Alternative risk transfer (ART) solutions represent specialized risk financing mechanisms designed to venture beyond the conventional insurance market. These solutions aim to reduce the expenses associated with more traditional risk transfer strategies by exploring non-traditional avenues. Historically, these solutions catered to larger businesses possessing robust financial positions that would allow them to take advantage of captive insurance companies, risk-purchasing groups/pools, etc. Not anymore.
Today, many ART solutions are becoming accessible to small and midsize businesses. These solutions can be leveraged to better optimize an organization’s risk profile – capital flexibility, achieving greater budget certainty, and alleviating administrative complexities. The range of options for risk transfer is expanding, with some solutions enhancing existing “traditional” coverage forms and others enabling businesses to finance risks that commercial insurers inadequately address. Below we delve into the existing ART landscape and explore what’s on the rise.
SHIFTING TIDES IN RISK MANAGEMENT
ART solutions, once predominantly found in the reinsurance sector, have become prevalent in the primary insurance market. As the alternative risk transfer market expands, providers and financiers are devising inventive solutions catering to companies of all sizes. This growth can be attributed to variety of market factors including:
Rate increases and restrictions: Insurance pricing for properties exposed to catastrophes, (particularly those businesses that suffer significant losses or operate in economically strained sectors) has been steadily increasing since 2017. Given these circumstances, many companies seek sufficient coverage without incurring excessive costs.
Increased presence of external capital: In the past, alternative risk financing primarily relied on significant insurers catering to riskier ventures. However, the landscape has evolved, and additional sources of capital have entered the ART arena. Private equity, sovereign wealth, hedge, and pension funds are now contributing to the expanded capital base for ART solutions.1
Technological advancements: Modern predictive modeling and risk technologies have revolutionized risk management. These sophisticated tools provide organizations with higher-quality data and analytics, empowering them to mitigate risks more effectively. Insurers and other stakeholders can now accurately assess and price risks, instilling confidence and encouraging innovation.
Market stagnation: Standard insurance policies offered by insurers may not always address evolving business requirements. Consequently, many organizations actively seek customized or tailored solutions, which insurers are often reluctant or unable to provide. This gap in the market has fueled the demand for alternative and flexible ART products.
TECHNOLOGY AND EMERGING AREAS OF ALTERNATIVE RISK TRANSFER
New approaches to risk transfer are anchored by technology and dynamic customization. As a result of the pandemic and national catastrophes over the past few years, unprecedented circumstances have prompted many organizations to reevaluate their perception of risk and uncover protection gaps. Thankfully, digitalization and alternative risk solutions are steadily advancing to shape the future of risk management.
At MJ, our proprietary software, APERTURE, plays a pivotal role in quantifying risks and creating adaptable profiles that respond to the ever-changing environment. With APERTURE, we gain valuable insights into past and potential future events, enabling us to develop innovative solutions that effectively mitigate these risks.
Across the board, progress in predictive modeling technology is opening new avenues for alternative risk solutions. Nonstandard integrated risk solutions, parametric insurance, and Multi-year Single Limit (MYSL) line-specific policies are just a few of the innovative solutions on the rise and key areas to monitor as emerging solutions.2
Even traditional Alternative Risk Transfer (ART) strategies are undergoing transformation. Capable of taking on several different forms, ART continues to adeptly blend traditional insurance and reinsurance with forms of self-funding allowing for greater complexity and degrees of customization. Examples of common ART strategies include:
- Loss-sensitive insurance plans, in which your premiums are based on your losses
- Risk-purchasing groups of individuals purchasing liability insurance
- Self-insured retention plans
- Protected cell captives, which allow you to rent a captive while ensuring complete separation of assets, capital and surplus between you and other participants.
- Self-insured groups and pools
- Captives, which are owned and controlled by their insured parties
- Group captives, which are owned and controlled by multiple insureds. Often firms of a similar size pool risks in an industry captive with customized insurance plans.
- Agency captives, which are typically structured like rent-a-captives
- Risk Retention Groups, which are insurance companies domiciled and regulated by a single state3
ORANGIZATIONAL ADVANTAGES OF ART
ART solutions cater to diverse areas of coverage and offer insurance buyers superior options pertaining to epidemiological risks, non-physical damage and business interruption, and weather risk. Business advantages pertaining to these solutions often include:
Cost reduction: By consolidating coverages and renewing on a multi-year schedule, organizations can maximize their interactions with a single carrier, increasing the likelihood of receiving concessions or discounts. This coverage bundling allows businesses to benefit from economies of scale, ultimately optimizing their capital allocation.
Minimized administrative demand: Managing multiple policies, endorsements, and carriers can result in significant administrative work and higher costs. Chaotic renewals and cumbersome claims adjustment processes can divert risk management staff from strategic, value-added work. By adopting bundled and multi-year policies, businesses can achieve economies of scale and reduce administrative workloads and associated costs. Additionally, parametric approaches simplify and expedite the claims process, reducing administrative burdens.
Budget Stability: Alternative risk solutions can provide organizations with budget stability by enabling them to forecast insurance costs beyond the upcoming year. Multi-year contracts for nonstandard solutions allow businesses to project their insurance costs over three to five years. Integrated solutions that consolidate insurance partners and parametric solutions that clarify coverage utilization also contribute to budget certainty, empowering businesses to understand their insurance expenditures better.4
LEVERAGING ART SOLUTIONS TO CREATE ROBUST RISK MANAGEMENT STRATEGIES
Anticipate a surge in innovations as nonstandard solutions make the shift from the reinsurance sector to the primary insurance market, becoming more accessible across various platforms. These advancements will create new opportunities for businesses to leverage the manifold benefits these products offer.
However, it is essential to recognize that integrating ART solutions should be part of a comprehensive risk management strategy that maintains a balanced approach. Partnering with the right team will bring clarity and set you on the right path.
At MJ, our innovative risk management team has been at the forefront, especially during market hardening. What sets us apart is our keen ability to listen to market dynamics, explore innovative solutions, and tailor them to precisely meet our clients’ needs.
To explore alternative risk transfer and discover how we can enhance your risk management strategy, contact us today.CONTACT US TODAY
- “Risk Transfer Mechanisms: Converging Insurance, Credit and Capital Markets.” 2023 Organization for Economic Co-operation and Development. Org. Retrieved 2023. https://www.oecd.org/finance/financial-markets/1939376.pdf
- “Mega-Trends in the World of Insurance: Impacts on Captive & Alternative Risk Transfer Markets.” Insurance Information Institute. org. Retrieved 2023. https://www.iii.org/presentation/mega-trends-in-the-world-of-insurance-impacts-on-captive-alternative-risk-transfer-markets-110607
- “Alternative Risk Transfer.”Zywave. com. Retrieved 2023. https://cms.zywave.com/home
- Anthony Figueroa. “The Benefits of Alternative Risk Transfer.” Risk Management Magazine. rmmagazine. Retrieved 2023. https://www.rmmagazine.com/articles/article/2021/07/20/the-benefits-of-alternative-risk-transfer