Alternative Risk Transfer, or ART, is an alternative from of insurance where a company can transfer risk without using traditional form of business insurance. The ART solutions are particulartly useful in unique and challenging situations where tranitional insurance doesn’t work.
Using Alternative Risk Transfer, the companies transfer risks to ther parties or to capital market investors and receive risk protection against certain risks.
Through the convergence of insurance and capital markets, techniques are used that enable capital market investors to directly get involved in providing insurance to protection buyers.
Some of the major areas of alternative risk transfer are risk securitization including catastrophe bonds (cat bonds) and reinsurance sidecars, trading of risk through industry loss warranties, and weather derivative contracts. Apart from these, there are many other innovative alternative risk transfer techniques.
Alternative risk transfertechniques can be used for managing various types of risks such as the following:
- Hedging unacceptable risks such as exchange rate, commodity, and weather risks
- Gaining financing cost advantages
- Reduce cost of borrowing
As an example, a wind energy company faces the that a lack of wind will significantly impact the power generation which will impair their ability to fulfil their financial commitments. The company may face as much as 20% variation in wind power generation which will increase their production and earnings volatility. In this scenario, the company can work with an ART solution provider to provide them a customized risk transfer solution.