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SAN ANTONIO -- The merging of capital markets with insurance and reinsurance markets is influencing the evolving role of the risk manager, the head of a major reinsurance intermediary says.

"Capital markets will join with insurance and reinsurance markets to provide financial capacity, and that will change the landscape of risk management," said E.W. Blanch Jr., chairman of E.W. Blanch Holdings Inc. in Minneapolis.

"When one looks at the number -- over 15 -- of publicly disclosed risk management transactions executed by the capital markets this year, one must conclude that the capital markets have a place in risk management," he said during a panel discussion at the 52nd Annual Meeting of the National Assn. of Independent Insurers in San Antonio last month.

Risk managers' roles are expanding, Mr. Blanch said, and the capital markets are playing a part.

"Our vision in our company is that organizations will embrace an enterprise view of risk management, characterized by a focus on economic value and balance sheet protection," Mr. Blanch remarked.

The result, he added, will be an "improved understanding of overall business risks faced by the organization, be it an insurance company or an insured."

Mr. Blanch emphasized that the "movement toward enterprise risk management is leading to the convergence of reinsurance and capital markets -- a movement toward integrated risk management solutions to complex problems and the acceleration of the evolutionary process of risk management organizations."

"Structured solutions will be tailored to the organization's unique combination of insurance and financial risks," Mr. Blanch explained.

Capital markets "will play a major role in the development of integrated risk management solutions," he noted, referring to a deal structured by United Services Automobile Assn. to fund hurricane catastrophe risks as an example of such solutions.

USAA found tremendous investor interest in its $477 million catastrophe bond issue that provides the insurer with a high-level reinsurance layer for East Coast hurricane risks (BI, June 23).

The bonds were issued by Residential Reinsurance Ltd., a Cayman Islands reinsurer USAA created to manage the funds raised through the issue and administer a reinsurance contract it provides to USAA.

"Reinsurance is a form of capital. Debt, equity and derivatives are forms of capital," Mr. Blanch pointed out. "Risk financing and risk transfer solutions often require multiple forms of capital. Thus, the convergence of capital and reinsurance markets will be necessary to efficiently solve risk management problems."

That convergence "will happen," he stressed, and "the result will be more responsive balance sheet protection for insurers and insureds alike."

Efficient methods of transferring risk will continue to be arranged through capital markets for risks related to asset valuation, credit, currency, commodity pricing and other exposures, Mr. Blanch said.

Not all the major players are convinced, however, that the impact of the capital markets on the insurance landscape will be as sweeping as some predict.

"I don't doubt that there is a high level of interest" in securitization of risks following the USAA offering and other transactions, said James E. Gustafson, chairman and chief executive officer of General Reinsurance Corp. in Stamford, Conn.

However, he added, "I'm a little bit of a skeptic about how much of an impact this is going to have across the rest of the industry."

Because of the "time and complexity" of transactions like the USAA offering, "I think personally the uses are going to be very limited," Mr. Gustafson suggested.

But, he added, "I do think there's a place for securitization," and transactions will continue to take place.

In the case of the California Earthquake Authority, the capital markets lost out to traditional reinsurance.

After investigating the capital markets, the CEA chose instead to purchase $1.5 billion in reinsurance coverage from Berkshire Hathaway Inc., explained Gregory Butler, chief executive officer of the CEA.

Price and predictability were among the reasons the CEA went the traditional route.

"Premium, at the end of the day, was a big question, because there was no guaranteed price we could plan on" when financing the coverage through the capital markets, he explained.

"We save somewhere between $20 million and $30 million a year for the CEA by going with reinsurance as opposed to where the capital market folks were telling us where we were going to be," Mr. Butler said.

Activity in the capital markets is continuing on the heels of the successful USAA offering.

"The pipeline of transactions for 1998 is encouraging," said Andrew J. Kaiser, chairman of Goldman Sachs Risk Advisors, the insurance and reinsurance brokerage unit of Goldman Sachs & Co.

There is a "continuation of new risks being introduced to the capital markets, which allows investors to diversify their portfolios among different risks" based on geographic location and type of peril, he said.

The USAA offering stands as an example of how a successful offering can be accomplished, Mr. Kaiser added.

That offering worked because it was highly rated, offered investors a healthy return and was "a clear and understandable risk," being a single-event hurricane bond, he explained.

And, USAA "committed its resources, its strategic vision and its intellectual capital to make the transaction happen," Mr. Kaiser said.

Robert W. Pike, chairman of the NAII and senior vp, secretary and general counsel with Allstate Insurance Co. in Northbrook, Ill., moderated the panel discussion.