SOUTHAMPTON, Bermuda-The increasing sophistication of risk managers is driving the increasing sophistication of the insurance market, a panel of financial risk insurers says.

With the convergence of financial and insurance markets, risk managers are turning to their insurers to provide solutions to numerous financial risks previously not covered by insurance, they say.

To meet the challenge, insurers are creating innovative new coverages, such as products similar to commodities futures contracts or products that link traditional insured risks to the movement of financial markets, they say.

Risk managers are taking a much more sophisticated approach to risk financing than they have traditionally, said David Kaplon, senior vp at X.L. Reinsurance Co. Ltd. in Bermuda.

"Risk managers are now demanding integrated solutions from insurance companies," he said at Bermuda Insurance Symposium III, which was held Feb. 18-21 in Southampton, Bermuda.

This movement is largely due to a trend toward recruiting risk managers with financial backgrounds and the integration of risk management departments with corporate treasury departments, Mr. Kaplon said.

This new breed of risk manager is asking insurers to develop insurance products to manage earnings and control revenue growth volatility, he said.

Finite risk reinsurers that have to offer innovative products to thrive in the currently soft traditional insurance market are leading the drive to develop these types of products, said Michael J. Cascio, vp at Stockton Reinsurance Ltd. in Bermuda.

Some products being offered address the needs of the commodities market, he said.

For example, insurance can be used to hedge against commodity price fluctuations, Mr. Cascio said. A commodity deal could be set up with an agreed price of $20, and an insurance product could be established to cover any fall in the market price of the commodity below, say, $16, to a minimum price of $10.

By using insurance rather than derivative products, the buyer of the contract may be able to obtain added tax and accounting advantages, he said.

The product would be similar to stop-loss insurance contracts, Mr. Cascio said.

One of the obstacles to the development of such products is the difficulty in obtaining sufficient data to make reasonable predictions, he said.

However, if insurers establish relationships with experts in the commodities field, this difficulty can be overcome, Mr. Cascio said.

Another issue might be the possible Securities and Exchange Commission regulation of the products, he said.

"We have to be careful that we are not actually dealing in these types of markets," Mr. Cascio said.

Another obstacle is the efficiency of the derivative hedge vehicles the commodity markets use. "It is difficult for us to compete in areas where financial markets are well-established, large and liquid," he said.

Insurance products will only have a chance to compete in markets such as the oil market for public utilities that are not yet dominated by derivative traders, he said.

Dual-trigger policies are another innovative product that could be used to address the traditional risk concerns and financial risk concerns of risk managers, said Graham C. Pewter, president and CEO of Commercial Risk Partners Ltd. in Bermuda.

These policies protect companies from the effect of a major traditional insurance loss in the same year as a major change in financial markets that affects their financial holdings, according to Mr. Pewter.

"Normally, the two functions are separately managed, but the corporation has one balance sheet and one set of earnings," he said.

By uniting the two problems under one insurance coverage, corporations can maintain large retentions but still have catastrophic coverage in place should a physical event and a financial event hit, he said.

The need for such products has grown as companies retain more risk, Mr. Pewter said.

For example, a company in California may be comfortable with a $50 million earthquake retention, and it may be prepared to take a $50 million loss on financial markets, "but what they don't want is for both to happen in the same financial period," he said.

By offering a dual-trigger insurance product that pays after two events occur, the insurance industry can address this problem, Mr. Pewter said.

"There is a great opportunity for insurance companies to try and devise products that respond to these issues," Mr. Pewter said.

However, with the new territory comes new challenges, Mr. Pewter cautioned.

Dual-trigger policies combined with the existing move toward larger retentions will erode premium volume for insurers even further, he said.

Also, a limited number of buyers would be interested in dual-trigger products. And few insurers have sufficient expertise to analyze financial issues such as interest rate movements, Mr. Pewter said.

The two events also could be linked so a dual-trigger policy designed to cover two separate events is in fact triggered by one event, he said.

For example, a blowout on an offshore oil rig could cause a fluctuation in oil prices and produce massive physical damage, he said.

Also, insurers will find little retrocessional capacity for such products, and the cost of laying off the risk into financial markets may be prohibitive, Mr. Pewter said.

"The trick is to find something that is attractive to the buyer and seller, and it's very, very difficult," Mr. Pewter said.

Steven Gluckstern, chairman of Zurich Reinsurance Centre Inc. in New York, moderated the session at the symposium.