The tussle for market share in transforming risk into capital market products between the insurance industry and investment bankers broke into a verbal sparring match between proponents of each sector during a discussion on securitisation yesterday at the World Insurance Forum.

On one side were David Govrin, chief underwriting officer of Goldman Sach's Bermuda-based subsidiary Arrow Reinsurance Co. Ltd. and John Nicholson managing director of Lehman Risk Advisors. Lehman has established a Bermuda-based subsidiary Lehman Re as a transformer.

Meanwhile Clive Tobin, senior vice president of XL Capital Products Ltd. and Thomas Heise, president of the Bermuda Commodities Exchange talked about why insurers and reinsurers were going to be better at capturing the securitisation market.

"Securitisation is going to be the future of this business,'' Mr. Heise said.

He believes insurers are better poised to take advantage of the market because they have the talent that knows how to package risk. The market will revolve with the insurer or reinsurer earning the spread between pricing of the contract with the client and hedging that risk off to investors through a capital market product.

"Insurers have a huge head start,'' he said. "They have all the underwriting expertise.'' Meanwhile Mr. Nicholson had a different view of the evolving market. He believes the investment banks will do a better job of transforming the risk.

While the insurance industry, particularly the property and casualty market, has a huge amount of excess capital, they don't have the capacity to meet the risk needs of huge clients that need to hedge off potential catastrophic losses.

The capital markets have the capacity and the investment banks know how to access that market more efficiently.

"Investment banks have the distribution,'' he said. "Securitisation involves the distribution of risk in the capital markets.'' On his side Mr. Tobin said XL Capital had gone through a major learning curve in doing a $200 million securitisation deal in July last year. In the deal $100 million worth of risk was hedged off to the capital markets and another $100 million was done through risk transfer and risk financing in a contract with the client.

While constructing the deal was more expensive than XL Capital had first envisioned in the end the experience was worth the effort. The deal cost about $2.5 to $3 million to complete. "The process was productive,'' he said. "But it was expensive and time consuming.'' Mr. Tobin believes last year was a watershed year for convergence of the insurance and capital markets in Bermuda. The volatility in the stock markets in the emerging economies put stress on the balance sheets of many banks.

These banks started looking at Bermuda companies to see where they could hedge off some of the risk.

"Banks started talking to us and are beginning to find more and more we could work together,'' he said. "Banks cannot take risk. Insurance companies can take big risks.'' He warned however that the insurance industry with its current excess capacity might get tempted to jump into the market without fully understand the risks.

"It's an exciting time, but it's also a dangerous time,'' Mr. Tobin said.

"The risk is the enormous excess capital and the danger is if banks come knocking at our doors we may jump into it. Financial risk is different from fortuitous risk and you need to understand that.'' BUSINESS BUC