Alternative risk financing refers to a specific form of self-insurance where companies allocate their monetary funds for certain business risks. These corporations opt for this private insurance when conventional insurers refuse to offer policies to finance their specific business risks. It involves using innovative techniques apart from traditional insurance policies and re-insurance to provide the corporate enterprises with adequate cover. These risk-financing techniques typically include excess insurance, retrospective rating, large deductibles, captive insurance, re-insurance, and self-insurance. The multi-line coverages are tailor-made to meet corporate enterprises’ specific needs, which most insurance providers do not offer.
Michael Saltzstein is a prominent financial and risk management specialist from America with many years of valuable industry-based experience under this belt. His areas of expertise are strategic alignment, alternative risk financing, worker’s compensation, loss control, crisis leadership, actuarial studies, and deductible analysis. He has a wealth of knowledge in conducting win-win negotiations, technology solutions, coverage evaluation, transfer decisions, and growth strategies. Apart from being a leading financial expert, he is also a veteran US swimming Official. Many prominent female athletes acknowledge his contribution in implementing the landmark six-point plan to eradicate sexual misconduct in the sport.
Most conventional insurers tend to offer their corporate customers coverage by pooling their specific business risks. Unfortunately, this method of risk-financing has a severe flaw. Companies with a good sound loss experience often have to subsidize those organizations. In such a scenario, corporations with bad loss experiences resort to alternative risk financing by establishing their insurance assets. These assets are the probable business losses that corporate enterprises might incur contingent on the occurrence of certain events. Moreover, when resorting to alternative financing techniques, these companies need to maintain a high level of managerial discipline and a commitment to allocate funds. The business claims of these companies should exhibit the following characteristics:
- Reasonable predictability,
- Moderate volatility,
- Minimal exposure to the likely occurrence of catastrophic events, and
- High frequency but low severity.
Many companies are now adopting alternative financing techniques to control escalating insurance premium costs. In doing so, the corporations can avail themselves of customized coverage to suit their specific business. The range can take the form of property-casualty, medical malpractice, worker’s compensation, and directors’ liability insurance. This makes alternative risk financing ideal for companies in the banking, healthcare, manufacturing, and public entities. These corporations opt for alternative risk financing techniques over traditional insurance for the following reasons:
- Ensures cashflow benefits,
- Eliminates dependence on conventional commercial insurance,
- Minimizes insurance acquisition costs,
- Provides the corporate enterprises with coverage that is unavailable or expensive,
- Enhances claim handling, and
- Stabilizes insurances prices over time
Michael Saltzstein believes that alternative risk financing can be a boon for companies who cannot get adequate coverage for their business risks from traditional insurers. Opting for this form of private self-insurance offers them many advantages not available in conventional insurance. These include enhanced cash flow, greater control over their business risks, and predictability in their insurance payments.