ART

ART

Who insured the last football world cup? Which insurer is large enough to provide for losses arising out of huge hurricanes like Katrina?

Well the answer lies in the caption of this post which is ART.The ART that Insurers know of has no relevance to the ART of common Knowledge. ART expanded to as Alternative Risk Transfer.

ART came into being as Insurers neither had solutions nor capital capacities to provide risk transfer solutions for all risks. Reinsurers then thought of Alternative Risk Transfer Mechanisms which would provide a near inexhaustible supply of capacities (Capacity in simple terms means ability to provide for losses)

ART is a multi billion dollar industry and draws support from capital markets worldwide. Today it totals to about 35% to 40% of the total traditional insurance market. The previous football world cup was not insured and the risk was handled by ART techniques. The infamous Hurricane Katrina was also one of the events that drew ART into protection mode.

What are the common forms of ART – The most common one is the Bonds also called as Cat Bonds (Catastrophe Bonds). These bonds in simple terms are like any other bonds which the buyer buys and in the event of the catastrophe the proceeds from sales of bonds are used to pay the losses. If there are no losses, the bond buyer gains from interest on bond proceeds as well as the insurance premium which the buyer of protection pays.


Another common ART form is the Weather derivatives. The Weather Derivatives are not strictly in terms of insurance as they are linked to index and not indemnity driven. The derivatives on a macro plane could also be like trading off of Hurricanes of USA to the Cyclones of Indian Peninsula etc – that is the funds collected from Hurricane Protection in USA could be used for Cyclone losses of Indian Peninsula and vice versa assuming that both may not occur together. Thereby the capacity to serve the losses of risk is much more

The above paragraphs are meant to give you an introduction to the concept of ART and I shall feel justified if they have generated interest in the reader to look for more.