Alternative Risk Transfer Solutions
Explore how your organization can approach risk finance and risk transfer with a new perspective.
What are Alternative Risk Transfer Solutions?
Alternative risk transfer solutions play an increasingly important role in corporate risk strategies. As organizations face increased complexity driven by evolving and interconnected risks, alternative risk transfer solutions can be a creative way to approach risk finance and risk transfer.
Alternative risk transfer solutions is a term used to describe the different methods that organizations can use to manage retained risks or transfer risk off their balance sheets. These solutions include captive insurance, multi-year structured solutions, parametric insurance, catastrophe bonds, and insurance-linked securities (ILS).
What are the Features of Alternative Risk Transfer Solutions?
Flexibility and Innovation
Alternative risk transfer solutions can be tailored to address specific exposures. As risks evolve, such as cyber threats and climate related risks, alternative risk transfer solutions can often be developed to cover new and emerging exposures, including via innovative mechanisms like parametric insurance.
Risk Management Diversification
Alternative risk transfer solutions can complement existing risk management capabilities. By diversifying the ways in which risk is managed and transferred and reducing reliance on a single risk transfer method, companies can build more organizational resilience and minimize volatility.
Access to Additional Sources of Risk Capital
Alternative risk transfer solutions can provide access to additional sources of risk capital beyond traditional forms of risk transfer, including access to capital markets. Instruments such as insurance-linked securities (ILS) can offer a way for insurers and corporates to transfer risk to investors in capital markets. The involvement of capital market investors, who may have a higher risk appetite for potentially higher returns, complements traditional insurance and reinsurance markets, and among other features includes helping to provide additional capacity for certain risks.
Cost and Volatility Management
Alternative risk transfer solutions can help businesses manage their cash flow more effectively and reduce the financial strain during recovery periods via structured solutions that spread financial exposures over time. Also, traditional insurance claims processes can be lengthy, particularly for complex losses. Alternative solutions such as parametric insurance and catastrophe bonds are designed to offer payouts for qualifying events over a shorter time frame.
Capability Overview
Broking and Risk Transfer
Alternative Risk Transfer Solutions
At Aon, our specialized teams offer a range of alternative risk transfer solutions designed to support organizations’ risk transfer strategies and help them meet their financial objectives.
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Captives and Cell Companies
Captives and segregated cell companies are formalized self-insurance structures that have many of the capabilities of traditional insurance companies and are recognized by insurers as legitimate risk bearing entities. Organizations can use captives and segregated cell companies to leverage their own capital to finance portions of their risk, avoiding the need to transfer it to the primary insurance market.
Captives and segregated cell companies are often used to transfer high frequency, low severity losses from a company’s balance sheet. They are also used to access reinsurance market capacity and to provide coverage for emerging risks where cover is not yet available in the primary market.
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Insurance-Linked Securities
Most ILS products are a form of securitized (re)insurance contract whereby capital markets investors receive premium for taking catastrophe risk, for example in the case of catastrophe bonds. If a defined loss event occurs, the capital raised from investors in the bond offering will be paid to the client as a (re)insurance recoverable.
Insurance-linked securities can be used to address modelled catastrophic risk, including natural catastrophe and cyber events, as well as more routine risks facing an organization.
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Parametric Solutions
Parametric solutions offer a predetermined payout in the event one or more specific events (or parameters) occur, such as measurable criteria that indicate the location or severity of a natural catastrophe or weather event. Unlike traditional insurance, which reimburses the insured for actual loss sustained after potentially extensive claims adjustment, parametric insurance payouts are determined by an independent, third-party based on an objective trigger event, which helps clients by accelerating the claims process and providing the most appropriate coverage to address the client’s specific protection needs.
Examples of triggers include the magnitude of earthquakes, the wind speed for hurricanes, the level of rainfall in floods, and burned area for wildfires.
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Structured Solutions
Structured solutions can provide bespoke alternative capacity by incorporating, for example, multi-year terms and the hybrid characteristics of risk financing and risk transfer.
These solutions can enhance risk/reward through risk sharing features. Offering a degree of flexibility, structured solutions can potentially be single line or multi-line, direct insurance or reinsurance of captive and prospective or retrospective (such as loss portfolio transfers).
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Reinsurance Solutions
Insurers – and increasingly corporates – can benefit from a range of capital options. These include debt, equity, and various forms of insurance and reinsurance (such as treaty and facultative reinsurance, legacy capital, alternative capital and parametric sources) to successfully navigate current market conditions while managing increased volatility and higher risk retentions.
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Collection
Parametric Insurance
Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.
