1. Chapter 23 Cases in Holistic Risk Management

2. Figure 23.1 - Structure of Insurance Coverages

3. Nontraditional Insurance Programs
Alternative risk financing: Risk-funding arrangements that typically apply to losses above a firm’s primary self-insurance retentions or losses above the primary insurance layer.
Integrated risk management: Coordinated alternative risk-financing approach of identifying, measuring, and monitoring diverse and multiple risks that require effective and rapid response to changing circumstances.

4. Nontraditional Insurance Programs
Two of the nontraditional transfer programs available to risk managers are:
Integrated risk (concentric risk and basket aggregates)
The features that attract corporations to these programs include:
Less administration time and cost
Less time and cost for negotiations with brokers and underwriters
Elimination of the need to build a tower of coverages
One loss triggers just one policy
Elimination of gaps in coverage (seamless coverage)
Elimination of the need to buy separate limits for each type of coverage
Multi-trigger contract

5. Nontraditional Insurance Programs
May include different combinations of coverages and may be designed for different lengths of time and different limits.
May be structured with one aggregate deductible for the term of the policy or with separate, per occurrence deductibles.

6. Nontraditional Insurance Programs
Finite insurance programs
Allow insureds to share in the underwriting profit and investment income that accrues on premiums if loss experience is favorable and recognize firms’ individual risk transfer needs.
Characteristics
Multiyear term
Overall aggregate limit
Experience fund is established for the insured’s losses
Interest earned on funds
Element of risk transfer
Designed for each insured individually using manuscripted policy forms

7. Nontraditional Insurance Programs
Can be used to fund primary losses.
Can be used in intermediate layers to stabilize infrequent but periodic losses.
Advantages:
Improves the balance sheet
Reduces volatility in earnings
Allows for profit sharing if the loss experience is favorable
Helps secure insurance for uninsurable risks
Accesses new capacity for catastrophic risks
Can be structured to include any type of risk, contingent on approval by the company’s auditors.

8. Nontraditional Insurance Programs
Potential Disadvantages
Tax and accounting questions
The premiums should not be construed as a deposit for accounting purposes
Any monies that are returned to the insured at the end of the period constitute taxable income
Time-consuming and complex to develop
Frictional costs may be greater than perceived benefits
Entail large outlays of cash each year of the term