Insurers can no longer fall back on reinsurance as a risk transfer mechanism without batting an eyelid. Todays questions are: Reinsurance or CAT bonds? Retention or forward commitments? Ex ante or ex post debt or equity? Insurers today have a set of options before them in different stages of development, and replete with their pros and cons, to consider and decide which risk financing or Alternative Risk Transfer (ART) route to take. The decisions are based on a combination of in-house and catastrophe model risk estimations.

Accustomed as they were to relying on the traditional markets of reinsurance to transfer risk, the ominous post Hurricane Andrew liquidity crunch and hardening of catastrophe-linked reinsurance rates in 1992, came as a revelation for insurers. Perhaps for the first time insurance companies realized that there can be times when even this source of succor would fail them and they would have to reckon without it. Perhaps 1992 was too early for a radical change. So, if insurers and investment bankers did put their heads together to tap the capital markets that were infinitely larger than the reinsurance markets with new instruments that could emerge as alternatives to reinsurance, not much happened then. Securitized structures like CAT bonds or catastrophe bonds, did not hit the market till 1997.

Future indications were very clear even then. Perhaps the first of the current spate of new generation super CATs, or, catastrophes, Hurricane Andrew, hit South Florida in 1992 causing insured losses of US$15.5 bn - a staggering figure by 1992 standards - and pushing up reinsurance rates by 75-80% between January 1992 and January 1994. The rates went up because the huge losses had reduced reinsurer capacities. Insurers were very hard hit, too. After the US$15.5 bn payout, it emerged that this amount was 50% more than all the premiums collected by insurance companies in Florida over the past 22 years! Further, a record 63 property/casualty insurers had become insolvent. At a time when the insurance industry needed to rely on reinsurance for existing cover, fresh underwriting and renewals, capacities had been virtually decimated, reinsurers had exited the market and many of them become insolvent.

Then came the Northridge earthquake of 1994, which hit California, bringing with it insured losses of US$23 bn - and this time, the losses equaled the entire premium amount collected by insurance companies in California during the entire span of the 20^th century! With much-needed reinsurance cover getting scarce and very expensive, reinsurers being downgraded because of credit default, the industry suddenly woke up to the changed realityalternative risk transfer markets had to be identified, and immediately, because it was a pressing need.

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