Alternative Risk Transfer (ART)
\ɔlˈtɜrnətɪv\ \rɪsk\ \ˈtrænsfər\
The transfer of risk without using traditional insurance products. In respect of a pension plan’s longevity risk, an alternative risk transfer would be any transfer of risk without the purchase of annuity contracts covering the individual participants of the plan.
There are two main approaches to alternative risk transfer:
- Through alternative products – these are investment products that act to hedge all or some of the risk outside of traditional insurance. Examples include derivatives such as swaps and hedging assets such as bonds.
- Through alternative carriers – this is where the risk is passed onto another entity outside of the traditional insurance industry. Examples include the setup of a captive insurer, the securitization and sale of the risk to alternative investors and self-insurance.