Alternate Risk Transfer is a broad range of new concepts to finance traditional insurance risks as well as non-traditional risks. It is the ceding and assuming of insurance and non-insurance exposure through non-conventional means. The aim of ART is to effect optimized risk transfer at optimal price, through a combination of insurance and other capital market instruments.As ART frequently involves risk retention, some authors prefer to call it Alternative Risk Financing, as, in their view, “financing” encompasses risk retention and risk transfer. Experts differ as to the instruments and practice that could genuinely be called “Alternative”. However, a few distinguishing attributes [Devine Patrick] common to most ART’s are:
ART, Characacteristics -ART deals are multidisciplinary as it draws from experience in insurance, risk modeling, capital market, investment banking, taxation, law and actuarial profession. Integrated risk management over a longer time horizon involving multiple contracting parties over multiple jurisdictions are more common with ART than any other risk financing mechanism. ART, Capital -ART involves drawing capital from different sources-banks, capital market, insurers, shareholders etc. and in the process affords opportunity for arbitrage between the price and products available in these markets, given their differential cycles, appetite for risks, cost of capital and regulatory framework. ART, Convergence -Financial deregulation allowing vertical integration and economics of scale in the insurance, banking and investment market are the main propellers of ART growth. ART, Constraints- Most ART deals, till now have been bespoke deals involving high transactional costs, but at the same time providing, wider cover than was ever possible under the conventional insurance programmes. Regulatory and statutory accounting treatment constraints have the potential of stifling the growth of ART in several markets.Risk Transfer, Alternate (ART) Instruments:

ART Instruments, Captives : Captives refer to specialized insurer or reinsurer created with the sole aim of providing cover to the promoters or affiliates. Most fortune 500 companies make use of captives, to some extent or more. Favorable tax treatment and benign regulatory regime have spurred the growth of captives in some of the regions in the world, for example, Caribbean and Europe. Captives may be acting as direct underwriter or a frontal operating as a reinsurer. Captives provide high degree of control to the promoters. In view of high administrative costs, innovations in the form of cell captives, rent a captive etc. allow cost sharing by several clients. Under these arrangements, assets of client are protected through legal separation of assets and liabilities of each underwriting account and that of the captive as a whole. The regulatory regime, especially in relation to admitted and non-admitted reinsures lead to complications in the arrangement with captives, such as collateral requirements. It may also necessitate maintaining arm’s length relationship with the captives in some regions.Association Captive : Captive Insurer having two or more parents, with the parents typically being members of an industry/trade/association.Pure Captive : Captive having only one parent and insuring the los exposures of that one parent.ART Instruments, Catex : Catex is a nationwide computer based trading exchange in the US to facilitate swaps of catastrophic exposure between insurers, reinsurers and self-insurers. Swap refers to a transaction involving buying and simultaneous selling of a similar underling asset or obligation of equivalent capital amount where the exchange of financial arrangements provide both parties more favorable conditions than they would otherwise expect. In Catex, bidders can pursue for trades for different regions, peril groupings, contract types, line of business and insurance products. The price would be subject to the relative value placed on the portfolio being swapped by each party. Portfolio can be swapped in the standard trading blocks of USD 1,000,000 and is subject to co-participation to discourage poor claims handling. For statutory purpose, Catex exchange contracts are treated as reinsurance.ART Instruments, Contingency Equity Put (Cat E Puts) : Equity put option enable the stock insurers to sell shares of their stock to investors at pre-negotiated prices when the catastrophic losses exceed the pre-specified trigger point. Insurer pays an option premium to the investor for this contingent facility. This facility may be very useful to the insurers, as post loss, the equity price may be down and equity dilution at pre-negotiated price may be an attractive proposition. Protection to the investors through minimum post loss statutory surplus could be built in. Similarly, buy back facility may be provided to allow insurers control their dilution.ART Instruments, Contingent Surplus Notes (Contingent Capital) : CSN instrument allows the insurer the right to issue surplus notes in future for cash or liquid assets, upon occurring of pre-specified events or even unconditionally (all purpose). It acts like a standby financing in case of catastrophic losses. Usually, a trust is flouted which sells a put option to the insurer in return for option premium. The trust then calls for investment from investors, offering a return higher than say Treasury rates for similar duration, which is then invested in high security instruments such as Treasuries. The option premium enhances the yield for the trust assets and investors. In case of contingency, insurer issues surplus notes to the trust, which in turn issues trust notes to the investors and invests in the insurer. The cost of maintaining this contingent facility is the difference between the coupon on the notes and the yield on the treasury rates.ART Instruments, Insurance Derivate : A derivate is a financial contract between two or more parties, which is derived from the future value of the underlying asset. The investor buys the position on the value of the underlying asset at some time in the future, which is tradable. In the insurance context, the underlying is the performance of a risk or a portfolio of risks. Derivatives provide a hedging mechanism to the cadent and the reinsurers to hedge their exposure in the underlying risk. Insurance derivatives in the form of option (upfront payment of premium and claim payment at the end) and swaps (single net payment at the end of the contract-contract for difference) could be based on single event or portfolio of risks and contracted with traders/investors from the banking, commodity and fund management sector. It is usually non-collateralised. Options can be based on specified index and can be traded on an exchange allowing anonymity, liquidity and standardized contracts at low transaction costs. It facilitates trading between investors and insurers and affords insurers with opportunity to hedge their exposure in specified risks.ART Instruments, Large Deductible Plans : Large deductible plans involve deductible ranging from USD 50,000 to USD 250,000 per accident or per occurrence. Usually employed in workers compensation line of business, it provides for insured to retain the cash till actual loss payment. Insurers are still exposed to the credit risk, as the unpaid losses are to be serviced by the insurers. Sometimes, collaterals are used to eliminate the credit risk arising due to inability to pay the loss under deductible.ART Instruments, Multi-Line Multi-Year programmes : Under a multi-line, multi-year policy, multiple lines of business (liability, property, business interruption etc.) can be covered in a layered approach for a long period. The losses are payable, if the combined loss exceeds a certain level. Even though ML/MY deals are long term in nature thereby reducing the frictional or administrative costs it usually provides flexibility such as increase in capital etc. ML/MY’s encourage the buyers to retain higher risks through internal risk diversification and cover “uninsurable” risks like credit risk, political risk and operational risks. Innovations such as double trigger, where by liability is admitted, only if a combination of two risks, say insurance risk and treasury risk operate help in providing wider coverage at economical price.ART Instruments, Retention Groups : Retention groups are pools of similar companies who join to self- insure by forming an entity that retains some risk and obtain reinsurance. A variant of this is a “Purchasing Group” which does not retain any risk. The advantage of both of these arrangement is collective bargaining due to inherent spread of risk and economy of scale.ART Instruments, Securitisation : Securitisation is the mechanism by which income-generating asset can be turned into a capital. In the case of insurance sector, premium income is used as the basis for securitization which in turn allows insurers to write more business. Securitisation deals enable risk transfer to capital market, especially in respect to high severity, low frequency perils such as hurricane, earthquake and other natural perils. In many countries, such as in the USA, there are severe regulatory and accounting roadblocks preventing insurers from approaching capital market directly for floating a security. The typical route is through a captive or a special purpose vehicle (SPV) which acts as an interface to the capital market. The insurer enters into a reinsurance contract with the SPV, which then issues equity and liability backed bonds to the capital market related to the performance of the underlying risks ceded. Most securitisation deals have been in respect of catastrophic risks (also called disaster bonds or Act of God bonds). But, non-catastrophe insurance securitisation (Covering large portfolio of homogeneous risks against economy dependent risk) is believed to holds enormous promise for the insurers as it would help them source capital from the capital market and release the capital held in their books for uncertain future claims.ART Instruments, Self-Insurance : Self-insurance is a formal accrual of liability through retention and payment of loss obligation as they become due. Sometimes, especially in the context of workmen compensation and automobile liability, regulation in the form of collaterals and qualification process may add to the administrative hassles. But the low cost of this method makes it an attractive proposition.ART Instruments, Standard Asset Protection and Residual Value : These innovations, especially designed for utility industries offer funding mechanism for risks arising out of decline in asset value due to market price depression for the assets and the produce. Possibly, privileged class of assets (standard assets) could be securitised leading to the revenue stream from this standard asset pool making this asset class more credit worthy than the underlying utility.ART Instruments, Time and distance (Financial reinsurance)(Finite or Financial Reinsurance) : Time and distance products, also called finite or financial reinsurance (in the reinsurance context) have been in vogue for some time. An initial payment of premium to a reinsurer earns interest which is drawn out through successive claims over a period of 3 to 10 years. More than risk transfer, these products affords cash flow stability and protects against the credit risk and timing risk associated with lack of immediate capital. Some other benefits of financial reinsurance are cost stabilization, protection against economically uninsurable and difficult risks such as wide swings in foreign currency exchange rates and deferred taxation. In the UK market, this has been used to handle syndicate’s run off of a year in account. Several variants of Time and distance products are possible even in direct insurance market. For example, a spread loss cover, where instead of an initial premium, successive annual level premium is paid which are invested creating an insurance fund. Claim, if any, is paid out of the fund. Payback like dividends, in case of favorable results, make the deal quite attractive. In the case of spread loss covers also timing risk is covered by the insurer. Another variant would be a blended finite product, where a part of the fund is used in purchasing catastrophic insurance cover. The insurer may also provide certain additional exposure cover, for a premium that is deducted from the fund. Blended finite product, attempts to provide insurance benefit with cash flow stability through investments. Yet another variant would be contingent liability cover under which the insured pays a level premium. However, on occurrence of a loss and payment of claim, the premium is suitably adjusted upwards to reflect the claim and interest cost during the unexpired period of the cover. Financial Reinsurance, has been innovated in the case of retrospective covers also, through loss portfolio transfer and adverse development cover. Loss portfolio transfer would appear essentially as a balance sheet cleanup operation to remove reserves. Adverse development cover may provide protection against the possibility of actual portfolio loss exceeding the estimated loss. In all the above cases, the protection is against the cash volatility through risk financing rather than risk transfer. This makes immense sense, as earning stability is rewarded in the market and enhances shareholder value.ART Instruments, Weather Derivatives : This form of derivative, now quite in use offer protection against the unseasonal weather for companies in the energy, retail, agricultural, leisure and other industries which are susceptible to weather conditions. In essence the companies pay fees for earning stability and protection of the bottom line, thereby increasing their shareholder value and rating standing. Weather derivative contracts are defined by location, type (cooling degree days (CDD), heating degree days (HDD), dates, chill wind factor, precipitation etc) strike, cap on loss etc. There are several weather contract indices, but due to active trading by utility industry, temperature, as measured in degree days (measured as difference between average temperature during the day and 65 degree Fahrenheit. If the average temperature is above 65F, the difference is CDD, otherwise HDD) is the most commonly used index. The contracts are normally, written for a season, but can be for a number of years also. Strike is at the agreed value of the index, say degree-days, at which compensation flows from one party to the other. The typical weather derivative products are in the form of put or call option, swaps and collars. In addition arbitrage opportunity exists under other derivatives also, for example credit derivatives where due to differential perception of risks and market knowledge, differentials pricing of risks are possible.Risk, Unsystematic : Chance of loss which is highly unpredictable in the aggregate because it results from forces difficult to predict. Recession, unemployment, epidemics and war-related perils are unsystematic.

A clause in Marine and Aviation Cargo policies providing that the cover attaches from the departure from the place of storage at a place named in the policy until the cargo arrives at a place of storage at a named destination or at some alternative place.

Coverage of the insured’s property while in transit over land from one location to another. Property insurance policies typically provide coverage only at locations identified in the policy.