The channeling of insurance risk into financial market products like bonds is on the verge of exploding into a multi-billion market, according to speakers at a conference focused on the sector.

About 60 insurance specialists are attending the two-day 6th International Forum Funding Catastrophe Protection conference which ended yesterday at the Hamilton Princess.

More and more companies are looking at insurance securitisation, the melding of insurance with financial products, as a means of spreading risk.

"The prospects are endless,'' Hedge Financial Products, Inc. vice president Richard Hernandez said in the opening presentation. "Going forward one of the things we are seeing with these securities is the merger of insurance and capital markets.'' Turning insurance risks into capital market products is known in the industry as securitisation. One of the main ways so far has been to issue bonds to raise capital covering catastrophe risk.

Catastrophe bonds aim to securitise large risks that are traditionally borne by insurers. The bonds are usually placed on one-off events such as hurricanes, tornadoes, or earthquakes.

Those in the industry want to tap the capital markets because it is seen as a large source of additional money to cover large risks. A.M. Best rating agency estimates US insurers have a total capital of about $260 billion. This is small compared to the trillions of dollars traded in the world's securities markets.

Several similar issues by others failed to attract enough interest and had to be cancelled. A.M. Best predicts ten or more deals to be offered this year.

Mr. Hernandez said securitisation is not far from what a lot of banks do currently.

"A lot of things commercial banks do look like insurance,'' he said. "What does a letter of credit do but guarantee payment? It's a type of insurance.'' He said securitisation will address the growing demand for multi-year, multi-line products because it is cheaper to do as companies need to do it only once.

"Risk financing is going to come from anyone who can provide it at the right price,'' he said.

Another trend he foresees is the method or adjusting rates of return to risk and other financial products concepts will become integrated into more traditional modes of analysis.

Here the rating agencies and other analysts are already developing methods of analysing the products being produced in the securitisation market. The concept has been around since the start of the decade, but few deals have been completed due to low investor interest or a lack of understanding.

Mr. Hernandez also believes the classic division insurers and reinsurers make on their balance books between investment portfolios and underwriting functions will break down as the securitisation wave grows.

"Reinsurers will rethink the nature of the business and themselves as risk financing specialists rather than risk transfer specialists,'' he said.

With securitisation coming to the fore, a reinsurer's capital will be viewed primarily as intellectual as opposed to financial, he said.

Investors will come to understand the products generated through securitisation as the market matures. The products are attractive as they are usually of short duration and the risk is not correllated with the financial markets.

While securitisation products won't match risk profiles in a precise way they'll be bought because the match will be close enough, easy to do, cheap and quick, he said.

"They are going to do it any way,'' he said.

Centre Solutions (Bermuda) Ltd. did the first insurance securitisation of 1998 with the issuing of $83.5 million in catastrophe bonds. Bermuda has adapted its insurance regulations to try and foster growth of these products and make the Island the leading market for securitisation.

Bermuda amended its insurance legislation this year to allow persons and entities who are not registered insurers under Bermuda law to invest in insurance derivatives.

BUSINESS BUC