In the ART world

Risk & Insurance, Jan, 2004 by Roger Crombie

"Authors and actors and artists and such/ never know nothing, and never know much./ Sculptors and singers and those of their kidney/ tell their affairs from Seattle to Sydney./ Playwrights and poets and such horses' necks/ start off from anywhere, end up at sex./ Diarists, critics, and similar roe/ never say nothing, and never say no./ People Who Do Things exceed my endurance;/ God, for a man who solicits insurance!"

--Dorothy Parker, Bohemia (1927)

The idea of insurance as an alternative has been around for ages, it seems, but alternative insurance has only been with us since the 1960s, when the first captive insurance companies were formed.

So what exactly is alternative risk? That's a little like asking, What is Jazz? There are as many definitions as there are alternative risk transferors and transferees, or musicians, for that matter. Alternative risk transfer (ART) is an approach, not a product. Think of it as alternative risk financing (despite its risible acronym, ARF).

One definition has it that any company that commissions the creation of its own solutions to its risk financing needs, and adopts techniques not used in the traditional insurance or reinsurance marketplace, may be considered an ARTist.

People may not know much about ART, but they know what they like. Breathes there the risk manager who has not heard of captives? The inaugural ART vehicles still drive the ART movement, more than 4,000 of them worldwide, catered to by more than 30 jurisdictions. Captives operate in all shapes and sizes: pure (single owner), group or association captives, and rent-a-captives favorites among them.

In its fifth decade, ART contains some time-honored techniques. A captive insurance company writing U.S. workers' compensation in, say, Vermont has the feel of a traditional technique in a traditional marketplace (particularly to those under the age of 40), but such activity is what might be termed classical ART.

What followed captives was more obviously alternative. Here the Jazz metaphor is be-bop. When Centre Re gave us the term 'finite' in the late 1980s, financial or finite reinsurance was regarded as the New Wave of ART.

Finite policies have no preconceived program structures or attachment points. Each program is structured for a particular insured and situation. No classes of business are excluded; if the underwriter can understand it, he'll cover it (usually). Finite risk had its origins in the Time & Distance policies bought by the Lloyds' syndicates until the early 1990s.

Multiline or integrated programs achieved the efficiency desired by insureds by offering one large aggregate limit across several lines of business. The programs usually operate on a multiyear basis. The insured deals with one insurer and only has to renew the program every three to five years. Finite risk gave rise to loss portfolio transfers (a.k.a. buyouts), spread loss programs, and adverse development covers.

Like a Thelonius Monk piano solo, ART follows the basic notions, but meanders all over the place. Securitization was going to be the next big thing, then it wasn't, and now it is again. The securitization of insurance risks begat transformer companies, which "transform" insurance risk into capital market products or vice versa, enabling non-insurance companies to participate in the risk.

The latest techniques in modern ART are avant-garde. Among current techniques are segregated cell companies (coming soon to a jurisdiction near you), derivatives, unusual investment strategies, and all manner of wild-eyed variations.

You don't have to wear a beret and sport a chin cushion to be an ARTist, although some do. Today's ART reinsurers are a relaxed bunch, often dressed down, "always concerned with new approaches. One or two, seen walking down the street, look like rock stars--or is it that rock stars of a certain age increasingly look like insurance people? The insurer as rock star is an extraordinary conceit, but then ART is an extraordinary business. Arf!

Columnist Roger Crombie, based in Bermuda, now writes on alternative risk. He can be reached at riskletters@lrp.com.