Product information

Alternative Risk Transfer “ART” - how it all started

Changes in the worldwide insurance industry have sparked renewed interest in what is know as Alternative Risk Transfer (ART), which is a method of protecting your assets from risks by using the non-traditional insurance market. Art is a sensible alternative for clients with a long-term, personal commitment to property loss prevention, a willingness to share the risk, a serious focus on loss control and a willingness to assume a portion of their own risk.

Alternative Risk Finance has been operating internationally for more than 50 years and in South Africa for more than 20 years and has been described in the press as a “must-have item in the toolbox of risk managers”. This concept of insurance has developed to where it accounts for $2773million of annual premium income internationally, whilst in South Africa it accounts for premium income in excess of R4billion per annum.

“At the end of the day, using an ART facility is a long-term commitment and is there no doubt that ART users who are used to enjoying the benefits of their own risk financing facilities will not be keen to return to the very market that forced them in ART structures in the first place” (Quote Cover Magazine Feb 2008)

The Alternative Risk Transfer ‘ART’ Policy

  • The product focus is on those clients with low claim levels and loss layers which are more predictable.

  • Clients are provided with an insurance policy where the premiums which were intended to cover a predictable loss layer, are set aside to cover specific types of losses.

  • Any surplus of these premiums are either returned to the client or transferred to the following underwriting year, with a no claim bonus rate.

  • The intention is therefore to reduce the cost contained in conventional insurance premiums.

  • The benefit to the client being that the product offers a dedicated risk management “vehicle”, providing wider scope in cover categories of risk where insurance companies were either unwilling to provide cover or it was too expensive to obtain cover at appropriate levels.

The benefits of Alternative Risk Transfer:

  • ART permits clients to participate in underwriting profits from a good loss history. Any surplus in the experience account that is not claimed, plus accumulated bonuses is refundable to the contract owner. Good risk management practice is thus rewarded and encouraged.

  • Its appropriateness for risk which are difficult to insure through conventional insurance. Some risks are seen as uninsurable by the conventional insurance industry – the ART self insurance policy allows clients to build up a contingency fund that is specifically reserved to protect against those events.

  • Enhances cash flow and financial stability. The experience account is liquid, because the policy can be cancelled at any stage with only 30 days notice. This gives the owner access to funds and assists in ensuring the survival of business in economic downturns or poor market conditions. The self insurance policy can further be used as collateral if finance is required.

  • Less expensive than conventional insurance for high frequency/low severity loss exposure. Ironically, risks that occur more frequent and that are of a smaller nature are more expensive to insure than risks with a low frequency and high in value. It therefore makes a self insurance fund a perfect instrument to insure these “nuisance value” risks. (See the illustration below)

  • It enables clients to retain more risk for their own account in a Tax Efficient manner. All premiums that are paid to the insurance policy is a tax deductible expense if the contibutions qualifies as a business expence (according to the provisions of Art 11A of the income tax act). The experience account is therefore esatblished with pre-tax funds.

  • Can be applied to any type of cover. Because of the nature of self insurance, any type of risk can be insured.

  • The client determines his/her own insurance programme. Unlike conventional insurance, there is no pressure on a client to contribute predetermined amounts as premiums. With our product, each client can contribute premiums and build up the experience account at his own pace and as his cash flow allows him to. It is common knowledge that all businesses go through good and bad financial cycles – it therefore makes sense to contribute to the policy in good times and either stop contributions in bad times or access the funds if times are tough. 

  • No cross-subsidizing of insurance premiums. Internationally we have seen that unrelated events, such as the recent tsunami in Japan or the Twin Towers event has an impact on conventional insurers globally. Participants in conventional insurance in South Africa and elsewhere end up paying for risks that they have no influence or control over. The same principle applies to risk pools locally – you will end up paying for the claims ratio that less responsible businessmen make against their policies. ART has no cross-subsidizing element built into the structure – every policy is self funded and every owner is responsible for his own claims ratio.