expansion.

Catastrophe bonds will explode into a multi-billion market by the turn of the century and Bermuda-based Centre Solutions (formerly known as Centre Re) is one of four players at the leading edge of this boom, according to credit rating company Duff & Phelps.

About $1.4 billion worth of catastrophe bonds have now been issued, representing one of the fastest growing asset classes in the market the company said in a special report on the insurance industry published this month.

The companies issuing the bonds are looking to the capital markets as a means of gaining better consistency in reinsurance capacity and pricing.

Duff & Phelps said since it became the first of the major rating agencies to publish a methodology for rating insurance-linked securitisations in January 1997 five major rated transactions have been completed.

A catastrophe or CAT bond is a "funding vehicle for a reinsurance contract in which the investor bears all or a portion of the underwriting risk on the contract'' according to the company.

For a CAT bond to work it needs an insurance company to purchase the reinsurance, a special purpose vehicle typically located offshore, and investors.

"The development of the CAT bond market has been the result of several innovative insurers and reinsurers, the most notable being USAA, Swiss Re, Tokio F&M, Zurich/Centre Re and the St. Paul, looking for capital markets solutions to allow for greater consistency in reinsurance capacity and pricing, and to add features not often available from traditional reinsurers, such as multi-year reinsurance programmes,'' the report states.

Three approaches have been made so far into issuing CAT bonds. In the book of business approach losses on insurer's underlying book of business are linked to the reinsurance contract.

Another approach, used by the Bermuda Commodities Exchange, is by means of an index. The Bermuda Commodities Exchange uses the Guy Carpenter Catastrophe Index (GCCI). The Chicago Board of Trade uses the Property Claims Services Index. Another is the RMS CAT Index based on a computer simulation of estimated industry exposure assumptions.

"The GCCI is compiled from actual paid loss data gathered from 39 insurance companies,'' Duff & Phelps states. "Though one would expect the GCCI to therefore be highly accurate, it is only reported once per quarter. Thus it is not as timely as the other indices.'' In the third approach, the parametric, losses are tied to a defined trigger linked to measurable parameters regarding a catastrophic event -- for example magnitude, location and focal depth of an earthquake as measured by the Japan Meteorological Agency.

In the past year since Duff & Phelps began rating CAT bonds there have been five major rated transactions with "unique structures and approaches'' the company said.

One for $80 million of coverage was completed as underlying reinsurance between Centre Solutions (Bermuda) Ltd. as a reinsurer of a Zurich Group affiliate.

The other bonds were issued by USAA, Swiss Re, and St. Paul Re.