The Concept
Alternative risk transfer is not a new phenomenon – in fact it has been around for many years and in different forms and has been mainly used by big business as a loss protection mechanism. Our clients sometimes experience the concept as novel, because it has never before been introduced to the middle section of business.
ART is also described as Contingency Policies or Cell Captives, although slight variations in the technical structure of the schemes do exist. Internationally the trend has been established for a far longer period and currently almost 50% of all insurance business is by way of ART.
How it works
Art is very simple. A business will enter into an insurance contract with an insurer, whereby the insurer creates an insurance account especially reserved for the business into witch all premiums are paid and wherefrom all claims are paid.
The business thus has their own insurance fund that acts as protection against any losses. It is the responsibility of the business to make sure that enough funds accumulate in the insurance account to pay for losses that may occur.
Benefits
End to cross subsidising:
Insurance in based on the concept of sharing of risk. The average in any situation can be deceptive, because there will always be extremes – this is why the business that manages it risks better that other, will always subsidise the poorly managed business. ART provides an exit to the subsidising of other risks that is not connected or managed by a business.
Share in profits:
When risks are managed well and fewer than anticipated claims occur – insurance companies make huge profits. By establishing a own risk fund, business can share in these profits that would have ended up in the pocket of an insurance company.
Control:
The contract holder can at any stage decide to increase, decrease, stop or alter the payments or the contract. The balance in the insurance account is transparent and statements reflecting all fees, bonuses received and contributions are readily provided and available to the insured. On cancellation the balance in the insurance account will be paid to the insured.
Asset:
The balance built up in the insurance account is a deemed asset in the statements of the insured – if properly managed, the normal expense attributed to insurance cost is converted into a business asset on balance sheet.
Promotes better risk management:
Experience shows that companies that make use of ART ends up with better risk management procedures and have fewer losses, because the ART system naturally encourages and rewards the establishment of effective risk management processes.
Uninsurable risks:
Every business faces new and unique risks that are sometimes not transferable to a third party or insurance company that is willing to insure against these risks. The self –insurance structure provides the solution to this problem. By establishing a risk fund you can protect your business against losses that would have otherwise dealt a crippling financial blow to your business.
Manage costs:
All conventional insurance contracts are subject to annual price hikes that is only too familiar and costly too the insured. Self insurance functions very differently and you as the insured can control the rising costs of insurance much better, because of the self governing mechanism of ART that is free from the control and restrictions of the general commercial insurance market.
Tax Implications
The tax advantages of investing in a self insurance fund are significant. The premiums that are paid to your self insurance fund is a tax deductible expense in the same way that the premiums paid to a general commercial insurance contract is. This allows you the ability to establish reserves with pre-tax income that is otherwise unavailable to a non-insurance entity.
Getting started
Now that you are weighing the benefits of self insurance and considering it as a valuable tool in your business, let us assist you in this. We have done our homework and we already know the pitfalls and opportunities that self insurance has to offer. We will very quickly be able to tell you if your risk profile is suitable for ART.
Please make contact with us to discuss the issue further.
