The tide of "convergence" is starting to turn, with insurers and reinsurers delivering the type of financial deals once associated with commercial and investment banks.

Until recently, the reality of "convergence" was banks encroaching on reinsurers' turf through insurance risk securitisation. By organising catastrophe bonds, for example, investment banks re-package risk for selling on to capital market investors.

But insurers and reinsurers are also branching out, organising structured finance deals for their clients, underwriting collateralised bond obligations and designing integrated risk solutions which address the investment side of clients' business as well as the underwriting result.

"If phase one of convergence was investment banks doing catastrophe bond issues," says Peter Gentile, president of New York-based Gerling Global Financial Products, "phase two is reinsurers striking into bankers' territory."

GGFP was established by Cologne-based parent Gerling Group as its centre for alternative risk transfer products. While much of GGFP's business involves finite risk reinsurance solutions for primary companies, the company has also participated in complex structured financing deals for non-insurance corporations.

Clive Tobin, chief executive officer of Bermuda-based XL Insurance, says that the (re)insurance sector's involvement in structured finance transactions grew out of finite reinsurance business and an increasing need by financial guarantee insurers and investment banks for additional sources of capacity. This really took hold last year following the dislocation in the financial markets caused by the collapse of Long Term Capital Management, and the crises in Russia and Asia. "There's been a lot of interest in what insurance companies can offer since the second half of last year," Mr Tobin says. "And the (re)insurance sector is receptive because it has too much capital."

The typical financing deal organised by a (re)insurer is a form of credit enhancement and is known as a "credit wrap".

In a wrap transaction the borrower effectively pays a premium for the (re)insurer's financial guarantee which is wrapped around the borrower's credit rating to secure cheaper financing. "The client can either go out and raise money from a bank or through the capital markets without any form of guarantee," says Mr Tobin. "Or they can come to XL and we can provide those guarantees and then go out to the markets and raise that financing at a cheaper cost."

Companies now see cross-selling opportunities from combining finance packages with conventional property-casualty cover. Often, a structured finance solution can be linked to specific events to produce a form of contingent capital. Such a product is a corporate banking staple, but reinsurers such as Swiss Re New Markets reckon their expertise in risk analysis means they can price the facility more efficiently than banks.

"We add value by avoiding excessive financing and providing a solution which is tailored to a specific event - so the company gets the cash when it is needed," says Guido Fuerer, head of structured finance Swiss Re New Markets (SRNM) in Zurich. "And financing by means of reinsurance can increase efficiency."

Financial risk management is increasingly important to insurance companies, Fuerer says. "Corporate management today is more focused on achieving an expected result and avoiding excessive volatility." With that in mind, companies such as SRNM and XL promote so-called integrated risk packages which address asset risk as well as underwriting risk.

SRNM has written several integrated reinsurance solutions which respond to fluctuations in the investment portfolio as well as to underwriting performance. The objective is to stabilise the client's overall balance sheet result. These contracts may for example, use a dual trigger, whereby coverage is activated if investment and underwriting losses are simultaneously in excess of pre-set levels. In one SRNM transaction, the trigger related to movements in a stock index; in another, it was based on the government yield curve.

Reinsurers reckon they can compete with banks for financial risk business because they are better equipped to quantify risk and have the appetite to match. According to XL Capital's Clive Tobin, the only potential brake on the (re)insurance sector's ability to compete with banks is companies' own access to liquidity.

"One of the ways of assuming risk is by purchasing bonds or assets rather than simply guaranteeing them. When we do that, we have to raise liquidity," says Mr Tobin. "That raises the question of risk concentration. As companies go out and do more 'wrap' transactions, for example, how much of their paper will the market accept?"

Peter Gentile believes that the development of wholesale financial services will inevitably follow a similar path to retail financial services, where mergers between banks and insurers are common. "One-stop shopping is coming to the wholesale sector," he says. "And phase three of convergence will be mergers and acquisitions between banks and (re)insurers."

Tabular information - Top 25 reinsurance groups


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