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Alternatives to conventional reinsurance
• ART has no strict definition, although it is often described as a non-traditional way of dealing with a risk transfer
problem.
2 • An ART solution is likely to contain several risk-financing techniques.
Chapter • Insurance-linked securities provide a mechanism within the financial system to transfer insurance risk to capital
markets.
• In common with conventional reinsurance, an ART product requires an event to take place that triggers a payment
by the investor to the insurer.
• Securitisations are better positioned to spread their risks across the broad spectrum of capital markets.
• Insurers have been among the largest purchasers of fixed-incomes securities from capital markets.
• Imbalance in the insurance and reinsurance industries has given rise to new financial products created within
capital markets, providing insurers with better tools to manage risk and investors with new investment
opportunities.
• Insurance-linked securities include:
– derivatives;
– multi-trigger policies;
– catastrophe bonds;
– contingent capital contracts;
– industry loss warranties (ILWs);
– reinsurance sidecars; and
– catastrophe futures.
• Captive insurance companies represent an alternative form of risk financing.
• The key difference between ART and the traditional insurance marketplace is that insurance and reinsurance
markets provide catastrophic risk coverage whereas the capital markets provide additional financial capacity for
insurance coverage.
• An advantage of capital market solutions is that investors are attracted to the diversification benefits and above
average yields of insurance-linked securities.
• A disadvantage of capital market solutions is that transactional costs can be high, especially for smaller trades. Reference copy for CII Face to Face Training
• The convergence of the insurance and capital markets has created an alternative channel for insurers to transfer
risk, raise capital and optimise their regulatory reserves.