By Huw Jones
LONDON (Reuters) - British regulators see no case for intervening to stop a wave of money moving into insurance-linked securities such as catastrophe bonds, saying the trend should not be overstated.
Billions of dollars from investment funds have flooded into the insurance sector, hunting for better yields, allowing insurers and re-insurers to spread risk and drive down prices.
One increasingly popular instrument is so-called catastrophe bonds, which are sold by insurers to share risks they take on for covering natural disasters and must be backed by collateral.
John Nelson, chairman of the Lloyd's of London insurance market, said last month that the trend helped to fund expansion but that it could undermine the sector's stability if not properly supervised.
"It's important not to overstate these developments," Julian Adams, the sector's top regulator in Britain, said in a lecture at Lloyd's of London on Wednesday.
"Some of these alternative structures have been a feature of the market for almost 20 years, so it's hardly a completely new phenomenon," Adams, deputy chief executive of the Bank of England's Prudential Regulation Authority (PRA), added.
The impact so far from the wall of money has largely been confined to North American catastrophe reinsurance, he said.
Such changes may pose questions for some incumbent firms' existing business models, but these on their own don't make a case for regulatory intervention, Adams said.
Intervention would be considered if the capital influx was bumping up leverage in the system overall and action could include forcing firms to hold more capital or changes to collateral requirements, Adams told reporters after his lecture.
Firms will have to analyse carefully whether enough collateral has been collected to cover their contracts.
The PRA is also looking at the extent to which insurance companies are taking on leverage and how the influx of money may affect business models and risk-taking, he added.
David Simmons, managing director at Willis Re, the reinsurance arm of London broker Willis (NYS:WSH), said that Adams raised some concerns and expressed some degree of confidence that the industry is mature enough to cope.
"One concern clearly is the new influx of capital will take business away from the reinsurance market and provide an impetus for guys to get involved in the capital markets where they may not have skills and competence," Simmons said.
Adams pointed out that it is not his job to protect existing business models from competition.
"If people want to come to the market, we will look at them on their own merits. If they meet the minimum criteria ... as far as I am concerned, there is no impediment to their authorisation," he said.
The key would be if new entrants can fail without harming the wider system or policyholders, he added.
Adams has been satisfied with the industry's response so far in trying to gauge if the influx of capital is temporary or a structural change in the market and what safeguards are needed.
Regulators are checking for the complex, multi-layered intermediation and structuring and restructuring of exposures that were a hallmark of risks at banks in the run up to the financial crisis.
"Are we alert? Yes. Have we seen it? At the moment, no," Adams said.
(Additional reporting by Chris Vellacott; Editing by Belinda Goldsmith and David Goodman)
- Julian Adams