What Is the 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 ART market includes risk retention groups (RRGs), insurance pools, and captive insurers, wholly-owned subsidiary companies that provide risk mitigation to its parent company or a group of related companies.

Key Takeaways:

  • The alternative risk transfer (ART) market allows companies to purchase coverage and transfer risk without having to use traditional commercial insurance.
  • The ART market includes risk retention groups (RRGs), insurance pools, captive insurers, and alternative insurance products.
  • Self-insurance is a form of alternative risk transfer when an entity chooses to fund their own losses rather than pay insurance premiums to a third party.
  • A number of insurance products are available on the ART market, such as contingent capital, derivatives, and insurance-linked securities.

How the Alternative Risk Transfer (ART) Market Works

The alternative risk transfer market has 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, that 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.

Alternative Carriers

Companies have a number of options when choosing an alternative carrier to adjust the amount of risk that they have in their portfolio. The largest portion of the alternative carrier market is self-insurance.

Self-insurance is when a company or individual sets aside its own money to pay for a possible loss rather than purchasing insurance with another company to reimburse them for any loss. With self-insurance, any costs are paid by the individual or company that suffers the loss rather than filing a claim under an insurance policy. In the case of a company, self-insurance could apply to health insurance. An employer that provides health or disability benefits to employees might fund claims from a specified pool of assets rather than through an insurance company. The employer avoids having to pay insurance premiums to a third party but retains the full risk of paying claims.

While still regulated by state insurance commissions, self-insurance allows the company to reduce costs and streamline the claims process. Coverages that are common among self-insurers include workers' compensation, general liability, 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 persists.

Alternative Products

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 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.