What are Alternative Risk Financing Facilities?

by Investing School on July 12, 2012

Alternative risk financing facilities are a way that an insurance company can offer a wide variety of products that are not usually available to their policy holders. Originally established and used by those who could not get coverage on the commercial market or at a reasonable rate, these facilities provide insurance through a different channel.

The products offered are usually similar to those offered typically. The difference is price. If the same insurance was taken out through a commercial provider it would likely be unaffordable. The products may also be unobtainable because the individual cannot qualify as a self-insurer.

Alternative risk financing facilities specialize in providing coverage such as property-casualty insurance, medical malpractice insurance, worker’s compensation insurance, captive insurance, risk retention groups and liability coverage for directors or officers. Banks, manufacturers and public entities may take advantage of such facilities in order to obtain coverage otherwise denied them.

Since most alternative risk finance is high risk, the majority of such financing facilities maintain their headquarters in Bermuda, where laws allow more flexibility.

The are several benefits to using alternative risk financing and affordability is just the first. With a captive insurance company the risk of availability is eliminated. Costs will be stabilized. The coverage can be truly tailored and reinsurance is directly accessible and the impact is cushioned. Claims settlement is under better control with a strong incentive for participants to target loss prevention.

Under general circumstances, the point at which alternative risk financing is recommended is the $1,000,000 mark. Once your premiums exceed that total, a captive insurance company is likely to be your best bet.

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