Creative program design: ART solutions for commercial real estate

Three commonly applied ART solutions for CRE companies

While there is no one-size-fits-all approach to ART and within each solution there is room for customization and creativity, the following risk financing mechanisms are particularly useful and widely used in the CRE world. 

Structured programs

Blending risk financing and risk transfer, structured programs may provide more stable terms, rates, and attachments over a multi-year period. Businesses accept greater ultimate program cost volatility than traditional insurance in exchange for a lower premium and potentially lower overall spends.

Structured programs provide more budget certainty, due to known premium spend and downside risk in each period. They offer an opportunity to increase self-insurance participation, with a known downside protection in the event of adverse loss experience. These programs are typically non-cancelable by the carrier or client. 

Another benefit with structured programs is the policyholder can potentially receive a portion of their premium back following a favorable client loss experience, or when incurred losses are lower than expected, versus the traditional insurance approach where the policyholder pays a nonrefundable fixed premium each year. 

Aggregate stop loss programs

Similar to structured programs, aggregate stop loss programs, sometimes referred to as plus aggregate programs, allow organizations a possibility of taking on a greater amount of retention over a multi-year policy period, in return for potential cost savings on premiums. 

These programs may provide protection against significant financial losses resulting from high claims that could exceed their current financial capabilities.

Fronting

CRE companies may also opt to use fronting to access larger insurance limits and capacities than what may be available through traditional insurance programs. A fronting arrangement entails a licensed insurance carrier (the fronting company) providing coverage to another entity, one that cannot write coverage, where the insured retains the risk via a deductible and indemnity or by transferring it to a captive insurer through a reinsurance agreement. Fronting policies may offer coverage in high excess layers with higher capacity, potentially providing coverage across all layers of an insurance tower, from primary coverage to excess layers. 

Determine if ART is right for your real estate needs

ART solutions offer a welcome opportunity for CRE companies to get creative with their risk financing strategies and find more flexible and suitable coverage for historically non-insurable or difficult-to-insure risks. If ART is right for your organization, the payoff could include time and financial savings, as well as greater control and a stronger risk management strategy overall.

To decide if ART is right for your organization, it’s important to consult knowledgeable insurance advisors who have experience in dealing with non-traditional capital sources. These advisors can assess your specific needs and risks and help you evaluate if ART solutions align with your risk tolerance objectives. 

Marsh’s Alternative Risk Transfer Group (ARTG) is uniquely positioned to help organizations like yours understand the suitability and value of innovative risk financing solutions, depending on your business’s objectives and risk profile.