Reinsurers are waking up to the fact that far from being just one of the latest industry buzzwords, securitisation of insurance risk is here to stay. When, in April this year, the owners of Tokyo Disneyland bypassed the traditional insurance and reinsurance markets and sought earthquake protection in the form of catastrophe bonds, reinsurers were served another warning that insurance securitisation is a form of risk transfer that simply cannot be ignored.

Oriental Land - owners of Tokyo Disneyland the world's most-visited theme park - was the first non-insurance corporation ever to securitise a catastrophic risk. It placed two cat bonds worth $100m each to protect it against property damage and business interruption caused by an earthquake.

"Maybe two or three years ago that risk would have been placed in the London market by a reinsurance broker. But Tokyo Disneyland has done its own thing and gone straight to the alternative risk transfer (ART) market," says Neil Ewing, Investment Director of CLM Insurance Fund.

Other non-insurance corporations are expected to follow Oriental Land's lead and tap the capital markets for insurance coverage. For instance, a Florida-based utility company is said to be considering a bond issue because it cannot get coverage for hurricane risk in the conventional marketplace. Traditional insurance and reinsurance companies must clearly prepare themselves for this new challenge.

"Everybody, including ourselves, has been testing the waters and giving securitisation a trial on a small scale," says Jacques Blondeau, chairman of French giant reinsurer Scor. "What we have seen so far is a fairly limited number of what I would call prototypes."

CLM has so far invested in five cat bonds, and CLM's Mr Ewing says that it is absolutely vital for traditional reinsurance providers to show corporate entities that they have the tools to participate in the capital markets. "It is very important for a company like CLM, which specialises in catastrophe reinsurance to be able to participate in this market. We have to make it known to the people who are placing their risks in this new way that we are able to do it with them. Otherwise they will simply go straight to the capital markets."

With reinsurance prices low, current market conditions provide little incentive for companies to take the securitisation route. "But I think when the reinsurance market turns, when pricing starts to firm, that is when the catastrophe bond option for an insurer of a corporate entity becomes more attractive," says Mr Ewing. Scor's Mr Blondeau agrees: "Where I see cat bonds playing a very big role is if we have another Hurricane Andrew [the 1992 windstorm that prompted the last huge hikes in the cost of reinsurance cover], and for example a big world-wide shortage of capacity for catastrophe covers. Then we will see the financial markets coming into play." He believes that cat bonds would be a very good way of filling the capacity gap for periods of two to five years. "We have to learn the technology and we are all more or less on the starting blocks. If we have another Andrew then the very next morning we can launch cat bonds and there will be demand," he says. "We do not see cat bonds as being competition to our own business, but they are going to be very useful products in due course."

"I cannot think of any time when securitisation will replace traditional insurance," says Prakash Shimpi, principal at Swiss Re New Markets and president and chief executive of Swiss Re Financial Products and Swiss Re Capital Markets. "I do not think it is on the cards because if you think about the characteristics of the two markets, insurance and reinsurance are very directly related to the book of business, so they are very customised transactions. Securitisation by its very nature, because it has to appeal to investors, has to achieve some degree of standardisation."