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ALTERNATIVE PRODUCTS BROADEN COVERAGE

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MONTREUX, Switzerland -- Alternative risk transfer products can be used to cover risks that organizations previously never thought they could manage, a senior broker says.

Martin Scherzer, senior vp-global risk finance and consulting group of J&H Marsh & McLennan Inc. in New York, said that previously uninsurable risks, such as regulation causing a loss of value of high-value assets or weather-related revenue losses, can be hedged using alternative risk financing techniques. Mr. Scherzer spoke to more than 100 Swiss risk managers, brokers and insurers earlier this month at the Swiss Assn. of Insurance & Risk Managers convention forum.

Although insurance buyers in Europe and the United States are showing high interest in alternative risk financing techniques, generally more U.S. than European risk managers are using them, said Mr. Scherzer. Developments from insurers and reinsurers are coming mainly from the United States, Switzerland, Germany, France and the United Kingdom, but the Swiss accounting system makes the use of alternative strategies more complicated for Swiss risk managers than for their U.S. counterparts.

"The basis for doing transactions is different (in each country); there is not one market more advanced than the other one," said Albert Peter, chief executive officer of Centre Re Solutions in Zurich.

Nevertheless, as risk managers embrace the concept of alternative risk transfer, the breadth of risks and exposures being addressed is expanding, said Mr. Scherzer.

SIRM President Paul Luternauer explained that risk managers are looking to alternative forms of risk financing because of three factors: lack of insurance capacity, price volatility in the insurance markets, and an increased need to cover business risks insurers and reinsurers have not traditionally accepted.

Mr. Luternauer, who is also director of corporate insurance at Zurich-based airline SAirGroup, said SAirGroup has a number of risks that cannot be covered or are too expensive for traditional insurance. These include credit risks, fuel hedging and investment risks.

For example, SAirGroup's annual fuel purchase budget is about $450 million; profitability is closely linked to the fuel price. This risk could be hedged by a mechanism that would hedge fuel against fleet financing interest costs, so that interests costs would go down as fuel costs rise, and vice versa, he proposed.

Alternative risk financing techniques have prompted insurance and capital markets to take a more comprehensive view of companies' bottom-line exposures, said Hans-Kaspar Zulauf, chief underwriter for Swiss Re New Markets at Swiss Reinsurance Co. in Zurich. "They have come up with more innovative methods and instruments managing and financing an organization's exposures to a variety of events that could adversely affect its cash flow, earnings and balance sheet strength, which goes beyond the boundaries of traditional insurance-buying," he explained.

In the future, as risk transfer products made up of insurance and reinsurance risk transfer solutions blended with capital market products help diversify risk portfolios, there will be an "overall global view of total risk" rather than the current isolated, fragmented view of insurance and reinsurance risk solutions, said Mr. Zulauf.

Centre Re's Mr. Peter identified four areas in which non-traditional risk transfer solutions can help organizations:

Earnings and balance sheet protection.

Project finance activities.

Multiyear commitments to providing capital.

Optimizing tax planning.

Alternative risk financing techniques are being developed in response to customers' needs, said Mr. Peter, and are "a powerful toolbox for serving our customers." But risk managers need to adapt to the changing products, he said, and "become more knowledgeable on the financial practices and risks of their firms," as well as becoming more conversant with the new products being offered by the insurance and capital markets.

These developments represent "a great opportunity for the risk management profession" to enter new territories within the organization, said J&H's Mr. Scherzer. "The truly sophisticated risk manager knows how to translate insurance into the language of the company and of finance."

Defining alternative risk financing as "everything that isn't traditional insurance" -- traditional meaning single-year, single-line policies -- Mr. Scherzer said he thinks traditional insurance will expand its offerings as risks once thought unusual are increasingly becoming accepted as normal.

Conversely, insurance companies that do not embrace the concept of alternative risk financing "will find more and more they are being excluded from opportunities," he said. "Clients will want to talk to a company. . .which can supply all those (traditional insurance and alternative risk financing) services."