alternative risk transfer


  • In addition, due to their non-traditional nature of business, much of the risk covered under alternative risk transfer is mainly obtained through the transfer of said risk
    to the capital markets, allowing companies to source its capital.

  • While such approaches involve “risk finance” as opposed to “risk transfer,” they are still generally referred to under the heading of alternative risk transfer Alternative
    risk transfer is often used to refer to activities through which reinsurers or insurers transform risks from the capital markets into insurance or reinsurance form.

  • Most of these techniques permit investors in the capital markets to take a more direct role in providing insurance and reinsurance protection, and as such the broad field
    of alternative risk transfer is said to be bringing about a convergence of insurance and financial markets.

  • In addition, a number of approaches involve funding risk transfer, often within the structures of the traditional reinsurance market.

  • [1] Customization The major market of alternative risk transfer is through self-insurance, where companies are still regulated by the government but it allows a company to
    have self-efficiencies through reducing costs and allowing a faster claims process.

  • The field of alternative risk transfer grew out of a series of insurance capacity crises in the 1970s through 1990s that drove purchasers of traditional coverage to seek more
    robust ways to buy protection.

  • [3] The non-traditional nature of alternative risk transfer thus allows those with different needs, from regular insurance customers, to get risk management that fits their

  • If companies have been successful in the past with a more conventional and well-documented form of risk transfer, those companies will tend to remain with their existing form
    of coverage and become very reluctant to shift.

  • It is also similar to a surplus lines market to where it also attempts to cover, through financing or transferring, non-traditional exposures and risks, especially ones large
    in cost.

  • There was a great deal of interest in such approaches in the late 1990s, and re/insurers worked to develop combined risk and enterprise risk insurance.

  • [7] Pitfalls of Alternative Risk Transfer Under-Utilization of Alternative Risk Transfer[edit] The main reason that many companies shy away from using ART is due to the inertia
    that companies experience when considering ART as a form of risk transfer.

  • The alternative risk transfer market gives a company many types of choices in regards to policy-making, giving it a customized nature.

  • Because life reinsurance is more “financial” to begin with, there is less separation between the conventional and alternative risk transfer markets than in the property &
    casualty sector.

  • The development and shift to ART has then allowed companies to re-think how their risk is going to be transferred or much can be retained, allowing companies to seek risks
    that are low volatility and predictable and losses are high in frequency but low in severity.

  • Standardization and trading of risk in non-indemnity form is another area of alternative risk transfer and includes industry loss warranties.

  • [2] The features of alternative risk transfer are that it allows the consumer to get a policy that matches their unique needs, coverage can be obtained for several years and
    for more than one line.

  • This has resulted in a shift where there is more focus on these types of alternate risk transfer and develop this market further, in addition to a changing insurance market
    and further technological advances.

  • [5] In addition from cost reductions, alternative risk transfer programs are not as easily influenced by the market, allowing stability and a more predictable market from

  • [6] The advantages of using alternative risk transfer is that diversification exists through the finance or transfer of risks, tax benefits, and a low cost to companies in
    different industries.

  • Regulatory and Accounting Standards • ART products began to make a reputation for themselves in the 1990s when numerous markets and institutions began breaking the barriers
    that made them mutually exclusive o Caused ART products to become increasing complex as a single product may be susceptible to multiple regulations and standard boards o Expert legal and financial consultation is strongly advised.

  • Uncommon mediums used for common risks • Risk Retention Groups (RRG): self-insurance capital (money) contributed by several companies that can range from small to medium in

  • Of all the obstacles observed, each one has a setback on its own and will cause an increase in the timeline in addition to adding to the costs, but if risk management is set
    to the highest standards, these will just be tests along the way that add strength to the system rather than establishing something not worth while.

  • Also, in the future, risk management will be something that is even more common especially in companies that lie in other nations.

  • Life insurance companies have developed a very extensive battery of alternative risk transfer approaches including life insurance securitization, full recourse reserve funding,
    funded letters of credit, surplus relief reinsurance, administrative reinsurance and related techniques.

  • Such transformation can occur through the policy itself, or through the use of a transformer reinsure, a method important in credit risk markets, hard asset value coverage
    and weather markets.

  • Alternative risk transfer (often referred to as ART) is the use of techniques other than traditional insurance and reinsurance to provide risk-bearing entities with coverage
    or protection.

  • For example, an oil company may desire protection against certain natural hazards, but may only need such protection if oil prices are low, in which case they would purchase
    a dual trigger derivative or re/insurance contract.

  • [8] Future of Alternative Risk Transfer The future of alternative risk transfer is that it will grow with the assistance of the same elements that first expanded the market.

  • [8] There are 3 key components that companies must account for and fully understand when considering the application of a form of ART in the corporate setting.


Works Cited

[‘Lawrence A. Cunningham, Securitizing Audit Failure Risk: An Alternative to Damages Caps, William & Mary Law Review (2007)
2. ^ “Alternative risk transfer”. Investopedia. 2018. Retrieved 2018-11-25.
3. ^ Hartwig, Robert P.; Wilkinson, Claire (2018).
Systemic risk. Huebner International Series on Risk, Insurance and Economic Security. Vol. 26. Springer. pp. 925–952. doi:10.1007/978-0-387-34163-7_20. ISBN 978-0-387-34162-0.
4. ^ “Alternative risk transfer”. Ian Giddy. 2006. Retrieved 2018-11-25.
5. ^
Hartwig, Robert; Wilkinson, Claire (2007), “An Overview of the Alternative Risk Transfer Market”, Handbook of International Insurance. Huebner International Series on Risk, Insurance and Economic Security, Huebner International Series on Risk, Insurance
and Economic Security, vol. 26, Boston, MA: Springer, pp. 925–952, doi:10.1007/978-0-387-34163-7_20, ISBN 978-0-387-34162-0
6. ^ Jump up to:a b Banks, Erik (2004), Alternative Risk Transfer : Integrated Risk Management through Insurance, Reinsurance,
and the Capital Markets, John Wiley & Sons
7. ^ Hartwig, Robert; Zolkos, Rodd (2001), Alternative risk transfer tools growing in popularity, Chicago, IL: Business Insurance
8. ^ Jump up to:a b c d Lam, James. Enterprise risk management : from
incentives to controls. ISBN 9781118836477. OCLC 1042139609.
9. ^ Luis Flores Ballesteros. “Using international financial markets for funding disaster recovery- The case of an Earthquake Catastrophic Bond in Mexico” Latinomaerica Puede Sep. 2008:54
Pesos 6 October 2008. “Using international financial markets for funding disaster recovery- the case of an Earthquake Catastrophic Bond in Mexico | Latinoamérica…puede”. Archived from the original on 2011-08-19. Retrieved 2011-03-08.
10. For extensive
coverage, see: Reactions Magazine, Benfield Quarterly, Insurance Insider. The key reference work for the space is “Alternative Risk Strategies” published by Risk magazine 2002
11. Captive & ART Review – A monthly publication dedicated to Alternative
Risk Transfer for the business community
12. Alternative Risk Strategies, published by Risk Books and edited by Morton Lane – A comprehensive though quite dated guide to the entire area of Alternative Risk Transfer (Risk Waters, London, 2002)

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