NEW YORK-Market conditions will have to change before capital markets-linked insurance products arrive in force, a group of senior insurance executives predicts.

While the lack of spread available for catastrophe risks is apparent in the insurance market, other factors are holding back capital markets-based products from coming forward as a solution to the problem, the executives say.

Among factors halting rapid development in capital markets insurance products are: *low insurance rates; difficulty in determining a basis risk, which is the risk that the price set for the instrument does not match the actual value if the event occurs; difficulties in pricing the product; and simple lack of experience, the insurer executives said at the Property/Casualty Insurance Joint Industry Forum held in New York earlier this month.

However, traditional insurance products do not address the problem of the high-level catastrophe risks, said Kenneth A. Froot, a professor at Harvard University and an associate at the Cambridge, Mass.-based National Bureau of Economic Research.

Little of the catastrophe exposures above $5 billion are covered by insurers, he said.

"If you look at the higher-layer catastrophe risks, you see that these risks are basically not very much shared," Mr. Froot said.

The trillions of dollars in the capital markets could be used to help share those risks, he said.

Several insurance executives said insurers likely will use capital markets in some way.

"It's coming," said Dennis A. Chookaszian, chairman and chief executive officer of CNA Insurance Cos. in Chicago.

But it could be 15 years before the market is widely used, he added.

"Many of the initial attempts will fail, and there will be false starts, but 15 years from now things will have changed dramatically," Mr. Chookaszian said.

CNA this month announced it planned to access capital markets through its new subsidiary Hedge Financial Products Inc., to be headed by financial futures expert Richard L. Sandor (BI, Jan. 20).

One thing holding back the development of the sector is the complexity of the risks, which increase the basis risks, Mr. Chookaszian said.

Whereas other financial products may only be affected by interest rates, insurance-based products will be affected by a wide range of catastrophe risks, so they need to be effectively aggregated before they can be transferred to capital markets, he said.

The constantly changing risk exposures and price of the coverage is another factor that makes it difficult for capital markets to be used for insurance, said Kaj Ahlmann, chairman, president and CEO of Employers Reinsurance Corp. in Overland Park, Kan.

"The big problem is we are trying to price something that is constantly changing," he said.

For example, the acknowledged windstorm exposure in Florida changed dramatically after Hurricane Andrew hit the state in 1992, Mr. Ahlmann said.

"Most of us were surprised by the ultimate losses that came out of that," he said.

The most sophisticated way to deal with these changing exposures is through reinsurance, but ultimately capital markets also will play a role in spreading the risk, Mr. Ahlmann said.

The current low rates for insurance are holding back rapid development of capital markets insurance products, said Maurice R. Greenberg, chairman and CEO of American International Group Inc.

"There's lots of capital markets capital ready to come in, but not at the current pricing levels," he said.

AIG is working with several other organizations seeking to develop capital markets products, but it has little expectation of immediate success, Mr. Greenberg said.

Insurance products currently do not provide large enough returns to attract capital markets practitioners, agreed William H. Bolinder, member of the corporate executive board of Zurich Insurance Group.

"The capital markets are clear right now that they don't think that the rewards are really there," he said.

The few deals that have been sealed have been extremely small, Mr. Bolinder said.

However, the size of the deals will grow, and that will lead to new problems for the insurance and reinsurance industry as capital markets target the most attractive business, he said.

"The risk that's left behind is what troubles me," Mr. Bolinder said.

Some insurance companies already are using or considering using capital markets, said some members of a later panel at the forum.

State Auto Insurance Cos. in Columbus, Ohio, buys catastrophe reinsurance and then uses other financing tools to fund risks above that coverage, said Robert L. Bailey, chairman and CEO.

"If the models we use are right, we can handle a 250-year event without hitting our surplus by more than 15%," he said.

The reinsurance industry does not provide adequate coverage for high-level losses, agreed Gary L. Countryman, chairman and CEO of Liberty Mutual Insurance Cos. in Boston.

Liberty Mutual would be interested in reinsurance coverage of $1 billion excess of $1 billion, but that is generally unavailable, he said.

"So we have thought a lot about concentration management," Mr. Countryman said.

The first session was moderated by Roberto G. Mendoza, vice chairman of J.P. Morgan & Co. Inc. in New York; the second session was moderated by Kathryn J. McIntyre, publisher and editorial director of Business Insurance.