NEW YORK -- Securitized insurance risk is attracting greater interest from insurers and investors, though it will have to expand beyond the current property catastrophe-related products to develop as a market, several experts say.

Despite soft reinsurance market conditions, the number of securitization deals is growing as sellers and buyers become more familiar with products like exchange-traded catastrophe options, cat bonds and contingent capital deals, experts said last week at a conference sponsored by the CNA Re unit of Chicago-based CNA Financial Corp.

Open interest in PCS catastrophe options on the Chicago Board of Trade has grown steadily since 1995, in recent months reaching nearly 20,000 contracts. The number of cat bond issues and swap deals, meanwhile, also has picked up this year, with one issuer -- San Antonio-based auto insurer United Services Automobile Assn. -- oversubscribed for a second hurricane bond issue in July after completing a successful first issue in 1997.

Investors are more interested in cat bond issues for several reasons, noted Anthony Chiarenza, chief executive officer of Hedge Financial Products Inc., a CNA securitization unit.

For one thing, the financial performance of cat bonds is uncorrelated with traditional investments such as stocks, bonds and commodities, allowing investors to diversify their portfolios. While interest rate-sensitive stock and bond markets fluctuate with every speech by Federal Reserve Chairman Alan Greenspan, for example, cat bonds are not similarly affected, Mr. Chiarenza said.

"If you are sitting on a one-year cat bond, it doesn't matter what he says," Mr. Chiarenza observed. "The point is, it's a non-correlated risk."

Investors can't get similar diversification by investing in insurance and reinsurance company stocks, he added, because they are still affected by market fluctuations and factors other than the insurance risk itself.

In addition, risk-adjusted rates of return have so far been higher for cat bonds than for a number of other traditional stock and bond funds, including the Standard & Poor's 500 Index, he said.

To gain acceptance as a distinct "asset class," though, securitized insurance risk must grow to encompass casualty and other risks besides cat exposure, Mr. Chiarenza said.

"If we are going to develop this market, we need to create a real asset class" that includes eight to 10 independent or "low correlation" types of risk, he said. "We clearly need something else. The catastrophe business (alone) is not going to do it."

He offered several candidates for securitization, including:

* Agricultural risks, where deals could cover damage to crops caused -- for example -- by Midwest drought. The cost of catastrophic weather-related damage to agriculture is now borne largely by government entities and could be shifted to the private sector, he said.

"There is $10 billion, $15 billion, $20 billion of risk here that could be securitized," Mr. Chiarenza said.

* Aviation risks, where coverage might be triggered by number of lives lost in air crashes; and marine risks, where bonds or swaps might cover specific oil rig losses. Securitizing these risks would be tough because traditional insurance markets are now so competitive, he observed.

* Pollution events, which could be covered in deals triggered by the number of barrels of oil spilled, for example.

* Insurers facing a risk of being clobbered by losses on long-term disability policies by higher-than-expected nursing home utilization rates.

* Weather-related events, such as losses or additional costs suffered by utility companies in heat waves.

* Casualty exposures, such as directors and officers liability, errors and omissions or workers compensation.

The problem securitizing liability lines, experts at the meeting agreed, is that losses are less predictable than in property lines, and it is therefore tougher to develop loss indexes needed to standardize a capital markets product.

Securitized transactions to date have included cat bonds, contingent capital deals and exchange-traded products like the CBOT's PCS options, noted Debra L. McClenahan, executive vp and senior financial officer of CNA Re.

In a typical cat bond deal, an investor's return is contingent on a catastrophic event. Payments to an issuing insurer can be triggered by a variety of things, including the insurer's own losses, industry losses or the occurrence of a specific event. A 1997 deal covering Tokio Marine & Fire Insurance Co., for example, is triggered by Tokyo earthquakes exceeding magnitude 7.1 on the Richter scale.

The deals can be structured so that investors' interest alone is at risk, their interest and principal or a combination of the two. USAA's 1997 bond issue, for example, consisted to two "tranches" of bonds, one in which only interest was at risk and the other in which interest and principal were at risk.

In contingent capital deals, an insurer secures a commitment of a capital investment if a triggering event like a hurricane occurs. These deals allow an insurer to set the terms of a capital infusion when it is in relatively strong financial condition rather than after a catastrophic loss, when it is in a less favorable bargaining position, Mr. McClenahan noted.

The "option premium" an insurer pays for a contingent capital commitment is typically less than the cost of traditional reinsurance, she added.

The other category of capital markets products is exchange-traded instruments, which -- in addition to the CBOT's products -- include catastrophe swaps available through the New York-licensed CATEX facility and products on the Bermuda Commodities Exchange.

Rather than competing with capital markets, traditional reinsurers can play a large role in risk securitization, Ms. McClenahan said.

Reinsurers have underwriting, pricing and auditing expertise to support securitization deals and can facilitate them by pooling ceding insurer clients to create a "critical mass" for securitized products, she said.

Reinsurers also can continue their traditional role, assuming ceding company risks that are not encompassed by securitized transactions.

"These core competencies make reinsurers the natural distribution channel for securitized risk," she said.

Richard Sandor, chairman of Hedge Financial and an early proponent of securitization, noted that the concept is following predictable stages of development that have previously marked nascent markets for commodities, such as wheat, or financial products, such as collateralized mortgage obligations.

The first stage is a structural change in a market that creates a demand for capital. This happened in the insurance industry, Mr. Sandor said, in the wake of Hurricane Andrew and the Loma Prieta earthquake, when insurers recognized that huge property values had become concentrated in cat-exposed areas like California, Texas, Florida and Long Island in New York and that they were not prepared for the potential loss.

Succeeding stages in the market's evolution led to the development of organized futures and options markets and later in a proliferation of over-the-counter markets, he said.

The test of risk securitization will come when a huge loss hits the initial group of investors in cat products. Rather than kill demand for the products, though, Mr. Sandor predicted the first mega-loss will fuel demand, as insurers seek more capital and new investors jump in to supply it.

"The game begins when the next big event occurs," he said. "A $100 billion Florida event, a $150 billion Los Angeles event will not hurt the securitization effort. It will make the market, not hurt it.'