The Modern Risk Backstops

As the risk landscape shifts throughout the insurance industry, traditional coverage can become more difficult to obtain for a reasonable cost.

For example, primary commercial auto liability has endured persistent and troubling losses for years, driven by social inflation and nuclear verdicts, pushing down carrier appetite and making a traditional policy much more expensive. That’s where alternative risk transfer—such as captives, fronting, and structure solutions—comes in, says Lee Mathewson, vice president of alternative risk and reinsurance for Nationwide.

Alternative risk solutions have been around for decades, he explains, but only recently have become more widely available and sought after as companies have grown more comfortable with pursuing non-traditional coverage. Besides commercial auto, structured solutions are also popular for property, general liability, and professional lines, Mathewson says.

As Mathewson puts it: “As one line of business or coverage becomes unavailable in the traditional space, the alternative risk space moves nimbly and quickly to pick it up,” and vice-versa. For example, while structured commercial property solutions were popular after large hurricane losses in 2021 and 2022, they are less in vogue now as losses have receded back toward 10-year averages.

In this environment, Mathewson believes the alternative risk space must be robust and successful so insureds can find the coverage they need if it is not immediately available in a traditional one-size-fits-all form. Building a successful alternative risk space requires expertise and partnerships between all elements of the insurance value chain.

The Nationwide Alternative

To demonstrate the former element, Mathewson walks through Nationwide’s approach to alternative risk. The insurer prioritizes three types of alternative risk transfer. The first is group captives, where Nationwide issues the primary coverage policy then cedes the risk to the group captive and provides stop-loss coverage on the back end.

Nationwide also focuses on fronting. “We write quite a bit of matching-deductible insurance policies. We’ll also front for international companies who may not have U.S. paper but still want to access the U.S. market.”

The biggest Nationwide alternative risk vertical by volume of business is structured insurance solutions, Mathewson says. These policies are highly customized: rather than the typical year of coverage before renewal in traditional risk transfer solutions, structured policies often are multiyear and can cover multiple lines, with widely varying limit and deductible structures that can be specific to each line covered or to each year of coverage.

To create these unique structured insurance solutions, an insurer must understand the risk on a fundamental level. “Institutional expertise is the big one,” Mathewson says. “Industry experts on the front lines working with the insured themselves or the broker to understand what the insured is looking for and then to create a product that meets it.” For Nationwide, this means leveraging years of underwriting and pricing expertise in alternative risk transfer through its partners, along with a deep internal background in capital and volatility management.

A major part of crafting a successful—and profitable—structured insurance solution is leveraging that institutional expertise to dig into the areas “where insureds often don’t have a lot of loss experience,” Mathewson explains. “For us, it’s building a nuanced pricing and underwriting process where we understand the insured’s motivations and pressure points to create a program bespoke to their needs by leveraging both historical experience and underwriting expertise about prospective and emerging risks.”

Partnerships Are Key

External partnerships between intermediaries and entities that take on risk are also essential to building alternative risk transfer solutions, Mathewson says. “Brokers, MGAs, primary carriers, reinsurance carriers—everybody in the insurance value chain is key to the alternative risk space being successful.”

Tailoring one of these solutions often involves a broker or MGA working with multiple carriers, insurers and reinsurers alike, across the insured’s tower. Each could create a different, possibly conflicting, bespoke solution for the insured or reinsured, Mathewson notes. Thus, a broker who can identify potential non-concurrencies and resolve them with the carriers is essential.

“That’s where institutional expertise and experience become valuable,” Mathewson says. “Not overselling or underselling the bespoke nature of what you build so that the insured enters a policy with eyes wide open where gaps can exist in their towers.”