GIM8250 - Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): over the counter products

A number of over-the counter derivative products may be used to transfer risk.

Insurance option contracts are like any other option contract. The prospective insured pays an option fee to the prospective insurer to secure the right to enter an insurance contract at agreed premium, terms and conditions. The purchaser can call the option if a loss occurs and secure coverage for the remaining period of the contract. The cost of conventional non-cancellable insurance might be double that of a policy cancellable at say 60 days’ notice. An option contract purchased together with a linked cancellable policy will provide the same long-term coverage at lower cost. For insurers the advantage of such arrangements is that the option fee is not a premium and does not require any capital support.

Post event insurance contracts may be used where an insured loss exceeds the insurance cover for an event, for instance a large compensation claim. Having appointed its own legal advisers, an insurer may indemnify the insured against a single specific claim for a large premium. If the final award against the insured is less than expected, a proportion of the premium will be returned to the insured.