By:DEBASHISH DAS (B4-12)

For many customers, insurance policies are instruments for meeting unpredictable cash needs: a premium paid in advance gives the insured the right to get cash when a clearly defined event happens just like financial options traded in derivatives market today. Rather than paying premiums to an insurer or reinsurer to cover their risks, these companies are de facto buying an "insurance option" - an instrument that guarantees cash as and when losses occur, regardless of any specific line of business. If these new instruments become common currency, they will threaten great chunks of traditional insurers revenue.

The predictable risk is no longer insured, as the company will itself be able to provide the necessary cash.

Instead of buying an insurance policy, a company could issue "risk bonds." Normally, buyers of these bonds would receive an annual premium, but in a year when unpredictable risk occurs, they could lose part of the principal of their investment.

In effect, insurance risk could start to be securitized just like credit risk.

Some big reinsurance companies like Swiss Re are planning to launch a product in combination of insurance risk with other such as currency risks.

Predictable risk could easily represent 40 to 50 percent of the total premiums paid by corporations today, and 80 percent of UK companies already retain a significant proportion of their own risks.

These would risk the business of middle level insurance company to lose its market share.

The degree to which traditional insurance companies already participate in these markets depends largely on national regulation and the domestic welfare system.

In others, private insurance companies are allowed to compete on a more or less marginal basis.

As the burden of social costs continues to rise across Europe, it is difficult to imagine that governments will not increasingly welcome the introduction of similar kinds of private insurance products.

The historical (and legally enforced) separation between accident (P&C), life, and health insurance business is therefore becoming an increasing burden for insurers wanting to offer a comprehensive package of personal cover.

Life insurers manage 10 to 15 percent of the world's financial assets, accumulated thanks to generous tax incentives from the state for those who take out life polices.

"Bancassurance" now represents more than 20 percent of the individual life market in the UK and half of the French market. Now, banks are also opening their own LI business.

In the UK, banks are aggressively selling personal equity plans (PEPs) as tax efficient rivals to life products.

Insurers, however, have largely been slow to wake up to the fact that they are now in direct competition for asset management money. Some have turned their investment function into a profit center, or acquired asset management expertise.

Example: The acquisition of Kemper ($60 billion under management) by the Zurich Insurance Group, and the acquisition of Barings by Dutch insurer ING.

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Switzerland, health insurers have started by offering clients a whole range of real services: a selection of hospitals, a network of physicians, and direct delivery of drugs. This US-inspired approach, known as managed care. Germany and Belgium similar practices have been adopted.

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One last role that insurers could play is that of transaction specialist. Clients would use insurers not because they smooth their cash flows or invest their money.

Allianz, through its APS-unit {Allianz Pension Services), offers a full service for the administration and handling of pensions.

Some corporations are starting to use their insurers as administrative partners for whole employee compensation programs and related insurance cover ensuring that they have an efficient, logistical system to track.

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Insurance companies will take the right operational and investment measures only if they have a clear vision of where to go. Strategic advantage will go to those that are first into new areas because they will capture the best partners and the most attractive customers. The opportunities are there for early entrants who identify areas in which they can offer new, clearly differentiated value propositions.

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