But nonetheless, the market has shown a steady growth in the last few years and remains a viable complement, and even an alternative, to the traditional reinsurance arrangement, industry experts said.

"The market has done fairly well with a few billion dollars worth of issuance every year. However, there are a number of reasons why the market hasn't exploded," said Jayan Dhru, a managing director at Standard & Poor's Ratings Services in New York.

One of the reasons is that until a couple of years ago, reinsurance rates were soft, which made it difficult for capital markets to compete with reinsurance rates, Mr. Dhru told National Underwriter.

And despite the recent price hardening in catastrophe reinsurance, another challenge has been the fact that the investor base in this catastrophe-linked bond market is highly specialized.

"Partly because we really haven't seen any significant natural catastrophe event in this market, we don't know how this market would behave post-event," he said. "In other words, in reinsurance you know that even if the rates harden, there will be capacity."

He continued that with CAT bonds, "you don't know if investors will be there following a catastrophic event. Having said all that, activities have been growing because it represents an alternate source of capacity."

Mr. Dhru noted S&P expects risk-linked securities to be part of insurance companies' risk management tools. "We are not expecting any massive growth in this segment yet. Still, we are expecting a steady growth," he added.

Chris McGhee, a managing director of New York-based Marsh & McLennan Securities Corp. and chairman of the risk-linked securities committee at the Bond Market Association, noted that while the insurance securitization market hasn't had an explosive growth, there is a reasonable argument that the market has been growing steadily.

"We had the first multiple issuance of catastrophe bonds in 1997. The market has been growing steadily since then?there has been a total of almost $6 billion of catastrophe bonds issuance since 1997, and about $3 billion of those are currently outstanding," Mr. McGhee said. "Catastrophe bonds are a compliment to traditional reinsurance and, in some cases, a substitute for reinsurance as well."

Mr. McGhee also noted that the price of reinsurance has clearly impacted CAT bonds.

If the catastrophe reinsurance price were to rise drastically, he said, more companies would look to CAT bonds as an alternative. "In the area of low probability property-catastrophe reinsurance and retrocessional reinsurance, prices have been particularly hard," he noted. In these cases, "CAT bonds compare quite favorably in cost and in comparable capacity."

If enough capacity is not available from the reinsurance marketplace, CAT bonds can be seen as an alternative, he said.

Although rate increases in traditional reinsurance can make CAT bonds more attractive, the capacity of this alternative risk transfer tool can keep price hardening in check, Mr. McGhee added. "My opinion is that, based on anecdotal evidence and conversations I had with insurers and reinsurers, CAT bonds can work as a constraint in the upward movement in prices of property-catastrophe reinsurance," he said.

But there remain some structural challenges that can impede a faster growth of the CAT bond market, Mr. McGhee observed.

"It's fair to say that any securities offering is generally going to be more time-consuming than an insurance or reinsurance contract," he said. "Nevertheless, it's worth the time when you consider potential benefits." The real question, he added, is whether CAT bonds are a viable, attractive alternative to reinsurance. "I think the answer is yes," he said.

Mr. McGhee added that while insurance securitization is still quite confined to property catastrophe risks, there could be an interesting use in the securitization of life insurance risks. "Also, the securitization of aviation risks and credit insurance is something that has been looked at as well," he said.

In the current CAT bond market, one of the most popular trends is parametric deals, said Roderigo Araya, vice president at Moody's.

In parametric deals, he said, the losses to investors in CAT bonds are tied to the occurrence of certain events whose parameters exceed certain thresholds. "It can be a certain magnitude in cases of earthquakes, or a wind speed in cases of hurricanes. This is the popular trend we are seeing," Mr. Araya noted.

The New York-based rating agency said it has rated four CAT bond issuances worth some $900 million in 2002, and that figure hasn't changed much in the past three years.

"After 9/11 [2001], we expected a big growth in the CAT bond market, but that really hasn't happened. Insurers could still get reinsurance at an adequate pricing," Mr. Araya said.

He noted that one interesting issuance during last year came from Paris-headquartered media conglomerate Vivendi Universal S.A., whose $175 million CAT bonds will cover exposures for the company's parks and film studios in California.

CAT bonds normally are issued by insurance companies and reinsurance companies, he explained. In Vivendi Universal's case, however, "they became part of the company's risk management strategy." Disneyland in Japan did something similar in 1999 when it issued CAT bonds to protect against earthquakes, "but we haven't seen this type of CAT bond in a while," he said.

For more information about the Risk-Linked Securities Conference, go to www.bondmarkets.com or contact Joann Mule of The Bond Market Association at 646-637-9281.