Catastrophe and dynamic financial modeling is a must; capital market solutions are a go; and the Year 2000 computer problem is all the buzz as reinsurance brokers continue to develop innovative solutions to solve cedents' problems.

The soft market continues to erode reinsurance brokers' top lines, and competition continues to come from many directions. Reinsurance brokers, therefore, are seeking new ways to grow and differentiate themselves.

At the same time, ceding company clients are demanding more tailored reinsurance products and more services from their reinsurance brokers.

One of the most valuable services that leading reinsurance brokers are offering today is sophisticated catastrophe modeling and dynamic financial analysis. All of the world's largest reinsurance brokers offer these services today. However, some have designed their own proprietary modeling capabilities, while others outsource these services.

Willis Faber Re, for instance, recently expanded its business of building catastrophe models for global hazards such as floods, windstorms and earthquakes, by launching a new computerized windstorm model created in a joint venture with the U.K. Meteorological Office. (BI, Sept. 7).

Dissatisfied with existing models, Willis Faber Re decided to combine Meteorological Office estimates with its own property damage estimates and insurance records from past windstorms. The model forecasts the potential value of insurance claims arising from windstorms in specific areas of the United Kingdom. The reinsurance broker plans to eventually expand the model to produce estimates of the probability of future U.K. storms and gales.

E.W. Blanch Co. recently unveiled its new catastrophe modeling software, called CATALYST 3.0. The software uses the latest technology and engineering resources to allow customers to use data output to manage risk. The software contains upgraded hail and tornado models, which have been added to existing hurricane and earthquake modeling features.

Just as reinsurance intermediaries are offering clients modeling solutions to help assess and mitigate the volatility associated with weather-related catastrophes, they also are offering dynamic financial analysis tools to help clients protect against balance sheet volatility.

By inputting a company's balance sheet data and using various probability and simulation models, these tools can analyze different outcomes based on such variables as interest rate swings or other catastrophes to help companies make more informed financial decisions.

Earlier this year, Aon Re Worldwide rolled out a new proprietary dynamic financial analysis model called Prime Re, which assists insurers in deciding whether or not to buy reinsurance.

"This is the first time we've really been able to do DFA modeling in relation to reinsurance purchases," explained Bryon Ehrhart, president of Aon Re Services, the unit that designs new products for Aon Re. "We've used it with 25 clients with very good results. It's changed the way they think of reinsurance buying," he said.

In addition to creating its own catastrophe modeling capability, Willis Faber Re also has brought in a DFA capability, which is proving useful in determining risks related to balance sheet analysis, said Peter Pruitt, chairman and chief executive officer of New York-based Willis Faber North America Inc.

John Cashin, executive vp of Willis Faber North America, added that the reinsurance broker has increased the effectiveness of DFA by hiring specialized technical, accounting and finance personnel.

Another service reinsurance intermediaries are taking advantage of is capital market solutions. While this alternative risk financing solution has resulted in more talk than action, more and more deals are being brought to market.

Aon Re has been a leader in this area with its catastrophe equity put product, CatEPut. Aon Re has placed three cat put programs for clients since 1996.

Earlier this year, Aon Re went a step further by not only developing but also structuring and securitizing a catastrophe bond deal for Yasuda Fire & Marine Insurance Co. Ltd. The deal secured $80 million in reinsurance for typhoon exposures for up to seven years. The transaction involved the sale of $80 million in notes by a Cayman Islands special-purpose vehicle; Aon structured and brought the notes to market (BI, June 29).

Aon Re is not alone, however, in this emerging market.

E.W. Blanch's recently formed unit, Blanch Capital Markets, together with Goldman Sachs & Co., led the underwriting on a one-year, $54 million catastrophe bond issued to finance reinsurance protection for F&G Re Inc. Like other cat bond deals, the transaction uses a Cayman Islands-domiciled special-purchase reinsurer, Mosaic Re, to issue the bonds, with the proceeds funding a reinsurance contract for F&G Re Inc. (BI, Sept. 7).

"There's been much more activity than a year ago," Chris L. Walker, chairman and CEO of E.W. Blanch, said of capital market products.

Among the other reinsurance brokers taking advantage of this emerging market, Marsh & McLennan Cos. Inc. last November formed Marsh & McLennan Securities Corp., which develops capital market solutions for the insurance and reinsurance market. In addition, M&M's acquisition of Sedgwick Group P.L.C. brings with it Sedgwick Lane Financial L.L.C., which has been an innovator in the capital markets area.

Willis Faber Re recently launched Capital Market Fund, a fund that channels investment by financial institutions into catastrophe bonds, derivatives and swaps. Willis Faber Re is looking at setting up more such funds.

In addition to its Capital Market Fund, Willis Faber Re in June established a new global company, Cordis Consulting, to increase its alternative risk transfer business (BI, June 15). Cordis brings together existing consulting operations into a branded product, and it is aimed at helping senior executives enhance earnings and manage risk.

Cordis has recently been launched in North America, though Mr. Pruitt said it is too early for it to have established any track record. But, he added, "we have great expectations that this is going to create a vehicle to increase the technical services that we provide our clients from an analytical standpoint."

In addition to offering modeling and alternative risk transfer services, reinsurance brokers have also been busy developing products for emerging risks. One of the most talked-about potential risks is the Year 2000 computer problem.

Guy Carpenter & Co. has designed a variety of reinsurance solutions for this potential computer exposure. For example, it designed an all-lines, multiyear aggregate stop-loss treaty policy to serve as the insurer's ultimate line of defense for Year 2000 exposures. It also designed Year 2000 specific excess-of-loss coverage with two triggers; one depends on the amount of losses over a specific period of time, and the other depends on a worse overall loss ratio than the planned level for the same period. Other Y2K solutions that Guy Carpenter has designed include contingent quota share agreements and contingent capital arrangements.

Like its competitor, Aon Re also has been busy designing various Y2K solutions for clients. In addition to a multiyear aggregate stop-loss product, Aon Re is expanding the use of its existing catastrophe equity put product, CatEPut, to provide contingent capital to cover aggregate Y2K losses. "It's an interesting use of that product," Mr. Ehrhart said, adding that Aon Re has put some programs in place but has not yet brought any to the market.

Other reinsurance brokers have also made new offerings during the year.

Benfield Greig Group P.L.C. recently set up Benfield Greig Interactive Ltd., which designs fully interactive World Wide Web sites, the first on behalf of Lloyd's of London for cargo business (http://www.cagoinsure.com). The CargoInsure site is underwritten by four Lloyd's syndicates and is accessible to both brokers and direct clients, such as shippers, manufacturers and freight forwarders. It enables users to obtain online quotes and to place risks, and it also offers a claims service provided by Lloyd's Claims Office.

In addition, Benfield Advisory was formed about 18 months ago to provide corporate finance advice on topics that include mergers and acquisitions, raising capital and general strategy.

Michael Caley, chairman of Lambert Fenchurch International Group Ltd. and CEO of the group's chief reinsurance subsidiary, London-based Kininmonth Lambert Ltd., is hesitant about giving any secrets away regarding new products the broker offers.

Mr. Caley did say, however, that over the past year the reinsurance intermediary has been active in new catastrophe excess-of-loss products that have an international appeal.

"We are working on alternative risk transfer, certainly, along with everybody else in the world," Mr. Caley observed. "It will be interesting to see what, if any, the impact of Hurricane Georges will have on ART and similar sorts of lines. . . .It has caused some heavy damage, particularly in the Caribbean, which is still being evaluated, and the impact it will have on reinsurance markets remains to be seen.'