Sidecars, reinsurance companies that contain a specific portfolio of risks financially supported by a sophisticated non-insurance investor, such as a hedge fund.Įstimates of the size of the market vary.Ī May 2017 study on the global commercial insurance market by Swiss Re put global commercial insurance premiums at about $720 billion in 2016.

Weather-based derivatives, financial tools that let businesses hedge their risk of losses from weather.Catastrophe bonds, which package catastrophe risk as securities that are bought and sold in the capital markets.Today the alternative market features a host of innovative products, including: Large deductible plans, in which businesses opt to retain a larger portion of their exposure through policies with large deductible amounts.Risk purchasing groups, organizations in which firms engaged in similar businesses or activities band together to purchase insurance coverage from a commercial insurer.Risk retention groups, insurance companies organized by a group of businesses or institutions in the same line of business to provide liability insurance for the owners or organizers.A captive is a special type of insurance company set up by a parent company, trade association or group of companies to insure the risks of its owner or owners. Traditionally, businesses and other organizations have handled risk by transferring it to an insurance company through the purchase of an insurance policy or, alternatively, by retaining the risk and allocating funds to meet expected losses through an arrangement known as self-insurance.ĭuring the liability crisis of the 1980s, when businesses had trouble obtaining some types of commercial insurance coverage, new mechanisms for transferring risk developed.Ĭaptives were the first to appear.

These mechanisms account for between 25 percent and 35 percent of the U.S. These include captives, risk retention groups, large deductible plans, catastrophe bonds, weather-based derivatives, sidecars and collateralized reinsurance.

The insurance marketplace has a number of ways to transfer risk, used mainly in commercial insurance.

Captive insurance for dummies