Why is this Topic Important to Financial Professionals? “The ART market unites the risk management and product development skills of financial institutions, insurers and reinsurers with the capital of global investors to give corporate risk managers the best possible means of managing financial and operating risks.” [Source:  Bimaquest - Vol. IV Issue I1, 37, 44.  July 2004.]

What is Alternative Risk Transfer, or ART?

As defined by International Association of Insurance Supervisors, ART means, “[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]

Some distinguishing characteristics, as compared to traditional insurance coverage, may include but are not limited to:[2]

• Untraditional risk funding
• Underwriting income retention
• Varying coverage depending on types of risk a business or individual may be exposed to
• Access to coverage for risks the conventional insurance market may consider uninsurable
• Potential to reinsure certain risks

Why would a business or individual consider ART?

Generally, there are uninsurable risks or risks that are prohibitively expensive 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 are covered though risk diversification, a business may want to consider the possibility of other detrimental events that could significantly affect its business.

The alternative risk transfer market can be divided into two general categories: “(1) alternative carriers and (2) alternative products.” [3] 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 other general category may include[4]:

• 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.” [5]

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

[2] Id.

[3] “Alternative Risk Transfer”.  Deepak Godbole.  GeneraI 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.

[4] Id.

[5] Id. at 39.

Tags: alternative risk transfer, ART

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