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Jan 2021

Australia: Insurance alternatives attract more attention

Source: Asia Insurance Review | Nov 2019

Demand for insurance alternatives has increased because traditional insurance may not be appropriate for every risk, and the market has opened up for more niche or tailored insurance solutions, according to a blog item by boutique law firm The Fold Legal lawyer Lydia Carstensen.
Insurance alternatives include parametric insurance, aggregate deductible funds, discretionary mutuals and captives. These and other insurance alternatives can easily operate side by side with traditional insurance.
Ms Carstensen says that there are several reasons why the time is ripe for insurance alternatives, and they are:
  • There are more catastrophic events unfolding every year, such as the 2019 Townsville floods. Each time a natural disaster occurs, attention focusses on the insurance industry’s conduct in the aftermath, for example, claims that are not properly assessed and claims that are not promptly paid.
  • Insurers are leaving certain industry segments and classes of insurance, meaning insureds cannot always find traditional insurance solutions for their risk.
  • Technology (including data collection and InsurTech) is becoming more effective and prevalent.
  • Insureds have become more aware of what works for them and what doesn’t and have a need for a greater range of risk solutions and more flexibility.
Alternative risk transfer solutions are worth considering if one is facing a gap in the traditional insurance market, particularly if the problem is:
  • Cost of insurance;
  • Convenience of insurance; or
  • Covering a hard-to-place risk because no insurer can be found which has the interest, capacity or appetite to underwrite the risk.
Insurance alternatives may also suit a buying group or association with stakeholders who have similar interests. 
Insurance alternatives are not always insurance
It is important to understand that insurance alternatives like parametric risk products and aggregate deductible funds are not always insurance for legal purposes. For example, they may be structured as derivatives, insurance-linked securities or a miscellaneous risk product. This means that they require a different financial product authorisation and may only be offered if the intermediary has an Australian Financial Services Licence with a ‘miscellaneous financial risk’ product authorisation. A 
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