Why is this Topic Important to Financial Professionals? This blogticle presents discussion on one area of the insurance world that is a hot topic. More and more businesses are seeking alternative risk insurance structures to cover a variety of risks. Those wealth managers who can assist clients in alternative risk transfer decision making provide additional resources and services over and above other competition.

What is Alternative Risk Transfer, or ART?

Alternative risk transfer, or ART is defined by International Association of Insurance Supervisors, to mean, “[a]ny form of risk transfer that include at least an element of insurance risk, opposed to pure financial risk, other than a pure insurance contract.” [1]

Alternative risk transfer has a long history. “The oldest known trace” of such insurance can be found in a maritime policy issued in Genoa in 1370. “That policy covered the shipment of goods from Genoa to Sluys and the most dangerous portion of the shipment trip, from Cadiz to Sluys, was reinsured.” [2]

Some distinguishing characteristics, as compared to traditional insurance or pure insurance contract, may include but are not limited to:[3]

• Non-traditional risk funding;
• Underwriting income retention;
• Unique and individual underwriting, i.e., lines of coverage can varry depending on types of risk a may be exposed to;
• Access to coverage for risks the conventional insurance market may consider uninsurable or too costly to insure through traditional methods; or
• Potential to reinsure certain risks

Why would a business consider ART?

Generally, there are uninsurable risks or risks that are prohibitively expensive or otherwise unavailable to insure through the traditional insurance market that a business may be exposed to by operating in its environment. These risks pose various threats to the operation of the business, and just as traditional risks such as fire, theft and flood loss are covered though risk diversification, a business may want to consider the possibility of other detrimental events that could significantly negatively impact its business, and take affirmative action to limit the possibility of losses.

The alternative risk transfer market can be divided into two general categories: “(1) alternative carriers and (2) alternative products.” [4] Examples of the former include:

• Self-insurance arrangements
• Captive insurance companies, which could include, wholly owned insurance subsidiaries, group captive insurance arrangements or some combination or multiple structures.
• Risk retention groups, which are generally formed to, as the name states, retain risk within a group of similar businesses or similar risks.

The latter general category may include[5]:

• multiline products
• specialty products written through an insurer such as Lloyds of London
• some derivatives and finite risk products

Generally, the “[i]nsurance industry has realized that though conventional risk transfer solutions are almost always [favored] (when available at viable pricing levels), it becomes essential to investigate the value of non-conventional solutions and to focus on the benefits that can be derived from these solutions.” [6]

In sum, there are situations where alternative risk transfer may be preferable to more traditional alternatives. Wealth managers that can identify potential cost savings for clients through alternative risk transfer present a competitive advantage.

Next week’s blogticle will discuss some particular risks that may be considered for ART.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] International Association of Insurance Supervisors (IAIS).  “Glossary”.   http://www.iaisweb.org/index.cfm?pageID=47##.  Last Accessed 8/24/2010.

[2] See generally Vladimir Njegomir and  Rado Maksimović. Risk Transfer Solutions for the Insurance Industry. Economic Annals, Volume LIV, No. 180, January – March 2009 citing, Herrmannsdorfer, F. (1926), Bedeutung und Technik der Rückversicherung, Verlag von Piloty & Loehle, München,p. 332.

[3] IAIS. Glossary.

[4] “Alternative Risk Transfer”.  Deepak Godbole.  General Insurance Corporation of India Bimaquest – Vol. IV Issue I1, 37, 41 July 2004. http://www.niapune.com/pdfs/Bimaquest/Volume-4_Issue%202/godbole.pdf.  Last accessed 8/24/2010.

[5] Id.

[6] Id. at 39.

Tags: alternative risk transfer, Business, captive insurance, General Insurance Corporation of India, insurance, International Association of Insurance Supervisors, reinsurance, self insurance

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