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BUYERS FIND GROWING NEED FOR ALTERNATIVE SOLUTIONS

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SOUTHAMPTON, Bermuda-Bermuda is well-positioned to take advantage of changes taking place in the commercial insurance industry, a panel of experts agrees.

Those changes, which affect the competitiveness of all insurers, include consolidation, securitization, regulatory reform and more complex risk financing needs of buyers.

"Bermuda offers freedom and expertise and customer focus to deliver specialized products that other markets can't," said Dennis Chookaszian, chairman and chief executive officer of CNA Insurance Cos. of Chicago.

"We have a major commitment to Bermuda, from both Aon and A&A, to place insurance, reinsurance and finite risk products," said Patrick Ryan, chairman and CEO of Aon Group Inc. of Chicago, which in December made a deal to acquire Alexander & Alexander Services Inc. (BI, Dec. 16, 1996). "We bring $500 million of premium to the Bermuda marketplace," he said, noting that Bermuda offers good underwriters and capital unfettered by excessive regulations and the past problems of the industry.

"The ability of the Bermuda market to react quickly-and with fewer bureaucratic hurdles-offers advantages," Mr. Ryan said. "The ability to be creative is what's fun, and the Bermuda market enables this more than heavily regulated markets."

Buyers also like Bermuda because it supports the ability to devise their own solutions, said Geoff Saunders, chairman and CEO of Strategic Risk Management Ltd. in Windsor, England. Bermuda's Centre Reinsurance Co. has a majority stake in SRM and helped in the recent launch of Mining Insurance Ltd., a mutual insurer in Bermuda designed to meet the specialized needs of the mining industry worldwide (BI, March 3). Mr. Saunders previously was risk manager for mining company RTZ Corp. P.L.C.

The three discussed the trends affecting Bermuda and the insurance industry in general during a session at the Bermuda Insurance Symposium III, held Feb. 18-21 in Southampton, Bermuda.

One development in which Bermuda has played a role is the revitalization of Lloyd's of London. Bermuda companies not only have established a competitive presence through branches in the London market but also have invested in several Lloyd's managing agencies, bringing new capital into the market.

"We've invested in Lloyd's because it has enormous talent and needs capital support," said Mr. Ryan. That underwriting talent supports Aon's clients, he noted.

The only potential downside, he said, "is that with so much capital now, I hope they don't start buying market share with our investment."

Competition and market consolidation is on the minds of all players.

"Consolidation makes the market more competitive with more efficiency and greater resources," said Mr. Ryan.

From the underwriter's perspective, there is likely to be an increase in competition for companies that are stronger and more focused, said Mr. Chookaszian. The top 20 insurers in the United States have seen significant consolidation, and more consolidation is likely among the larger companies, as occurred with recent mergers between Travelers Corp.'s and Aetna Casualty & Surety Co.'s property/casualty operations and also between CNA and Continental Corp., he said.

Smaller insurers will fare well in this environment, Mr. Chookaszian predicted.

"Little firms will be flexible and competitive because of specialization," he said. "Medium-sized firms will be challenged and face more consolidation."

"The buyer will welcome specialization. We welcome the ability of global players to concentrate and focus on the needs of the buyers," said Mr. Saunders.

The industry closely watches securitization, which has the potential to deliver even more capital to insurers.

"Hedge Financial demonstrates our own interest in securitization," said Mr. Chookaszian, referring to CNA's pending acquisition of Centre Financial Products, which will be renamed Hedge Financial Products Inc.

"The concept of securitization will change our industry over the next 20 years. We'll see a robust market in insurance-backed securities, much as we've seen the growth of interest rate instruments," he predicted. "But it takes time to form a robust market in intangibles, at least 15 years."

CNA plans for Hedge Financial to take the approximately 30 lines of business the insurer is in and, over the next two years, develop securitized products for each of those groups, he said. "We're going to try and see where it all fits; many won't," he said.

"We're one of the last multiline insurers, which makes CNA a good lab to test these products," Mr. Chookaszian said. CNA also plans to use Hedge Financial to develop instruments that will provide an alternative to reinsurance to create additional capacity, he noted.

The prospect of greater capital markets involvement in the insurance industry does not pose a threat for current players, Mr. Ryan said.

"We don't expect disintermediation or to be replaced by securitization," he said.

"We believe investment banks, not insurers, will lead the move to transfer risk via the capital markets," he added.

'It's early and we're seeing a lot of smoke and mirrors, but the smoke is clearing," Mr. Ryan said of securitization of insurance.

Another area of opportunity for the industry is risk managers' expanding view of risk.

Mr. Chookaszian said insurers already are positioned to meet the resulting demand for new types of protection.

"Insurers are already in areas such as residual value insurance for automobiles, financial guarantees and sureties," he noted. "As companies put the risk manager in the role to oversee these risks, it's a natural that insurers will respond," he said.

"We use 'risk management' in our vernacular as the exclusive province of our industry. But many commercial banks' definition of risk management is far broader, covering funding risk, currencies, etc.," said Mr. Ryan.

"There is convergence between the two, and if insurers are not prepared to participate, they'll have a limited future," he said.

The panel agreed banks will play a role in insurance, though it may be a limited one.

"One has only to look to Europe and bancassurance to see what's happening," said Mr. Ryan. "It will be much more competitive, particularly for life insurers," he said.

"I doubt that banks will be an effective market to underwrite property/casualty and pure life insurance products, such as term life. They will be more effective in annuity-type products," said Mr. Chookaszian. He added that he would welcome banks attempting to enter other insurance lines, though, as it would make insurers more competitive in comparison.

A more likely development is mergers among banks and insurers, he said. "They'll buy us; we'll buy them."

Peter Rackley, chairman and CEO of Western International Financial Group of Hamilton, Bermuda, moderated the session.