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Pearl Jam and Nirvana were "alternative" rock bands in the early 1990s, but their music, as emulated by countless groups today, is now mainstream. Such is the case with alternative risk transfer.

"It really isn't the alternative market anymore. It's the market," said Ernst Csiszar.

The former president of the Property Casualty Insurers Association of America and former director of the South Carolina Department of Insurance pointed out that alternative market trading greatly increased this past year to more than 300 trillion. Most of the activity, he said, is happening at the Chicago Mercantile Exchange and the Chicago Board Options Exchange.

"The real financial capital is Chicago," said Csiszar, who now works in private investment.

An alternative market for alternative finance is insurance. Catastrophe bonds have become common, and more exotic vehicles such as protected cell companies and event-loss swaps are emerging.

"The beast has woken up," he said.

Part of the reason is the traditional market's failure to handle catastrophes. "We don't know how to handle low-frequency, high-impact events," Csiszar said, adding that "there's only one place to turn" to handle these events--the trillions in the alternative financial markets.

Csiszar's comments could be taken with a grain of salt, considering he was speaking last October at the conference of the Self-Insurance Institute of America Inc., a trade group dedicated to the expansion of ART. Csiszar employed his acerbic wit, laced with words like "idiocy," to condemn traditional insurance, whose overall underwriting attitude he characterized as "let me just get to the next day."

But Csiszar is not alone in publicly laying bare the inadequacies of traditional insurance and the "not again" soft market that its underwriters have tumbled into.

Still, alternative finance is not without its troubles. "We have a mess going on," he conceded about the mortgage-backed securities crisis, adding that it was still "nothing but a blip"--affecting but 5 percent of the total alternative financial markets.

If fear doesn't overwhelm the economy, Csiszar said, then only good will come of the subprime correction in the form of better risk modeling and more transparency.

January 1, 2008

Copyright 2008© LRP Publications