Climate change, with its shifting weather patterns and extreme events, brings a host of new risks to businesses. In turn, traditional insurance may find itself unable to cover these new risks, exposing many businesses to significant losses.
Enter alternative risk transfer (ART). Simply defined, it is a collection of techniques that provide protection outside of the traditional re/insurance system. ART creates tailored insurance, reinsurance and other non-traditional risk management solutions for corporate, insurance, and investment clients worldwide. It aims to fill an exposure gap that arises when traditional (re)insurance is inadequate in dealing with unusual, emerging or complex risks.
According to Green, ART deals with traditional risks, such as earthquakes or typhoons, in a different way.
“[These are] traditional insurance risks, but the people we place those risks with and the way in which we place them is different,” he said. “We might be looking at something like earthquake risk, and instead of transferring it to the insurance market, we transfer it to the capital market, such as investors, pension funds, and investment banks – these are entities that are increasingly interested in taking insurance risk.”
Green explained further that ART uses banking instruments like bonds, derivatives, and swaps. These are used to transfer risk to a different group of investors using different techniques to those usually found in the traditional insurance market.
Advantages of ART
According to Green, “one of the key advantages to ART is that traditional insurance is very focused on physical damage, whereas ART is much more focused on protecting a company’s revenue streams.”
This is because a business’s revenue can be impacted by an event, even if the business’s premises and property are not damaged or affected by that event. Thus, ART is able to protect against much broader financial losses than those covered under traditional insurance.
One example Green provided was a hotel in Macau that sought coverage from typhoon risk. While the hotel operator was not worried about physical damage caused by the typhoon, it was worried about the inclement weather preventing customers from travelling to Macau, leading to a significant loss of revenue.
“Traditional insurance is not very well geared up to cover situations like that, because you’re looking at covering a loss of revenue when there has been no damage to the hotel at all,” he said. “That is exactly what ART is able to do. We’re able to cover the loss of revenue even without physical damage. In the event a typhoon of a certain strength hits Macau, then we will pay out, even if the damage to the hotel is zero.”
Another advantage of ART is that it is able to release funding faster, as it skips one of the lengthiest steps in the insurance claiming process
“The payout under ART is much quicker than under traditional insurance,” Green said. “Under traditional insurance, there is a claims assessment and loss adjustment period, which can take quite a bit of time – even months or years. With ART, payments can be received within days.”
This is especially valuable to many business clients who are looking to protect their cashflows and make rapid recovery under their insurance programs.
ART can also serve as a backup source of capacity, especially in emerging markets where coverage may be in short supply.
“When capacity in the traditional insurance market becomes quite scarce, clients sometimes look to the ART market,” Green said. “For example, when buying typhoon coverage in the Philippines, and the traditional market is full or has not enough capacity, [insurers] can turn to the ART market to provide additional capacity for that risk.”
However, for all of ART’s advantages, there are certain areas where traditional insurance can provide better solutions. According to Green, liability is one such area where insurance excels in protection, while ART leans more towards natural disaster and weather-type risks.
Climate change
Given ART’s advantages in weather-related risks, Allianz has created a climate solutions group which is focused specifically on ART-based approaches to climate risk, Green said.
The group’s work mostly includes covering extreme weather events, floods, and lack of rainfall. It also incorporates agricultural solutions, working to mitigate the risks’ impact to crops and food supply across Asia.
Another major focus is renewable energy. More and more climate scientists are calling for the decarbonisation, or the reduction of reliance on fossil fuels, of the global economy to cut down on carbon dioxide emissions. This results in an increased demand for renewable energy sources, such as solar and wind. ART solutions include covering renewable energy operators from unusual conditions such as lack of sun or lack of wind.
Because climate change is an ongoing process, managing its risks must also keep up.
“We look at very long solutions,” Green said. “Some of the deals that we do are 20 to 25 years long. When you think about climate change, you need to be thinking in terms of 20 to 25 years versus a traditional policy period that is usually one year.”
Allianz’s capabilities
According to Green, ART began in the 1990s in the US before spreading to other global regions, and Allianz has engaged in it ever since.
AGCS’s ART arm has offices in global insurance centres – Bermuda, New York, Zurich, London, and Munich. Its Asia-Pacific operations were launched in October 2018, catering to Allianz corporate clients in the region.
Green said that Allianz’s biggest advantage, aside from its global reach, is that it has both insurance licences and derivatives licences.
“This is important because many ART deals are often executed as swaps, options, or bonds. Clients are looking for derivatives, and in order to offer those solutions, you need to have a derivatives licence. Allianz is one of the very few insurers that has a derivative licence.”
Allianz also offers structured solutions such as risk financing, which helps clients address the initial problem, then spread the cost of the risk over many years.
“Rather than insuring a risk for a one-year period, we help clients finance their risks over a much longer period,” Green said. “Rather than taking the risk, as happens in traditional insurance, we will work with the client to finance that risk over a period of time.”
