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The Spectrum Of Alternative Risk Financing Opportunities

The last 40 years have seen the steady evolution of alternative solutions for the funding and financing of underwriting risks. (Re)insurance companies and brokers have worked together in developing these alternative risk transfer (ART) products. The pace of this evolution has increased rapidly during the last decade, particularly, the last five years. Not only has the range of ART solutions grown significantly with the development of insurance derivatives, contingent capital, and catastrophe bonds, but the cast of players has expanded with the involvement of investment banks and more direct participation by capital market investors in accepting underwriting risk. Insurance-based ART solutions have also begun to embrace non-insurance risks as the disciplines of (re)insurance and corporate finance converge. This paper explores the full spectrum of alternative risk financing opportunities now available to (re)insurance companies, as both sellers and buyers. The paper also details the development of ART products for corporate and insurance companies. The factors that continue to support the growth of ART are reviewed. The author concludes that pressures to deliver added shareholder value through the efficient use of capital would provide fertile ground for the cultivation of further forms of ART. However, the insurance industry needs to adapt and extend its range of skills to remain a major player in the ART field.

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