When traditional insurance markets constrict and premiums soar, risk managers face a critical decision: accept volatility or find innovative solutions. For Ash Kilada, Vice President of Risk Management at XPO, a major transportation company, that decision came three years ago when insurers exited the large fleet market and left a coverage gap that threatened to destabilize financial planning. 

His solution? Alternative risk transfer through structured programs paired with a captive insurance strategy—an approach that's becoming increasingly relevant as hard market conditions persist across multiple industries. 

The Problem: When Insurance Markets Fail 

Companies purchase insurance for two fundamental reasons: protecting against catastrophic loss and reducing financial volatility. But what happens when the insurance you need becomes unavailable or prohibitively expensive? 

For large trucking operations, this became reality when Chubb and other major carriers declined to underwrite fleets greater than 2,000 vehicles. " Retaining the risk would have introduced a lot of volatility," Kilada explains. The company needed coverage for claims between $5 million and $20 million—too large to self-insure comfortably, yet not possible to transfer to traditional markets at reasonable rates. 

This middle ground represents a critical challenge in corporate risk management: predictable losses under $5 million can be funded through working capital, and truly catastrophic losses above $20 million can be pooled with other companies through traditional insurance. But that intermediate layer—less predictable than working losses yet not truly catastrophic—creates planning nightmares for finance teams. 

The Solution: Pooling Risk Across Time 

Alternative risk transfer offers an elegant solution to this dilemma. Rather than pooling risk with other companies through traditional insurance, structured programs allow organizations to spread retained risk across a multi-year period while transferring enough risk to a third party to qualify as insurance. This approach works well with risk that is easier to predict across a 3-year period. 

"What alternative risk transfer really does is that you're pooling some of these less predictable retained risks to your future self—to yourself next year and the year after," Kilada explains. "It's kind of like a self-pooling across time by using a third party." 

Here's how it works: Instead of setting aside $5 million this year for a potential $10 million loss (because actuaries apply a risk charge for losses that might occur immediately), companies can spread that risk across three years and pre-fund at a lower annual cost. The structured program requires a minimum amount of risk transfer to qualify as insurance, but the primary goal is reducing volatility. 

The Strategic Advantages 

Beyond volatility reduction, alternative risk transfer provides several compelling benefits: 

• Financial Planning Predictability: CFOs and FP&A teams gain time to plan for large claims rather than absorbing unpredictable hits to the balance sheet. "That's what alternative risk transfer also does—it gives them time to plan from a cash flow standpoint and from a P&L standpoint," Kilada notes. 

• Claims Control: By keeping the first several layers of coverage in-house, companies maintain greater control over settlement decisions. This prevents the scenario where insurers settle claims higher than necessary to avoid nuclear verdicts and bad faith exposure—settlements that ultimately drive up future premiums. 

• Capital Efficiency: If the anticipated loss doesn't materialize within the three years, companies can either recover the pre-funded capital or roll it forward to protect against future years' exposure. 

• Access to Reinsurance Markets: Alternative risk transfer programs typically flow through captive insurance companies, providing access to reinsurance markets and additional risk management flexibility. 

Beyond Auto Liability: Broader Applications 

While Kilada's experience centers on trucking liability, alternative risk transfer proves valuable across multiple risk categories. Property insurance represents another opportunity, particularly when market hardening drives premiums to irrational levels. 

"If the underwriters say the risk is worth X, and I think it's worth Y and X is a lot higher than Y, I'd rather not give them that premium because it's not worth it," Kilada explains. For properties in high-hazard areas—where traditional insurance becomes expensive or unavailable—alternative risk transfer provides a path to manage volatility without overpaying for inadequate coverage. 

Implementation Complexity: The Devil's in the Details 

Despite its advantages, alternative risk transfer requires sophisticated structuring and careful planning. Program terms around annual aggregates, term aggregates, and additional premium triggers can significantly impact the actual protection provided. 

Kilada cautions that risk managers need experienced advisors to navigate these complexities: "I wouldn't suggest the risk manager who's never done it before to do it on their own. I think you need a good advisor that can be open and forthcoming on all of the risks and challenges and the details—because sometimes the devil is in the details." 

Key considerations include: 

• Aggregate structures: Understanding how annual versus term aggregates affect coverage for multiple losses 

• Premium mechanics: Clarifying when additional premiums trigger and how they're calculated 

• Captive requirements: Ensuring proper policy wording and reinsurance pass-through arrangements 

• Cash flow management: Structuring payment terms to align with organizational planning cycles 

The Role of Captives 

Alternative risk transfer programs almost always require captive insurance companies as pass-through vehicles. While wholly owned captives don't provide P&L protection on their own (they consolidate into parent company financials), they serve several strategic purposes: 

• Accelerated tax deductions by converting predicted losses into deductible premiums in the year they are paid – assuming the captive qualifies under IRS rules. 

• Access to reinsurance markets for structured programs 

• Ability to manuscript custom policy forms 

• Pooling of risks across different business units and potentially other firms 

"The biggest advantage for utilizing a captive is accelerated tax deductions," Kilada notes. "You know you're going to have those losses, but you can't deduct them all until they actually occur. If you have a captive and convert it into premiums, now you can deduct that, and that gives you an accelerated tax advantage." 

Looking Ahead 

After evaluating alternative risk transfer for a decade, Kilada implemented structured programs three years ago when market conditions made the economics compelling. His advice for risk managers considering this approach: Understand your risk profile, evaluate whether traditional markets can adequately serve your needs, and invest in proper advisory support. 

The insurance market shows no signs of stabilizing in sectors like transportation, cyber, and climate-exposed properties. As more organizations face coverage gaps and volatile pricing, alternative risk transfer will likely transition from an alternative strategy to a mainstream enterprise risk management solution. 

For risk managers navigating these challenges, the message is clear: when traditional insurance markets fail to provide adequate protection at reasonable costs, structured programs offer a viable path to reduce volatility, maintain financial stability, and regain control over risk management decisions. 

To learn more about optimizing your insurance data to improve program and captive management strategies, book some time with us here.