Learn about the different types of alternative risk transfer. Also known as ART, this type of protection provides ways to transfer complex risks faced by companies that cannot be handled by traditional commercial insurance.
Types Of Alternative Risk Transfer
Alternative risk transfer (often referred to by the acronym ART and also known as structured insurance) is a process that involves using techniques outside of traditional types of commercial insurance to safeguard businesses. ART is usually available to businesses that have low-risk profiles and have proven that they are dedicated to upholding safe operations. The insured party assumes a portion of its own risks, and in exchange for doing so, will receive lower premiums or a reduced amount for the net cost of insurance.
Alternative risk transfer came about as a result of a collection of insurance crises that businesses faced between the 1970s and 1990s. These crises lead those who purchased traditional commercial insurance to find a stronger and more effective way to purchase protection. There are several different types of alternative risk transfer. In many situations, ART provides capital market investors the opportunity to provide more direction protection for companies.
Alternative Risk Transfer Features
ART features unique characteristics. These characteristics commonly include:
- Protection that is customized to the specific needs of the insured party.
- Multi-year coverage.
- Multi-line coverage.
- Coverage options that are not usually offered in the traditional commercial insurance marketplace.
- The insure party retains some of the risk.
Benefits of Alternative Risk Transfer
The intention of alternative risk transfer is to provide companies with a way to protect themselves from some of the limitations that are associated with traditional commercial insurance. The types of alternative risk transfer offer organizations some significant benefits, which include:
- A way to self-finance risks that typically aren't covered by a traditional commercial insurance policy.
- A way to transfer non-traditional risks.
- A means to access alternative forms of capital, which presents competition and helps to boost competitive pricing.
- Coverage is not subject to swings in the market, which means premiums that are more stable and predictable.
Alternative Risk Transfer: How It Works
There are two primary segments associated with the alternative risk transfer market:
- Transferring risks through alternative products.
- Transferring risks through alternative carriers.
Types of alternative risk transfer - the latter involves locating organizations that would be willing to accept responsibility of the risks associated with the insurer free of charge; pools or captive insurers, for example. The former involves purchasing insurance policies and other types of financial products; securities, for instance.
Alternative Risk Transfer Strategies
There are several strategies that can be involved in alternative risk factor. Some of the most common strategies employed in ART include:
- Retention plans that are designed to be self-insured.
- Insurance plans that are loss-sensitive; the premiums are dependent on the losses.
- Cell captives that are protected, which makes it possible to rent a captive while keeping assets completely separated.
- Captives, which insured parties own and control.
- Group captives that several insured parties own and control.
Of all these options, self-insurance makes up the largest portion of the alternative risk factor market. Though state insurance companies do still regulate those who are self-insured, companies have the ability to reduce their costs. It also makes the process of filing claims easier. Some of the most common types of coverage that are associated with self-insurance include:
- Workers' compensation
- General liability
- Physical damage
- Vehicle liability
Is Alternative Risk Transfer The Right Choice For Your Business?
If you are trying to decide if ART is the right choice for your organization, you should first make sure that you address particular areas of your business to ensure that it is the best option. Some factors that you should take into consideration include:
- The size of your portfolio. It should be large enough to warrant the costs.
- Loss patterns should be predictable.
- Whether or not alternative risk transfer would but your company in serious financial risk.
Types Of Alternative Risk Transfer? - The Bottom Line
We hope this article on types of alternative risk transfer? has been informative. Alternative risk transfer is a feasible option for certain businesses. If you are considering ART, make sure you speak with a reputable insurance broker to learn more about the benefits, what options are available, and whether or not it will actually be the best choice for your organization. Safeguarding your business from losses should be a top priority, and alternative risk transfer could provide you the protection your company needs.