonds that completely or partially lose their principal/interest if a predicted event occurs. Contingent Surplus Notes: In this option, the notes the capital (money) supply holders when there is a loss. Weather Derivatives: policies are made available for the occurrence of certain extreme weather events in this option. Cat-E-Puts (Catastrophe Equity Put Options): this option allows a company to sell/emit equity at a fixed price in case of an event of a disaster.

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• Underwriter 
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