LONDON (Reuters) – British regulators see no case to intervene to stop a wave of money moving into insurance-linked markets such as catastrophe bonds, saying that the development 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.
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.
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, he said.
However, Adams pointed out that 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.
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