Ace's New Futures Contract Guarantees Coverage, Rates.

Ace Ltd., the Bermuda-based insurance giant, has introduced a futures contract that gives customers the right to buy property insurance at locked-in rates, terms and conditions for as long as three years.

The product is being offered worldwide through Ace Bermuda Insurance Ltd. at a time when the chronically soft property/casualty market is showing signs of a turn, incidence of catastrophes are growing and the threat of turn-of-the-century computer breakdowns is looming over the industry.

Ace will offer as much as $200 million of all-risk capacity and $25 million of earthquake capacity in high-risk areas to large commercial customers, all at guaranteed rates and coverage terms. Klaus Gebhardt, senior vice president of property at Ace Bermuda, said the upfront cost to customers would range from about 2% to 20% of the full premium, depending on risk factors and the length of the commitment in the futures contract.

Gebhardt said the contracts should appeal to risk managers who fear they will be left without coverage after a major loss or catastrophe, as well as those who are concerned that rates are about to rise. The product will attract "companies that have a great deal right now and they know it's not going to last," he said.

"The fear factor is out there," Gebhardt said.

He noted that companies often find themselves unable to reinstate coverage after a major loss has exhausted the limits of an existing policy, and one company's loss can often stigmatize an entire industry in the eyes of insurers. He said Y2K worries loom large as trial lawyers look for the next big liability issue, since asbestos and pollution claims are diminishing.

Analysts said the futures appeared to be a good idea. "I think it could be very significant because people want to he able to plan," said Alan Zimmermann, an analyst with Morgan Stanley Dean Witter in New York. Zimmermann said the contracts are in line with a general growth in demand for futures products across the capital markets, all in the name of predictability.

Chris Cantwell, an assistant vice president in A.M. Best Co.'s property/casualty division, said that in past years such a product would have been enormously risky because catastrophes such as Hurricane Andrew in 1992 caused wild swings in rates. Any company committing itself to lower rates would risk missing a windfall if the market hardened abruptly. But since Andrew, Cantwell said, catastrophe modeling has grown so sophisticated that insurers are well prepared for potential losses. That factor and continued overcapacity in the industry mean that price swings are much less pronounced, even after a major event.

"Pre-Andrew, this wouldn't have been a good deal," Cantwell said. "Post-Andrew, it's probably a good deal for Ace."

Other benefits, Cantwell said, include a stable stream of fee income if clients don't exercise their options and great potential for cross-selling with other Ace units, including the just-acquired property/casualty operations of Cigna Corp.

He said the product differs from other futures and options because the coverage is tailored to each customer's needs. By contrast, buyers have found it difficult to match their own risk profiles with instruments such as the catastrophe futures and options offered by the Chicago Board of Trade.