This is the first in a four-part series of blogs exploring alternatives such as parametric products, aggregate deductible schemes and discretionary mutuals.
Insurance alternatives
- There are several reasons why the time is ripe for insurance alternatives:
- There are more catastrophic events unfolding every year, such as the 2019 Townsville floods. Each time a natural disaster occurs, attention focuses on the insurance industry’s conduct in the aftermath, for example claims that are not properly assessed and claims that are not promptly paid.
- Insurers are leaving certain industry segments and classes of insurance, meaning insureds cannot always find traditional insurance solutions for their risk.
- Technology (including data collection and insurtech) is becoming more effective and prevalent.
- Insureds have become more aware of what works for them and what doesn’t, and have a need for a greater range of risk solutions and more flexibility.
Traditional insurance may not be appropriate for every risk, and the market has opened up for more niche or tailored insurance solutions.
Insurance alternatives include parametric insurance, aggregate deductible funds (ADFs), discretionary mutuals and captives. These and other insurance alternatives can easily operate side by side with traditional insurance. For example, an alternative risk transfer solution can be used to target specific or niche risk areas while traditional insurance covers broader risks without significantly increasing the cost to the insured.
Who are insurance alternatives suitable for?
We will cover who is the target market for each insurance alternative in our later blogs in this series, but generally, alternative risk transfer solutions are worth considering if you’re facing a gap in the traditional insurance market, particularly if the problem is:
- Cost of insurance;
- Convenience of insurance; or
- Covering a hard-to-place risk because you can’t find an insurer who has the interest, capacity or appetite to underwrite your risk.
You may also find that insurance alternatives suit you if you’re a buying group or association with stakeholders who have similar interests. In particular, if you want more oversight and control of your risk exposure and protection, alternative risk management initiatives may support your stakeholders by driving down the cost of their insurance.
Insurance alternatives are not always insurance
It’s important to understand that insurance alternatives like parametric risk products and aggregate deductible funds are not always insurance for legal purposes. For example, they may be structured as derivatives, insurance-linked securities (ILS) or a miscellaneous risk product. This means that they require a different financial product authorisation and may only be offered if you have an Australian Financial Services Licence (AFSL) with a “miscellaneous financial risk” product authorisation.
This is particularly important if you’re an insured who is looking to purchase through a broker. You want to make sure that whoever is advising you has the right authorisation and licence to advise on and provide the product.
If you’re an insurance broker, it’s important to be aware of these “out-of-the-box” solutions and know whether, when and how you can advise on these solutions.
Lydia Carstensen, lawyer, The Fold Legal
