Aquila Re president and CEO Brian O'Hearne is dedicated to redrawing the insurance landscape by promoting the convergence of risk management techniques in the energy, insurance and capital markets.

At the recent Risk and Insurance Management Society (RIMS) conference in New Orleans, Mr. O'Hearne was a speaker in a session on insurance and capital markets with the title: "So What?"

Mr. O'Hearne explained: "What we see is a converging of risk management techniques between the energy market, the insurance market and the capital market, and weather is really probably the best example of that."

He said many different groups including banks and insurance companies were participating in the market and that Aquila Re saw the need for both the custom structure that end users wanted, specifically tailored like an insurance product as well as the need for liquidity.

Aquila Re's strategy has been to expand outside of the energy market and develop alternative products, and Mr. Hearne gave the example of the agricultural market.

"We have been talking to farmers about the effect of temperature and how much rain they get," he explained, "but they didn't want to buy the weather derivative that just had temperature and precipitation because that doesn't explain all of the crop yield.

"So what we came up with was a product that guarantees a certain yield across the county or crop reporting district. That is starting to really put us into the crop insurance market."

Mr. O'Hearne said this was a great tool to diversify the company's portfolio as the weather needs for energy companies versus the needs of farmers to have a successful season were different.

"If it is hot and dry, the crops fail but the energy companies make a lot of money. So that is where we really see the growth in the weather market is being able to find these offsets," said Mr. O'Hearne

Part of Aquila Re's arsenal in assessing risk is through the company's website at www.guaranteedweather.com, the second most popular insurance website, according to Yahoo.com, says Mr. O'Hearne.

The website contains comprehensive information on the weather market as well as having a pricing engine.

"People can go in and if they think they understand their exposure to the weather they can actually price different structures and then come to us to get a quote," he said.

Aquila Re also offers a contest to meteorologists in the US for the best forecast.

"We pay them $50,000 a season for three years, or six $50,000 prizes, so the meteorologists are very excited. That has led us to develop a forecast product," he explained.

"We have what we call "guaranteed forecasts" that will guarantee the forecast for up to ten weeks so there will be payouts outside of what we guarantee is the forecast."

"If you think about a farmer who is thinking of applying fertiliser or pesticides, if it rains, it washes away. So we will basically guarantee that it won't rain more than "X" or they can get their fertiliser application free. So we are working with a chemical company to back their product."

Mr. O'Hearne said the product had beneficial environmental effects as farmers tend to over apply fertiliser or pesticide to counteract adverse weather conditions.

Mr. O'Hearne has been with Aquila Re for four years, and Aquila Re has been in Bermuda for two years next month.

"I think Bermuda is an excellent incubator of new ideas, there are a lot of bright people here developing new products.

"We see a lot of opportunities to cooperate with the insurance companies from our risk management and energy background," which he said was one of the reasons the company set up on the Island.

"We thought if we are going to get into the Insurance market, doing it in Kansas City versus Bermuda... we felt that Bermuda provided better opportunities.

"It gives us the ability to write it as insurance as traditionally we have just written products as derivatives because of insurance licensing in the US.

Now that we are in Bermuda, we can write it as insurance or a derivative.

"The energy industry is used to transactions as derivatives but as we go into these new markets like agriculture or retail, they are more used to buying insurance."

Concerning the evolving market, Mr. O'Hearne said the weather markets currently transact about $7.5 billion of notional risk per year and he thought within the decade, it could be as much as $50 billion a year.

He said some companies even had loan covenants which require hedging a certain amount of their weather risk as it is such a successful programme.

Mr. O'Hearne explained: "A dollar in a bad year buys more assets and more opportunity than a dollar in a good year. So if your competitors are suffering and you have hedged, you have the competitive advantage. So we are starting to see that take hold."

The Enron fiasco has created huge waves in the energy markets and Mr. O'Hearne said of the largest corporate failure in US history: "I think it creates tremendous opportunities for those still in the market. We are picking up a lot of business but it is also putting a lot of pressure on the energy companies just from the taint of what they did."

Other companies are also picking up the pieces, however, and Mr. O'Hearne said: "Swiss Re has picked up part of the Enron team and (in Bermuda) you have Tempest and Commercial Risk, as well as ElementRe and ourselves."

He also said more banks were getting in to the business such as the latest entrant, Deutsche Bank.

Aquila continues to expand its market share and recently announced a partnership with GenSec Bank in South Africa.

The company also has similar strategic alliances with Macquarie Bank, Australia's leading investment bank, Mitsui Sumitomo, one of the largest insurance companies in Japan, and for several years has marketed weather derivatives in Europe through its US-based organisation and through an alliance with Hiscox, a Lloyd's of London insurance underwriter.

Aquila Re has offices in Bermuda, the US, Canada, the UK, Australia, and are the biggest electricity provider in New Zealand. The company also recently bought Midlands Electricity in Birmingham, England and are currently entering the Europe market through Germany and Scandinavia.

Aquila Re was one of the market pioneers involved in many of the industry's earliest transactions and was wholly owned by energy company UtiliCorp United until May 2001 when the company was floated, but later bought back by UtiliCorp following the Enron bankruptcy and its effect on any company involved in the industry.

Mr. O'Hearne explained that because of Aquila's expertise in the risk management market, UtiliCorp changed their name to Aquila Inc. in March and Aquila changed its name to Aquila Merchant Services.

The company also recently won a risk manager of the year award from energy and power risk magazine which Mr. O'Hearne says really reflects what the company is doing in the weather and alternative risk and insurance market.

On the web: www.merchant.aquila.com

www.gauranteedweather.com