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Some of the conditions that contributed to the early appeal of financial reinsurance may have changed, but a strong market for the products remains, even if reinsurers must sometimes work harder to serve it.

Newly emerging exposures and new approaches to covering risk-particularly with an emphasis on holistic risk management-are creating myriad opportunities for financial reinsurance products, according to those in the industry.

Demand for financial reinsurance has not lessened, said Merv Holland, president of Bermuda-based Inter-Ocean Reinsurance Co. "If anything, there's more."

"You just have to scratch harder and be creative," Mr. Holland said.

"There's just a great deal of activity in terms of closed transactions in this area," said Jon Roberts, president of Enterprise Advisors Inc. in New York. "And it's coming despite the soft traditional market."

"One of the main reasons is that there are still many areas that are not being addressed by the conventional insurance and reinsurance markets," Mr. Roberts said. "The soft market is only there for coverages which have always been provided in the past. What may be difficult are coverages that are not standard."

Graham Pewter, president of Commercial Risk Reinsurance Co. Ltd. in Bermuda, said his company's revenue and premiums written are growing "explosively." Commercial Risk's gross revenue will increase 50% to 60% this year, Mr. Pewter said. "Now that as a view of economic activity means there is plenty of demand for our products."

"It's true that the writing environment is such that some finite products have to be aggressively sold vs. bought," Mr. Pewter said. "Quite often we find situations where we can't blame the client for buying traditional coverage because it's so aggressively priced."

Low rates for traditional reinsurance are "having a dampening effect in some quarters" on financial reinsurance products, particularly in the property area, the Commercial Risk president said, though overall strong demand continues.

According to Bruce Reich, principal and co-head of worldwide insurance marketing for Swiss Re New Markets in New York, the ultimate factors that have driven the financial reinsurance market in the past remain. "Companies are still trying to control underwriting volatility," he said.

For reinsurers offering financial reinsurance products then, a market is still there, particularly if they can craft products to meet ceding companies' specific needs.

From Commercial Risk's standpoint, that often means combining with other reinsurance efforts under the umbrella of the company's ultimate parent, French reinsurer SCOR S.A.

As a result, SCOR can present finite risk reinsurance to customers as part of a menu that includes traditional coverages, Mr. Pewter said, pointing out the potential advantages of both approaches so that a client can choose the product that better fits its needs.

According to Mr. Holland, one key in the current market is to find companies that "look beyond a great market for traditional reinsurance" and instead want to look at risk financing over the long term.

"We lost half or two-thirds of our business, frankly, at year's end," Inter-Ocean's president said. "And we've rebuilt that business this year."

"A lot of our clients decided to take their profits and commute and buy traditional cover we couldn't compete with" on price, he explained.

But the company since has rebuilt its business to that year-end 1996 level by attracting new clients and new approaches to serving them, and Inter-Ocean expects to surpass that by crafting creative reinsurance solutions and identifying the customers in search of them.

"And that's being careful, too," said Mr. Holland, referring to the risks it assumes. "In a market like this, you have to be careful."

Mr. Pewter agreed that a key to financial reinsurers' success is finding innovative solutions to ceding companies' problems.

"We're being asked to respond to classes of risks and exposures that we have not looked at before," Mr. Pewter said. "Flexibility is essential."

One key market that Mr. Holland sees for financial reinsurance is writing loss portfolio transfers for companies involved in mergers and acquisitions that want to improve their balance sheet by ceding some liabilities in a tax-advantaged manner.

Environmental exposures have provided a number of opportunities in terms of retrospective products, Mr. Reich said, and catastrophe reinsurance, while generally available, is another area where Swiss Re New Markets

sees some interest in using financial reinsurance products.

Very large companies that have concentrated exposures in the Southeast or California may find capacity hard to come by, Mr. Reich said. "Or they may want to buy something on a multiyear approach."

Using financial reinsurance to meet the need for contingent capital in the catastrophe area "is a very good application of the product," Mr. Reich said. "It works very well in cases where a company has to be sure that it is able to continue operating after an event."

"One of the harder markets is the retrocessional area," he added, noting that the market there might prompt reinsurers to look at financial reinsurance as a way to lay off some risk.

Financial reinsurance products also provide a way of serving customers taking a broader view of their companies' exposures and "looking at both sides of the balance sheet simultaneously," Mr. Reich said.

"In general, risk management is moving toward a more holistic approach and that certainly plays to the strengths of the financial reinsurance products," he said.

Mr. Roberts of Enterprise Advisers also sees considerable interest in products aimed at providing integrated risk management programs for large corporations. "I suppose this would be more non-conventional insurance than it is reinsurance," he said.

Dual-trigger coverages, which tie coverage to the occurrence of two different events, such as an earthquake and a major commodity price change, for example, are another developing market, Mr. Roberts said.

"These types of products are difficult to hedge and difficult to price because the payoff function for the insurer or the reinsurer of these two events may not be perfectly correlated," he said. "We make a market for these dual-trigger products as a reinsurer and we have to manage that risk internally."

The anticipated Year 2000 computer problem is another exposure that companies are addressing with financial reinsurance products. "There's a lot of demand for immunizing the balance sheet against the damage the Year 2000 problem could bring to an enterprise," Mr. Roberts said.

Still, while many reinsurance buyers express interest in the financial reinsurance products, many ultimately choose a simpler traditional reinsurance contract, Mr. Reich said.

Traditional reinsurance has the advantages of being easier to understand and easier to put in place and unwind, he noted. It also frees the buyers from some of the regulatory or accounting concerns that financial reinsurance might present.

But, while accounting regulations and a low interest rate environment are frequently cited as key detriments to the financial reinsurance market, Mr. Reich doesn't buy it.

"Certainly the accounting issues related to reinsurance have been pretty well vetted by the rating agencies and the accounting community," he said.

Consequently, reinsurers have a good understanding of such issues as to how much risk must be transferred.

The fact that the resolution of those questions has produced clear standards provides an advantage in marketing financial reinsurance, the Swiss Re New Markets executive suggested.

"I think it was more difficult when we had a grayer area and the clients-particularly some of the more conservative ones-were reluctant to do some of these when they were under a cloud of suspicion," he said.

Meanwhile, where interest rates are concerned, "certainly you get a bigger bang for your buck when interest rates are higher," Mr. Reich allowed. "(But) we've been in a fairly stable interest rate environment for about a half a dozen years, so that's not new anymore."

One measure of the market for financial reinsurance may be the considerable interest in providing it.

"There's more competition," said Commercial Risk's Mr. Pewter. "There seems to be an ever-increasing number of carriers that are engaged in non-traditional. I don't suppose there is any kind of major reinsurance group that is not involved in some finite capacity."

"With the consolidation that's taking place in the industry, companies have to be providers of a full range of services and that includes finite risk," Mr. Pewter said.

"There's more and more capital coming into the business," Mr. Holland said. "I don't see how there's going to be a home for all this capital."

But Inter-Ocean sees its future in that market, according to Mr. Holland.

"We had our board meeting in London. We're trying to explain to them what we see our role being in the future and we see it being a vehicle for financial reinsurance products," he said. "We were set up in a tax-advantaged market to take advantage of things that are going on in this market."

"You just have to dig a little deeper," Mr. Holland said. "And it's also good to have the right connections with the right partners. Clients and brokers have to have a real clear understanding of what you can do."

That said, Mr. Holland indicated that he doesn't think the industry is doing an adequate job of educating clients and brokers on the advantages of financial reinsurance.

The financial reinsurance products "at this point are not as widely accepted (as traditional reinsurance)," Mr. Reich allowed. "That's going to change over time."

"And there's growing interest in some of the new products like securitization and contingent products," he said.

Still, Mr. Reich said he doesn't expect financial reinsurance products ever to replace traditional reinsurance, which remains "viable, straightforward and proven."