Alternative Risk Transfer (ART) Market

Generally speaking, "risk transfer" is a way of making sure that you're not the only one hurt if something bad happens to you. You are literally transferring some of your risk onto someone else.

The most common form of risk transfer is insurance. For a fee, the insurance company agrees to take on some of the liability if certain bad things happen, like a car accident or a robbery. But there are other forms of risk transfer. These can be found on the Alternative Risk Transfer Market.

Now before you start imagining a place like Seattle's Pike Place Fish Market for insurance-like products (aisles and aisles of middle-aged people in suits tossing thick stacks of paper to each other), the market isn't a real place. It just describes the industry of ART, which can include things like self-insurance (a company insuring itself) or captives (multiple companies insuring themselves together, though they might want to consider a friendlier name).

There's also things like the derivatives market, where companies can buy options that hedge themselves against risk. An example would include weather derivatives, which allow companies to buy contracts that pay off if certain weather events happen, like if snowfall in a particular place is a above a certain level, or if rainfall comes in below a certain mark.

Let's look at an example on this last one. You own a ski resort. If you don't get enough snow, you'll have to shut down for the winter and lose tons of revenue because of the bad (for you) weather. As a way to transfer risk in this scenario - get ready for some A-R-T baby! - you can buy weather derivatives that pay off if snow levels turn out lower than expected. Then, you'll get revenue from the derivatives if there isn't enough snow for skiing, making up for at least some of the money you'll lose for having to close the resort.