investment bankers, should be key decision-makers in moves toward the securitisation of catastrophe risks.

President and CEO of Bermuda-based property catastrophe reinsurer PartnerRe, Herbert Haag, has reported in a quarterly newsletter that while there is great potential in tapping the $15 trillion available in capital markets to supplement catastrophe reinsurance capacity, it is still in the early stages of development.

Included in the publication PartnerReviews, the letter sums up views in a discussion about the promising prospects of securitization.

But he said: "This opening of another door for banks to enter the insurance business brings a need for caution. At this stage, experts needed for the risk validation to prospective investors are not found in the investment banking world; they are found in the reinsurance world.

"It is our view that the reinsurance industry with its expertise in evaluating the frequency and severity of natural catastrophes, should play a decisive, if not dominant, role in the development of these products.

"From this perspective, PartnerRe is enthusiastic about the role of a knowledgeable reinsurer in this field.'' Mr. Haag said that while there is great potential in the theory, success will depend on the ability to evaluate the catastrophe risk involved.

Insurers face tests He said that experts with years of experience at evaluating catastrophe risks were needed.

He added that early attempts this summer by US investment banks to sell catastrophe bonds faced more obstacles than they expected.

"Two planned issues, intended to cover US hurricane losses this season have recently been withdrawn from the market or postponed until next year,'' he said. "Another major test will come in the form of the securitized portion of the CEA (California Earthquake Authority) programme. However, it is already clear that investor education and approval by rating agencies or regulators requires much more time than anticipated, as potential investors face difficulty in valuing these new securities.'' Mr. Haag advised that much care must be taken to ensure that a securitised product does not shake investor confidence at the first loss event.

He added: "In fact, products which are based on short term, `roll the dice' structures are not helpful in developing this new asset class.

"Equally, attempts by risk carrying issuers to replace traditional reinsurance with the motivation of reducing costs for their catastrophe protection may not achieve their long-term objective.''