The term “alternative risk transfer” (ART) is used to describe a wide range of insurance and risk management products and strategies. While each ART product is unique, they all share one common goal: to help businesses manage and transfer risk more effectively without relying on traditional commercial insurance. But with so many different options available, how do you know if ART is right for your organization? In this article, we’ll explore what alternative risk transfer is, the benefits it can offer, and some key considerations to keep in mind when deciding if it’s the right move for your business.
Defining Alternative Risk Transfer
Alternative Risk Transfer (ART) is an area of risk management whereby organizations utilize non-traditional methods of insuring against risks, such as vehicles other than insurance and financial means. This allows companies to: achieve better financial control over their risks increase transparency overall better manage the specific risks associated with their business strategy
An important feature of ART is a greater emphasis on self-insurance or retention of the risk ensuring that the organization not only has the expertise to understand their specific risk profile but also the capacity to absorb potential losses. With these controls in place, companies are able to make smarter investment decisions while enjoying improved protection against financial losses resulting from previously uninsured or untraded risks.
The ART market is a segment of the insurance industry that offers companies the ability to purchase coverage and shift risk without relying solely on traditional commercial insurance. This sector includes risk retention groups (RRGs), insurance pools, and captive insurers, which are separate entities that provide their parent company or a group of related companies.
The Benefits Of Using Alternative Risk Transfer
Alternative risk transfer has gained popularity in part because of the following benefits:
- Does not subsidize others whose premiums are inadequate to pay their claims
- Gains access to profits generated from current insurance premiums
- Has more control of who shares your risk
- Is not subject to market swings, and provides stability and predictability in premiums
Whether Or Not Art Is Right For Your Organization
Alternative risk transfer is typically available to companies with low risk profiles and a dedication to maintaining safe operations; in ART the insured party assumes a portion of its own risk in exchange for lower premiums or a reduction in net cost of insurance. In many cases, ART gives capital market investors a more direct role in providing protection.
Characteristics unique to ART often include the following:
- Multi-year, multi-line coverage
- Coverage tailored to a special need of an insured
- Coverage not generally available in the marketplace
- The insured party retains some risk
When you are making the decision to self-insure, it is important to address specific areas to ensure it is a viable proposition. Important considerations when weighing alternative risk transfer include the following:
- Is your portfolio large enough to warrant the costs?
- Do you have predictable loss patterns?
- Is the pricing of specific and aggregate coverage feasible?
- Would the self-insured retention and maximum potential loss expose your organization to unacceptable financial risk?
- Is your organization committed to improving the loss and safety record through proper monitoring and action?
Types Of Alternative Risk Transfer
A captive is a form of self-insurance where an independent insurance company is created and owned by at least one non-insurance company for the purpose of insuring the employee benefits or commercial insurance risks of its owner (or owners). Employers might choose to form a captive as an alternative to traditional insurance in order to better control costs and manage the risks associated with providing employee benefits.
The different types of captives include:
Single Parent Captives
Single parent captives are an insurance company that is wholly owned and controlled by one non-insurance company.
A group captive is an insurance company that is owned by several unrelated non-insurance companies. Although each owner of the captive retains some control over their portion of the risk, the collective pooling of resources gives members better purchasing power and a greater level of shared risk management.
Segregated Account Rent-A-Captives
Segregated account rent-a-captives are captives that offer access to the benefits of a captive without requiring you to form your own. In this case, multiple companies can share in a single captive owned by an experienced third party and managed by an experienced team.
A captive can offer significant savings and become a substantial long-term investment. By creating and owning its own captive insurance company, an employer can keep all the savings and interest income it earns from the captive. This means that instead of spending money on insurance, an employer can earn money from its captive policy over time. This is particularly beneficial for large organizations with excellent loss history.
Self-insurance is an alternative risk transfer method where a company or individual chooses to set aside money to pay for possible losses instead of buying insurance from another provider. It requires the policyholder to cover all costs associated with the loss and offers advantages such as cost reduction and streamlined claims processing, while still being regulated by state insurance commissions.
Commonly self-insured coverages include:
- Workers’ compensation
- General liability
- Auto liability
- Physical damage
Despite the varying regulations of states, self-insurance has continued to grow in popularity due to its cost efficient nature and increased loss control potential.
Pools are a popular risk transfer option for businesses facing similar risks. They consolidate resources to provide insurance coverage, such as workers’ compensation. By pooling their resources, companies can access insurance coverages that would have been otherwise unavailable or unaffordable.
Alternative Risk Transfer can be a great way to manage risk for your organization, but it’s not right for every company. At Kapnick, we can help you evaluate your alternative risk options. Reach out for more information at firstname.lastname@example.org or 888.263.4656.