SOUTHAMPTON, Bermuda -- The securitization of insurance risks currently is a costly and time-consuming process, but it is the wave of the future, an insurance executive says.

The few securitized and integrated risk deals completed in 1998 are sure to be followed by more, as buyers and sellers grow more accustomed to the new products, said Clive Tobin, senior vp at XL Capital Products Ltd., a unit of the newly named XL Capital Ltd. in Hamilton, Bermuda.

But as insurers and reinsurers grow more comfortable with the products, there is arisk that they will rush to offer them before they are fully prepared in an attempt to find new revenues in the soft market, he warned.

"We are headed for real exciting times but also dangerous times," Mr. Tobin said at a panel on securitization at the World Insurance Forum last month.

But, despite the risks, policyholders should be able to use the new products to find coverage for risks the conventional insurance market is unwilling to take on, another panelist said.

And by accessing capital market coverages, policyholders will eliminate many of their credit risks, another added.

1998 was a watershed year for securitized and integrated insurance coverages, said Mr. Tobin. A few of the deals completed last year showed the way that new deals will be formed in the future, he said.

XL Mid Ocean Ltd., another unit of XL Capital, took part in one such deal when it bought $200 million in high-layer retrocessional coverage from the capital markets and the alternative risk transfer insurance market (BI, Aug. 17, 1998). In another instance, British Aerospace P.L.C. bought a $2.4 billion, 15-year program to cover actual and contingent liabilities (BI, Dec. 14, 1998).

The XL Mid Ocean product enabled the company to buy high-level coverage quickly, Mr. Tobin said. The only problem was the expense. Fees paid to modeling companies, brokers, lawyers and rating agencies; the cost of the road show for potential investors; and the cost of setting up a special-purpose vehicle for the transaction totaled between $2.5 million and $3 million, he said. "That really raises the rate on line."

Despite the current high costs, the innovative coverages are sure to become more commonplace in the future, Mr. Tobin said. And as more deals are put together, some of the costs should be reduced, he said.

More insurance and reinsurance buyers are realizing that the new structures are flexible and enable buyers to package a lot of different risks, Mr. Tobin said. And those risk packages can be hedged in the financial markets, he added.

He cautioned that the soft market might prompt insurers and reinsurers to offer such products prematurely. "The risk is that there's an enormous amount of excess capacity (in the insurance market), and people might rush into it," he said. Insurers and reinsurers who want to offer securitized products need to employ people with financial backgrounds outside of insurance to help develop them, Mr. Tobin said.

Securitization deals also can eliminate some of the business risks that are associated with traditional insurance and reinsurance coverages, said John C. Nicholson, a managing director at Lehman Bros. Inc. in New York.

Most of the deals involve bond-type structures where the capital is collected from the investors, placed in a special-purpose vehicle and repaid if there are no losses. "You don't have to worry about the reinsurance company being around to pay the losses, because you already have the collateral there," Mr. Nicholson said.

Securitized deals are most obviously useful as a way to cover risks that traditional insurers and reinsurers are not prepared to take on, said David E. Govrin, vp in the risk markets group at Goldman Sachs & Co. in New York.

"If a company has a significant concentration of risk or risks that are difficult for the traditional market to handle, then securitization becomes more attractive," he said.

For example, a large company with most of its operations built near the San Andreas fault might find capital markets-based coverage more attractive than coverage offered by insurers, Mr. Govrin said.

However, some areas of coverage that have been difficult to place in the past might not find a ready alternative in the capital markets, he said. Environmental liabilities, for example, would be difficult to place in the capital markets, as there are no modeling programs to give investors a firm estimate of a potential loss, Mr. Govrin said.

Thomas Heise, president of The Bermuda Commodities Exchange, also spoke at the session.

Daniel V. Malloy, president and chief executive officer of Stockton Reinsurance Ltd. in Bermuda, moderated the session.