Alternative Risk Transfer (ART) Market

The alternative risk transfer (ART) market is a portion of the insurance market that allows companies to purchase coverage and transfer risk without having to use traditional commercial insurance. The alternative risk transfer market includes risk retention groups (RRGs) as well as insurance pools and captive insurers.

The alternative risk transfer market is broken into two primary segments: risk transfer through alternative products and risk transfer through alternative carriers. Transferring risk to alternative carriers entails finding organizations, such as captive insurers or pools, which are willing to take on some of the insurer’s risk for a fee. Transferring risk through alternative products entails the purchase of insurance policies or other financial products such as securities.

Companies have a number of options when it comes to choosing an alternative carrier in order to adjust the amount of risk that they have on their portfolio. The largest portion of the alternative carrier market is made up of self-insurance, which, while still regulated by state insurance commissions, allows the company to reduce costs and streamline the claims process. This is because self-insurance eliminates some of the costs that commercial insurers pass on to policyholders. Coverages that common among self-insurers include workers compensation, general liability, and auto liability and physical damage. Despite the fact that both workers compensation and auto liability are heavily regulated by the various states, growth of self-insurance in these two lines has continued. Since self-insurance is typically associated with cost efficiency and increased loss control.

Risk retention groups and captive insurance tends to be more popular with large corporations. Pools are more commonly used by businesses that face the same risk, as it allows them to pool resources to provide insurance coverage. Pools are also often associated with groups of governmental entities that band together to cover specific risks. Most frequently, pools have been established to deal with workers compensation coverage. Since workers compensation is one of the most troubled lines of coverage, interest in pools should continue.

A number of insurance products are available on the ART market. Several of these options, such as contingent capital, derivatives, and insurance-linked securities, are closely associated with debt and bond issues, as they involve issuing a bond. Proceeds from the bond issue are invested in order to increase the amount of funds available to cover liabilities, while bondholders receive interest. Securitization involves bundling the risk of one or more companies together, and then selling that risk to investors who are interested in gaining exposure to a particular risk class.