Alternative Risk Finance means using techniques other than traditional insurance and reinsurance to provide your business with cover.
Insurance is based on the pooling of risks, so those with good loss experiences are forced to support those with bad loss experiences. Alternatives are available to low risk organisations and we can offer a full spectrum of risk financing methods including high deductible programmes, self-insurance retention and captives.
In many cases, it gives capital market investors a more direct role in providing protection. Unique characteristics include:
- Multi-year, multi-line cover
- Cover tailored to a special need of an insured
- Cover not generally available in the marketplace
- Insured retains some risk
What Does Alternative Risk Finance Look Like?
Risk-financing vehicles can take on several different forms, with varying degrees of risk. As a strategic enterprise risk management process, it can blend traditional insurance and reinsurance with forms of self-funding.
Logically, the plans with the least risk, complexity and expense generally provide the least cover. The more risk retained, the greater the benefits. Complexity and administrative expenses can grow as well.
Common strategies include:
- Loss-sensitive insurance plans, in which your premiums are based on your losses
- Risk-purchasing groups of individuals purchasing liability insurance
- Self-insured retention plans
- Protected cell captives, which allow you to rent a captive while ensuring complete separation of assets, capital and surplus between you and other participants
- Self-insured groups and pools
- Captives, which are owned and controlled by their insured parties
- Group captives, which are owned and controlled by multiple insureds. Often firms of a similar size pool risks in an industry captive with customised insurance plans
Alternative risk transfer has gained popularity in part because the insured:
- Does not subsidise 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 – gain stability and predictability in premiums
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