Many top executives and risk managers lack the necessary knowledge of alternative risk transfer (ART) solutions to make use of these innovations, a new survey shows.

With an estimated $US1 trillion ($1.43 trillion) earmarked by pension funds, sovereign wealth funds and others for investment in risk finance, traditional insurance market solutions are increasingly supplemented by alternative capital.

Despite this, the annual Excellence in Risk Management study by Marsh and the Risk and Insurance Management Society found many respondents, particularly those in senior management, are unfamiliar with ART solutions such as catastrophe bonds, parametric insurance and captives.

“This should be seen as a call for risk professionals to educate both themselves and senior executives, to add value to strategy conversations,” the report – called Strategic Risk Finance in the Era of Big Data – says.

The report draws on more than 600 responses to an online survey, plus a series of focus groups with leading risk executives.

There is general agreement that ART solutions hold promise. Yet among top executive respondents surveyed, more than half need to learn more about ART products. This drops to about one in three among risk executives.

Among top-tier executive respondents, a lack of understanding about how the products work is cited as the main barrier to use, followed by cost and the belief their organisation is too small to make use of ART products.

Among risk professionals, explaining the benefits of ART solutions to others in an organisation and cost are tied as the No.1 obstacle, followed by a lack of data and analytics to make or justify choices.

The report says data-driven modelling is critical because companies need to compare traditional insurance against ART solutions to clearly understand the value each provides.

“Without effective modelling, an organisation may not recognise the benefits of alternative finance solutions for such a risk, while capital providers would be unlikely to express interest,” the report says.

It says that by leveraging advances in risk modelling, ART solutions can be at the forefront of innovation, providing coverage for risks that are traditionally difficult to quantify or insure, for example the financial repercussions of a pandemic.