Alternative risk transfer

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. The field of ART 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.

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 ART 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. [Captive Insurance Companies] are formed by firms and re/insurers to receive premiums that are generally held and invested as a "funded" layer of insurance for the parent company. Some captives purchase excess of loss reinsurance and offer coverage to third parties, sometimes to leverage their skills and sometimes for tax reasons. [Financial reinsurance] in various forms (finite, surplus relief, funded, etc.) consists of various approaches to reinsurance involving a very high level of prospective or retrospective premiums relative to the quantity of risk assumed.

ART is often used to refer to activities through which re/insurers transform risks from the capital markets into insurance or reinsurance form. Such transformation can occur through the policy itself, or through the use of a "transformer" reinsurer. This type of activity has been important in credit risk markets, hard asset value coverage and weather markets. Reinsurers were notable participants in the early development of the synthetic CDO and weather derivative markets through such activities.

Another area of covergence is the emergence of pure insurance risk hedge funds such as [Nephila], [Fermat], [Securis], [Coriolis], [Pentalia], [Goldman Sachs Catastrophe Fund], [Stark Catastrophe Fund], [Acuance], [Solidum], various Zurich-based funds managed by [Clariden Leu] Bank and Banque [AIG] and other such funds. These function economically like fully collaterallized reinsurers (and some of them operate through reinsurance vehicles, such as Nephila's Posiden Re), but take the form of hedge funds. A more specialized version is Gamut Re, a tranched collaterallized risk obligation managed by Nephila.

Key market participants

Investment banks, notably Swiss Re Capital Markets and Goldman Sachs across life and catastrophe sectors and Lehman Brothers in the life sector.

Insurers, including AIG, Zurich, and XL

Reinsurers, notably Swiss Re across the life and catastrophe sectors.

Brokers including Willis, Marsh, Aon Corporation, Benfield, and Carvill.

Consultants, notably Risk Management Solutions.

Key sectors

Key sectors of the Alternative Risk Transfer marketplace include the use of Captive Insurance companies, financial reinsurance, Finite Risk insurance, catastrophe bonds, Reinsurance Sidecars, contingent capital, captive insurers and reinsurers, dual trigger insurance, industry loss warranties, Weather derivatives

Sources

For extensive coverage of this space see Reactions Magazine, Benfield Quarterly, Insurance Insider. The key reference work for the space is "Alternative Risk Strategies" published by Risk magazine 2002

Captive & ART Review [1]
A monthly publication dedicated to Alternative Risk Transfer for the business community

Key market participants

Key sectors

See also

Sources