Recent years have seen finite risk reinsurance become a mainstream product. Valerie Denney puts some questions to several reinsurers about the market's development to date and future potential.

Finite risk reinsurance has come a long way since it first emerged almost 10 years ago, but the issue of semantics remains; much in evidence in the following replies. The message here is that with increasingly sophisticated corporations viewing risk in its entirety, creative, customised products are the order of the day. It is difficult in such an environment to categorise products.

The interviewees certainly agree on one thing, however. Finite risk reinsurance opens up new vistas and possibilities.

Jon Roberts, president, Enterprise Reinsurance

Could you provide some brief details of your company?

Enterprise Reinsurance was formed to help insurance companies and large corporations manage both insurance and financial risks. The company was incorporated in January 1997, under the laws of Bermuda. It is licensed as a class 3 insurer under the Insurance Act, 1978 (as amended by the Insurance Amendment Act, 1995 of Bermuda) to write general and long-term insurance business.

Initial capital contributed of over $100 million demonstrates the commitment by Enterprise's owners, including Morgan Stanley, Employers Reinsurance and Chubb. In addition to their financial support, these owners offer world class insurance, investment banking and financial products support to Enterprise.

How would you define the term "finite risk?"

The term "finite risk" implies limited risk transfer and is not the defining characteristic of our business. Enterprise's business is "strategic risk financing," which is structured transactions designed to achieve specific financial objectives of an enterprise.

These transactions tend to be large, strategic trades and are highly customised solutions. They often involve insurance risk and insurance policies, but can also involve financial risks and financial products, such as options and forwards protecting the assets of an enterprise.

These transactions are tailored to achieve a financial goal, such as reducing volatility, improving liquidity, reducing leverage, etc.

What finite risk reinsurance products do you currently offer? How do you expect these to develop in the future? For example, are you finding risk managers increasingly demanding?

We do not have a limited list of products because there is an unlimited list of client needs and unlimited creativity among our staff to solve each need. Each client situation is unique and we deliver highly customised products that address the singular balance sheet, accounting and tax requirements of each client. In broad terms, we offer multi-year and multi-line (prospective and retrospective) covers to achieve stop loss protection, loss portfolio runoff protection, and other mechanisms blending traditionally uninsurable risk with conventional coverages. We also invest in debt and equity securities to provide capital, and we sell puts and calls to cover the risk of fluctuating prices on an underlying asset. We choose the simplest of these that accomplishes one or more strategically important goals of our clients, who are both insureds and (re)insurers.

Our experience with risk managers is that they as a group are becoming increasingly demanding and integrating their risk management functions much more closely with their finance and treasury operations. We are responding with integrated financing programmes that combine insurance and financial risks to achieve cost efficiencies. This type of whole enterprise approach we believe will lead to increasing use of strategic risk financing to better meet client needs.

Bermuda is where the finite risk reinsurance market originated. Does Bermuda remain the leader in this area of business?

Bermuda has traditionally been a venue that has encouraged innovation. As a result of this policy, Bermuda retains its position as one of the centres of alternative risk transfer, strategic risk financing and other innovative financial and risk management techniques. It is our belief that this situation is likely to continue for as long as Bermuda continues to appoint dedicated regulators who ensure that effective regulation is married to commercial reality. Bermuda's adoption of the new financial/risk exchange is ample proof that the island will be a major, if not pre-eminent, centre for innovation in the future.

What difference do you believe finite risk reinsurance has made to the "traditional" reinsurance market?

Strategic risk financing has changed how risk is managed. All enterprise risks are now analysed and financed as a whole. To achieve this it has been necessary to bring together risk insurance managers, treasurers, and financial officers in a way that has not happened before. As a result, traditional structures are now being much more closely examined and their efficacy questioned before they are implemented.

More and more reinsurers are taking an interest in finite risk products. Will this trend continue?

Yes. As insurance and finance are converging, reinsurers must meet the demands of their now more sophisticated clients. If they do not someone else will.

The more important question is which insurers and reinsurers will hire people with the necessary skill sets to allow them to expand quickly into this area. Investment banks have not hesitated to hire insurance expertise from the insurance industry, and insurers and reinsurers must do likewise to obtain expertise in structured finance.

How do you regard the future for the finite risk reinsurance market?

We see the future as one of increasing growth. This is because most enterprises now have the technology to view insurable, financial and other risks as a whole and can appreciate that addressing discrete segments of risk over short time periods is cost inefficient and can cause them to lose substantial competitive advantage.

We see a blurring of distinctions between insurance, reinsurance, and capital market products. The challenge for the insurance industry is to seize this opportunity and use this expanded tool kit to provide innovative solutions for their customers before someone else does.

Peter A. Gentile, president and ceo, Gerling Global Financial Products

Could you provide some brief details of your company?

Gerling Global Financial Products (GGFP) was formed in 1997 as the worldwide centre for marketing, product development and underwiting alternative risk transfer products as well as finite reinsurance and capital market products for the Gerling Group. During the first year the company has provided more than $500 million in capacity to clients.

How would you define the term "finite risk?"

Alternative risk transfer (ART) products such as those provided by GGFP are focused on a company's desire to accomplish a specific financial result through the use of innovative risk transfer approaches. ART products offer companies creative, customised methods of managing various kinds of corporate risk and allow them to realise benefits such as:

* Stabilising financial results by releasing hidden values from their balance sheets or by hedging financial losses with insurance or reinsurance coverage.

* Assisting in mergers and acquisitions.

* Enhancing financial ratios.

* Presenting a more secure presence to ratings agencies and financial analysts.

* Transferring hard to place coverage.

What finite risk reinsurance products do you currently offer? How do you expect these to develop in the future? For example, are you finding risk managers increasingly demanding?

The finite risk market is defined by two major convergences in the field of insurance coverage: the convergence of insurance and reinsurance as well as the convergence of traditional and non-traditional product lines.

Market opportunities are broadening new product lines, and finite risk and capital market alternatives are finding greater acceptance. GGFP provides services and partnerships with clients in conjunction with specific products. The skills and capabilities of GGFP's actuaries, lawyers, underwriters and accountants come together to form unique transactions tailored to fit unique situations. The linkage to reinsurance is in the fact that reinsurance is a financial structuring tool which is used to help risk managers and other financial managers to unlock hidden values on their balance sheets or to free capital encumbered by economic, regulatory and accounting constraints.

Bermuda is where the finite risk reinsurance market originated. Does Bermuda remain the leader in this area of business?

The reinsurance industry, like other financial services businesses, has been profoundly affected by the speed of technology and the interconnectedness of the world. The finite and reinsurance world has become more virtual and less geographically dependent.

Bermuda remains an important location for reinsurance, but it is not the centre for finite and capital market products. While the United States remains the focal point for innovation in risk transfer alternatives and the capital markets, Europe is quickly following the US on this course.

What difference do you believe finite risk reinsurance has made to the "traditional" reinsurance market?

It has broadened the definition and the application of reinsurance, providing insurance companies, corporations and others with new methods to share risk, to unlock capital and to find new sources of capital.

More and more reinsurers are taking an interest in finite risk products. Will this trend continue?

As long as finite reinsurers are providing value and access to capital, as well as new ideas and new ways to achieve success and corporate goals, yes. The current competition in the marketplace will continue to make reinsurance an attractive business proposition.

How do you regard the future for the finite risk reinsurance market?

Our biggest competitor is naive capacity and low cost traditional insurance and reinsurance. Despite soft market conditions, the future is exciting and intriguing. For people with energy, innovative ideas and insight into ways of bringing together these new and disparate financial tools, finite reinsurance opens up new vistas and opportunities.

Mr Gentile has the following to add: The key element for success of any organisation is its people. The ability to compete for intellectual capacity is far more important in determining an organisation's success today than being the largest. Capital is fungible and will flow to the most successful organisations.

It is an exciting time to be in the finite markets. The multitude of possibilities available by combining finite reinsurance with other financial products adds new dimensions and opportunities for the future.

Innovations and creative new applications will enable reinsurers to reach new heights of success and profitability.

Wayne Daniel, executive director responsible for ART business, Liberty Re.

Could you provide some brief details of your company?

Liberty Re was authorised as a composite reinsurer by the DTI on 23 October 1997, with an initial paid-up share capital of £250 million. Liberty Re plans to write a global balanced portfolio of reinsurance business across all lines, including non-traditional. By end 1998 Liberty Re will have 77 staff, the majority of which are based in the London head office, with representative offices in Stockholm, Hong Kong and Tokyo. By 2002 gross premium per capita of £2-£3 million will lead to gross premiums of £400-£600 million per annum. Liberty Re is wholly owned by Liberty Mutual Group, Boston.

How would you define the term "finite risk?"

The definition of "finite risk" can vary depending on the context and audience. I usually take it to mean a contract of greater than one year with a contractually limited maximum loss ratio (typically in the range of 90% to 500%).

What finite risk reinsurance products do you currently offer? How do you expect these to develop in the future? For example, are you finding risk managers increasingly demanding?

Liberty Re designs reinsurance products around the needs of the client, seeking to maximise the efficiency of the client's reinsurance protection taking into account the client's views with respect to risk and reward. Therefore, we do not have a list of "products" as such. Rather, we rely on accurately modelling the client's situation to design an optimal bespoke solution for each client.

In the future, we expect that the typical multi-line, multi-year finite programme will become increasingly commoditised, with virtually all insurers offering them to corporations or insurers. It will eventually cease to be a specialist product. In order to maintain a position of leadership insurers will have to begin developing new areas of expertise by incorporating non-traditional coverages and looking at the entire range of financial risk management for their clients.

Bermuda is where the finite risk

reinsurance market originated. Does Bermuda remain the leader in this area of business?

Bermuda remains a leader in finite reinsurance because many of the leading writers are based there. Their leadership is being eroded by the dissemination of finite techniques throughout the global insurance market and the opening of branch offices by many Bermudian insurers.

What difference do you believe finite risk reinsurance has made to the "traditional" reinsurance market?

In some areas, finite reinsurance has had almost no impact. However, most of the market has heard a few buzzwords and enjoys using them. The range of practitioners that genuinely understand finite techniques is still restricted, but over the next few years it is likely that the market will gradually adopt finite reinsurance as a standard insurance tool.

More and more reinsurers are taking an interest in finite risk products. Will this trend continue?

The trend will continue and finite reinsurance will become an industry standard.

How do you regard the future for the finite risk reinsurance market?

The future of finite structures is virtually unlimited and we believe it will gradually begin to supplant many of the traditional techniques as the client led demand for reduced transaction costs and risk-loads is enforced by the market.

Daniel Malloy, president and ceo, Stockton Reinsurance Limited.

Could you provide some brief details of your company?

Stockton Reinsurance was incorporated as a Bermuda company in 1982, and licensed to write insurance and reinsurance business in September, 1994. At the commencement of reinsurance operations, Stockton Re had $216 million in shareholders' equity. Since its introduction to the insurance and reinsurance markets, the company has demonstrated significant premium growth and increases in net income year over year. For the fiscal year ended March 31, 1998, net US GAAP premiums written were £205 million, and total shareholders' equity was £504 million. The increase in premium volume and shareholders' equity validates our business model, which is the provision of innovative finite insurance and reinsurance products to insurance companies and corporations.

How would you define the term "finite risk?"

Finite risk covers a broad spectrum of products not normally covered in the traditional insurance marketplace. Its strength lies in its flexibility, as it does not limit itself to one type of risk, line of business, or reinsurance structure. Finite risk represents a combination of risk transfer and risk financing which attracts clients who do not seek to rely on the traditional insurance practice of mutualising risk across an insurer's large portfolio, but prefer to manage their own risk over time, and across non-correlated elements of their own exposures.

What finite risk reinsurance products do you currently offer? How do you expect these to develop in the future? For example, are you finding risk

managers increasingly demanding?

In general, Stockton Re does not think in terms of products when dealing with tailor made reinsurance programmes. Instead, we prefer to view each client's situation as an opportunity which requires some form of reinsurance solution. In many cases, risk managers take a very active role in evaluating their own portfolio of risks, and then seek the appropriate partner to develop a solution. Specific examples of these opportunities include: 1) requests for group health reinsurance, and 2) loss portfolio transfers. The interest in the health industries arises from the mergers and acquisitions coupled with health care reform as most recently stated in the Health Insurance Portability and Accountability Act. Loss portfolio transfers, which are often done when a company is exiting a line of business, or restructuring a balance sheet either pre or post merger, allow Stockton to utilise our highly quantitative underwriting skill set and ability to discount loss reserves.

Bermuda is where the finite risk reinsurance market originated. Does Bermuda remain the leader in this area of business?

Due to its regulatory environment, infrastructure, location, and a history of alternative market solutions, Bermuda was a natural centre for the first finite risk writers established in the mid 1980s. The success of these companies and subsequent growth in their capital and premium volume has given Bermuda an acknowledged leadership position in finite risk. However, the increasing popularity of finite risk products has encouraged companies in other markets to offer similar programmes, to the extent that finite risk coverage can now be obtained in most of the world's major insurance markets.

This globalisation of finite risk can either further establish Bermuda as the leader in this area of business, or let others take an increasing share. It all depends on whether or not the Bermuda finite companies can continue to offer the highest level of responsiveness, innovative ideas, and cost efficiency.

What difference do you believe finite risk reinsurance has made to the "traditional" reinsurance market?

Finite risk reinsurance's biggest contribution to the traditional reinsurance market is a heightened awareness that reinsurance is a vital component of the long term capital structure for ceding companies. Prior to the development of finite products, most ceded reinsurance buyers viewed reinsurance as a means of reducing excessive loss activity, but very few recognised the financial statement and shareholder value implications of a properly structured reinsurance programme. Today, far more reinsurance programmes incorporate elements of finite risk, which have been developed to maximise the surplus and shareholder value over a longer period of time.

More and more reinsurers are taking an interest in finite risk products. Will this trend continue?

Please see answers given to previous question.

How do you regard the future for the finite risk reinsurance market?

In finite risk, as in any line of business in today's market, those companies which have established a leadership position due to their experienced personnel, sufficient capital, and focus on their clients will continue to thrive. Ultimately, continuing to provide products which add value to customers will separate the successful companies from the rest of the pack. Our "independent" status is a strong positive as customers tire of having reinsurers compete with them.

Valerie Denney is co-editor of this publication.