"Insurers Can Profit By Seeking New Kinds of Risks"

Captives, known for being an alternative for risk transfer, must find new risks to cover if they wish to compete in the financial-services world, said David L. Wasserman, chief executive officer of Centre Solutions.

"The insurance industry hasn't demonstrated enough innovation and creativity to thrive in today's market, let alone in a deregulated market," Wasserman said. He gave the keynote address Monday at the Ninth Annual World Captive and Alternative Risk Transfer Forum.

Especially in a soft market, insurers must look to create new products. And in light of the recently approved financial-services reforms--and the expected wave of banks moving into the insurance business--Wasserman said insurers must expand the definition of insurable risk.

He said a risk is insurable if it's understandable, measurable, manageable, and able to be applied to modeling.

"These risks are already there. We're not creating it. They are being held by shareholders, lenders and buyers," Wasserman said, noting captives can take a bit of that risk, add it to their portfolio, and make a profit.

This often involves the insurer injecting itself into a business deal involving the sale or lease of an asset.

Centre has offered residual value insurance, which guarantees the value of an asset at some future point. Guaranteeing that an airplane will be worth a certain amount in five years allows the company leasing the plane to offer a lower rate to an airline, because the leasing company knows the value of their asset is guaranteed over the life of the lease.

Centre has offered a similar coverage for real estate, guaranteeing that a property will be worth a certain amount at the end of a specific period. The company has also offered project finance coverage, which guaranteed that a hotel under construction would produce enough revenue to pay off debt.

Wasserman said long-tail coverage--such as guaranteeing the value of property in 25 years--can be sold off when the market takes a turn up. "The longer (the policy) the better," Wasserman said, noting that longer coverage offers more options and opportunities for the company to unload a policy in good times.

Centre has been expanding into areas of alternative risk, so much so that its coverage of traditional property/casualty and life/health business has dropped from being about 80% of its book of business in 1996 to being 50% of its book. Still, the company rejects 94% of alternative risks presented, taking on only about 6 of every 100 potential deals, Wasserman said. "If ever there was a time to be aggressive and innovative, I think that time is now," he said.