Structured insurance and ART provide answers to market complexity: Anra

Risk managers should consider using structured insurance and alternative risk transfer (ART) in order to address current market complexities, according to a recent webinar held by the Italian Risk and Insurance Managers Association (Anra), and insurance company Allianz Global Corporate & Specialty (AGCS). The experts said that such options not only offer solutions to the current hard market and economic volatility, they also enable better financial planning and risk retention as well as protection against emerging risks. The persistence of the hard market, the imminent renewal of insurance programmes expiring at the end of the year, a landscape of emerging risks for which traditional insurance solutions are not effective, and high market volatility – all these elements mean there has never been a better time to understand structured insurance and ART, according to Anra and AGCS. Today, insurers have not only tightened their underwriting conditions, but they are also asking organisations to have greater capacity to retain and self-finance their risks. And for complex risks such as cyber, supply chain, political and terrorism-related risks, non-traditional solutions are needed. The first step is to understand some basic principles. It is the buying motivation that distinguishes alternative, structured (re)insurance from conventional (re)insurance – the spreading of the risk, not the transfer of the risk, and the reduction of P/L volatility. Risk financing is debt finance in the form of insurance, which provides bespoke accounting benefits (differently than debt finance). In case of an adverse event, the loss is paid and the resulting economic impact is spread over multiple years. Through structural features such as aggregate limits, sublimits, aggregate deductibles, additional premiums and loss contingent extensions, the ART carriers typically look at financing the first loss over a multiyear period, taking a second/third loss position. From a legal perspective, in order to consider the risk insurable, it is necessary to show that the eventual loss is fortuitous and financially quantifiable. Risks that are not insurable from an economic perspective can be managed with an ART solution, provided they are insurable from a legal perspective. Also, a risk that is difficult to estimate (no data) cannot be transferred, but through a structured ART solution, can be identified and financed over time, provided it can be blended with risks that we can calculate and sufficient risk transfer is established. Also, a provision can only be recognised on a balance sheet if and when there is a liability, such as a present obligation resulting from past events, the payment is probable, meaning “more likely than not” and the amount can be estimated reliably. Finally, for a contract to qualify for (re)insurance accounting, the (re)insurer must have at least a 10% probability of sustaining a 10% or greater present value loss, where the percentage is calculated on the ceded premium. A structured (re)insurance solution therefore enables the transfer of profit/loss volatility to the balance sheet of the insurer, which in turn optimises the cost of capital deployment (such as of a captive), provides financial stability and supports increasing risk retention capabilities. Virtual captives are one of the ART solutions attracting the greatest interest. While a traditional captive is set up as a (re)insurance company within a corporation, a virtual captive is a multiyear agreement with a licensed insurance company. The main advantages of a virtual captive are that no initial capital injections are required, the risk retention capacity is increased, and it allows for better planning and budgeting. In conclusion, the use of structured insurance and ART solutions has several benefits for a corporate. It enables increased risk retention despite not having a captive, allowing better management of the market cycle through a buffer acting as a standby liquidity facility. It provides coverage for special risks excluded from traditional policies through blending with calculable risks. It allows the corporate to build up self-retention capabilities over time such as low claims bonuses, return premiums and coverage extensions, and it enables better planning and budgeting.

Structured insurance and ART provide answers to market complexity: Anra

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