* Intervention possible if system-wide leverage too high
* Pressure on firms to check collateral levels
By Huw Jones
LONDON, Oct 2 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
"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, 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
"Are we alert? Yes. Have we seen it? At the moment, no,"