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 alternative risk transfer 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.
consists of various approaches to reinsurance involving a very high level of prospective or retrospective premiums relative to the quantity of risk assumed.
This area of alternative risk transfer activity diminished after the general hardening of the commercial insurance and reinsurance markets following the 9-11 terrorist attacks.
Because life reinsurance is more "financial" to begin with, there is less separation between the conventional and alternative risk transfer markets than in the property & casualty sector.
It has, for example, been suggested adapting cat bonds to the risks that large auditing firms face in cases asserting massive securities law damages.
[2] The features of alternative risk transfer are that it allows the consumer to get a policy that matches their unique needs, coverage can be obtained for several years and for more than one line.
It is also similar to a surplus lines market to where it also attempts to cover, through financing or transferring, non-traditional exposures and risks, especially ones large in cost.
This unwilling and cynical response, coupled with a lack of historical data and precedent, has generated a stereotyped stigma that categorizes ART as an untested and unpredictable form of managing risk.
Yet, the largest determining criterion for the reluctance of companies to adopt ART in their business is that utilization of such a system usually requires a full foundation-to-roof restructuring of culture.
The future of risk transfer does look ever so bright, but there will be obstacles in the way; these include contractual differences, capacity/supply problems, pricing challenges, and organizational complexities.
Of all the obstacles observed, each one has a setback on its own and will cause an increase in the timeline in addition to adding to the costs, but if risk management is set to the highest standards, these will just be tests along the way that add strength to the system rather than establishing something not worth while.