Introduction
Insurance is a means of compensation following the occurrence of a loss.  Most people consider it important or even essential that they insure, because loss or damage can bring untold suffering.  To the businessman a loss could upset years of planning and budgeting for the success of its business.  In short, however, insurance is a risk transfer mechanism.

What is risk?   
Risk is the chance of a loss or the possibility of an unfortunate accident taking place.  The taking of risks is based on an individual's own experience; however there is a limit to the amount of risk one individual can bear.  There are some risks for which insurance companies are prepared to take responsibility and provide cover and most of these risks are common to most of us, and although we may have some control over the final outcome, these risks cannot be completely avoided.

Several important principles are raised here:

1. A person may only insure a risk which would cause him a direct personal loss.  He cannot, for example, insure his neighbour’s car or a friend’s life.  He must have what is called insurable interest in the subject matter of insurance;
2. A person may not receive more than the amount of any loss he has suffers;
3. The monetary amount of the loss or damage should be measurable;
4. The loss or damage should be entirely accidental to the insured.

Alternate Risk Transfer is a fancy way of describing alternate methods of insurance and risk management, of which there are many. From the most basic alternative of going without insurance (self-insuring) to so-called "program business captives", there are a wide variety of strategies from which to choose.

Various problems encountered by clients dealing in the conventional Insurance Market have caused them to pursue other options of insuring. The main problem has been that every time insurance industry profits decline sharply, the industry goes into crisis mode – rates go up sharply, deductibles rise and underwriting guidelines tighten.

Most insurance companies do not use logical solutions to help them calculate their rates. This should be easy enough especially for Insurers who have been in existence for a long time. They would calculate rates based on the trends found in the company’s own experience, class by class; however, they should not consider sudden fluctuations and catastrophes in the company’s experience, as these are catered for by the individual insurance company’s reinsurance program.

In recent years, insurance Premiums worldwide have risen much faster than claims, however, in most markets, insurers group themselves into cartels and form “Market Agreements” which are usually based on the results of one or two companies, but the higher “Market” rates tend to benefit all participating companies. If individual insurance companies only took the time to analyse their own loss experience properly, they would find that there was never a need to increase premiums, based on the “swings and roundabout” principle.

It has also become clear that a small number of insured people may be responsible for a large percentage of losses, and individual insurers should deal effectively with this small percentage of clients who regularly have losses, rather than unilaterally increasing rates across the board, thereby affecting even those who have perfect claims records. A simple example is where there are four or five bad drivers in a fleet of 200 or more vehicles, and yet when this small group of drivers has had a bad year, the Insurer increases rates and deductibles across the board, while tightening underwriting guidelines for the fleet as a whole, rather than applying these new terms to the errant drivers, or excluding them from cover altogether.

There has also been a tendency of Insurers applying the “One rate suits all” principle. Here, no inspections are done of the property to be insured to identify good and adverse features of each risk presented to the insurer, instead, every risk is charged the exact same rate, when in fact, risks should be rated based on merit – no two risks should have the same rate.

ART has increased as a result of some of the above problems, and the following are some of the different types of risk transfer mechanisms used in insurance markets: -

Protected Cell Captives (PCC’s)
PCC’s are essentially rent-a-captive companies that ensure complete separation among program participants. PCCs generally guarantee complete separation of each cell’s assets, capital, and surplus from each other. Because they can achieve economies of scale, rent-a-captives try to make captive insurance affordable for companies that would not otherwise be large enough to profitably own and operate their own captive.

This method became very popular in Zimbabwe, as insurance premiums seemed to become unaffordable due to the hyper-inflationary environment, and many large clients opted for this form of ART, however, as the local currency became more and more irrelevant, this option was discarded and companies which were set up to provide rent-a-captives, found themselves starting to offer conventional insurance products.

Captives
A captive insurance company is an insurance company that is owned and controlled by its insureds. According to Captive Insurance Companies Association (CICA), the first captive ever formed was in the late 1800s, and was designed to write more cost effective fire insurance policies for New England textile manufacturers that were hit hard by increasing market rates.

Captives gained popularity in the 1980s as a result of the US liability crisis, particularly in the medical arena.

Single Parent (Pure) Captive:
A single parent captive is owned and controlled by one owner, typically the parent organization, and is formed as a subsidiary company. The captive subsidiary underwrites policies for the parent, and solely bears the risks of the parent.

Group Captive:
A group captive is owned and controlled by multiple insureds. They may or may not be related entities or a part of a homogeneous group like industry or trade groups. Typically, companies of similar size pool their risks in an industry captive with customized insurance plans. Similarly, companies of similar size in different industries can also form group captives to enjoy the benefits of a captive model. More recently, associations have been forming association captive insurance companies to offer captive services as part of their membership benefits.