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RISK MANAGERS who are interested in new risk financing options have only to look to the reinsurance market, where many reinsurers are at the leading edge of developing new means of transferring risk.

Reinsurers are leading the charge to tap the capital markets and develop a new array of financial instruments to spread risk. Their increasing experimentation and expertise with these new tools will only accelerate the trend among some large commercial buyers to deal directly with reinsurers and investment banks, bypassing insurance companies.

Indeed, while many insurance companies also have benefited from reinsurers' creativity with alternative risk transfer and have used such deals to sustain low property/casualty rates, only a handful have clearly seen the potential for developing these tools for their clients. They ignore this potentially huge market at their own peril; already, a significant chunk of the large commercial market has bypassed traditional insurance in favor of alternatives such as captives, pools and finite risk insurance, among others. That percentage of lost business is bound to grow with the allure of capital markets financing -- and an increasing number of financial services entities eager to step in.

To date, a big part of the traditional insurance market has reacted to this shift among large commercial lines buyers by increasing its focus on middle-market business. But it is only a matter of time before risk managers of those businesses also put their sophistication to work and seek to take advantage of these new options.

Some of the recent deals include issuing bonds to finance catastrophe exposures, blending traditional and finite risk coverage, and trading options on multiperil-linked notes. In the latest twist, Swiss Re has entered into a basis swap with another reinsurer that protects both companies in the event of windstorm losses that reach a certain scale.

To date, risk managers have particularly expressed interest in alternative instruments to protect themselves from catastrophe losses. But there is also interest in alternative risk financing programs for environmental losses.

Increasingly, risk managers also are looking for ways to shift previously uninsured business risks, ranging from currency-related exposures to loss of revenues due to shifts in climate, among other risks. Even more basic needs, such as increasing a captive insurer's capacity, could be met with capital markets instruments.

Demand for alternative instruments is bound to grow. The race to develop new risk financing tools so far is being led by reinsurers, and they are the ones to which corporate customers increasingly will turn, unless insurers jump-start their engines.