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Europeans have discovered the "cat option," but only time will tell if it will be as popular as it has become in the United States.
This summer has seen a number of developments in the alternative risk transfer arena in Europe, and experts in the field believe it is a sector set for more growth.
Earlier this month, Hanson P.L.C., a London-based building materials group that is heavily involved in the United States, unveiled a risk financing program -- part traditional insurance and part finite risk coverage -- that provides $800 million of coverage for the cost of cleaning up U.S. pollution sites (BI, Aug. 10).
A month earlier, Alternative Risk Finance, a joint venture set up last summer between France's AXA Group and French bank Paribas S.A., placed what it hailed as Europe's first catastrophe option to provide $30 million of California earthquake coverage for an unidentified U.S. client.
In June, Chubb Insurance Co. of Europe S.A. announced the creation of Alternative Risk Consulting, a new unit involving an alliance with accounting firm Ernst & Young in London to service alternative risk programs for European clients (BI, June 15).
That same month, Winterthur Group of Switzerland bought an 80% stake in Alternative Risk Solutions Inc., a Waltham, Mass., unit of Arkwright Mutual Insurance Co. Winterthur said at the time that it intended to extend its "position and know-how in this growth sector."
Lloyd's of London has identified alternative risk financing as a key issue, and its Market Board expects soon to help individual syndicates decide whether to offer alternative products.
According to Chris Mundy, client development and planning manager at Corporate Risk Solutions, a London-based unit of Sedgwick Ltd., the $800 million Hanson program, which Sedgwick helped arrange, was "as far as we are aware, the biggest that we have in the public domain" in Europe.
Mr. Mundy said his reply was qualified, however, because the bulk of alternative risk financing deals are not publicized. So it is almost impossible, he said, to know the full extent to which these programs have been adopted in Europe.
Mr. Mundy said he believes that only about 20% of alternative risk financing deals ever become public knowledge, and that it is even less common for their full terms to be disclosed. Secrecy stems from the fact that many of the deals are commercially sensitive -- if disclosed, the transactions could send a company's stock price soaring. In addition, a company could lose a competitive advantage if competitors copy its risk financing program.
However, Mr. Mundy speculates that in some sectors where environmental or public liability exposures are particularly high -- such as energy, utilities, motor manufacturers and pharmaceuticals -- the vast majority of companies either have in place, or are considering, some type of alternative risk financing program. Overall, about 70% of the world's alternative risk transfer deals are done by U.S. companies, he estimated.
Chubb Europe's Alternative Risk Consulting unit is similarly reticent about naming names, but Marion Brown, a consultant with ARC in London, said the number of its clients is approaching 50.
She said the work done by ARC is tremendously varied; it includes "all the quirky stuff that no one could find a home for" in the conventional insurance market. Alternative solutions the consultant has explored for clients have ranged from multiline, multiyear programs using captives to loss portfolio transfers, to liability transfer for acquired employees to difficult-to-insure risks such as Year 2000 and environmental exposures.
Ms. Brown said ARC is "getting a huge amount of interest out of Europe." Other areas where European clients are showing interest in alternative risk financing include solutions to protect brand reputation, intellectual property rights, loss of key personnel and cost overruns from multiple projects.
James Olivo, head of global capital markets for Swiss Re Capital Markets Corp. in New York, said European interest in alternative risk financing solutions, while lagging behind that in the United States, is definitely on the increase.
"We are seeing more securitization of European risk. . .and we are seeing more European investor interest in securitization deals," he said.
Mr. Olivo believes the European life insurance sector is further along in terms of embracing alternative risk financing products than the property/casualty sector. Life insurers are increasingly looking to alternative forms of shifting their risks as a result of deregulation, mergers and acquisitions, and the growth of new products.
One recent example is a L260 million ($424 million) bond issue by National Provident Institution, a U.K. mutual life insurer. The purpose of the bond, which is linked to National Provident's future profits, was mainly to help it absorb the heavy up-front costs incurred on life policies sold to customers.
Steve Isles, Paribas' London representative for its Alternative Risk Finance joint venture with AXA, said the July cat option that ARF structured was successfully placed with a small number of investors. He said the client involved may do more such transactions.
"Client interest is really picking up" in Europe, he said. ARF currently is working on a catastrophe bond for a European issuer and talking to a number of other companies about securitizing property and casualty exposures, he said.
Mr. Isles said most of the alternative risk financing solutions being developed in the United States are applicable in Europe and are likely to find their way over here. ARF has been marketing a number of products, including catastrophe bonds, securitized risks and weather-related bonds, among others. He said ARF is seeing a lot of interest in such products and, in particular, coverage of European weather-related exposures.
AIG Europe (UK) Ltd. has also been strengthening its team in London to deal with growing demand for alternative risk financing products in Europe.
John Nicholas, recently transferred from New York to become the London unit's managing director of risk finance, said AIG Europe's initial focus is going to be on such areas as insurance derivatives, weather hedges with both single and dual triggers, and loss portfolio transfers.
AIG is also marketing an integrated risks product, called COIN, or Commodity Embedded Insurance, for financing balance-sheet risks and traditional exposures in a single policy.
Mr. Nicholas said AIG is "looking at a number of transactions," but, like other companies, was unable to discuss them.
He said investor demand is definitely building, in large part because there is a growing band of investors who want a different asset class that is unconnected to equity markets or fixed income.
Sedgwick's Mr. Mundy said that if anything is holding back development of alternative products, it is not lack of investor interest but the current low cost of traditional insurance.
Mr. Mundy predicted that the prospects for growth of alternative risk financing solutions in Europe are good.
"The fertile ground for ART deals is where you have an increase in liabilities and where perhaps there is some doubt as to whether that liability applies, or as to its amount, or when it will fall," he said.