What is Alternative Risk Transfer?
A glossary
Alternative Risk Transfer or ART is used to describe a broad range of risk transfer, risk financing and retention solutions that do not fit the conventional Property and Casualty insurance model. There is no set definition of what ART consists of, but it is often used as a ‘problem solving’ approach for key business concerns.
ART solutions include parametric, captive solutions, capital solutions, retention financing or structured re/insurance. ART is growing in popularity as multinationals evolve their risk management strategies and seek bespoke solutions for an increasing array of risk scenarios that are not always catered for by the traditional market.
A large, multinational company with its own captive program can still benefit from services from insurance companies. Typically, captives may not have the capital, regulatory permissions for insurance transactions around the world or other infrastructure that an insurer can offer.
For this reason, they often utilize fronting services, whereby insurers take on the operational work of issuing and managing the policies and premium payments. Additional services and solutions such as claims, risk consulting, underwriting, or structured reinsurance programs can also be provided.
Catastrophe bonds, or cat bonds, are multi-year collateralized covers for named natural catastrophes such as storms and earthquakes, using an indexed loss trigger. They are an example of insurance securitization transferring a specific set of risks to capital market investors. Bermuda remains by far the largest issuer domicile of catastrophe bonds or other forms of insurance-linked securities.
Investors take on the risk of a catastrophe loss in return for rates of investment return. Should the named peril event occur, the pay-out will be triggered automatically, and the investor will lose some, or all, of the capital they have invested. An insurer or reinsurer is typically involved as ‘issuer’ of bonds and will receive the money to cover claims.