Understanding Alternative Risk Transfer

Joel Geddes III, CWCA, AFIS

Alternative Risk Transfer, often referred to as ART, means using techniques other than traditional insurance and reinsurance to provide your business with coverage. Alternative risk transfer is typically available to companies with low risk profiles and a dedication to maintaining safe operations, because the insured party assumes a portion of its own risk in exchange for lower premiums or a reduction in net cost of insurance.

Risk-financing vehicles used in ART can take on several different forms, with varying degrees of risk. As a strategic enterprise risk management process, ART can blend traditional insurance and reinsurance with forms of self-funding. Understandably the plans with the least risk, complexity and expense generally provide the least coverage. The more risk retained, the greater the benefits. Complexity and administrative expenses can grow as well. Common ART strategies include:

1. Loss-sensitive insurance plans, in which your premiums are based on your losses.
2. Risk-purchasing groups of individuals purchasing liability insurance.
3. Self-insured retention plans.
4. Protected cell captives, which allow you to rent a captive while ensuring complete separation of assets, capital and surplus between you and other participants.
5. Self-insured groups and pools.
6. Captives, which are owned and controlled by their insured parties.
7. 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.
8. Agency captives, which are typically structured like rent-a-captives.
9. Risk Retention Groups, which are insurance companies domiciled and regulated by a single state.

Alternative risk transfer has gained popularity in part because the insured does not subsidize others whose premiums are inadequate to pay their claims, they are able to take themselves out of the insurance company pool.   Insureds gain access to profits generated from current insurance premiums, and you have more control of who shares your risk.  With good risk management practices and control of claims you are not subject to market swings, you are able to gain stability and predictability in your insurance premiums.

When you are making the decision to consider an alternative program, it is important to address specific areas to ensure it is a viable proposition. Important considerations when weighing alternative risk transfer include the following:  The premium being collected should be sufficient to warrant the costs of the program.  There should be predictable loss patterns and a long term business strategy behind the decision.  Self insured retentions and maximum potential loss exposures should not expose the company to unacceptable financial risk.  Your company should be committed to improving the loss and safety record though proper monitoring and action.

There are many ART programs available and matching your company with the best option for your business is a critical component of a successful risk transfer strategy.