According to a report in the Times newspaper this morning, the UK’s Prudential Regulatory Authority, a City regulator tasked with regulation and supervision of financial services including insurance, is monitoring the influx of alternative capital into the reinsurance market.
The Times gives no source for its claims but says that the Prudential Regulatory Authority is closely watching the inflows of capital into the insurance and reinsurance market from capital market investors such as hedge funds and pension schemes.
The fact that the biggest regulator and supervisor of the financial markets in the UK is aware of the alternative reinsurance capital and insurance-linked securities market should come as no surprise. The UK’s Financial Services Authority recently split into the PRA and a Financial Conduct Authority. The FSA itself has monitored catastrophe bonds and other forms of capital markets backed reinsurance instruments in the past.
The Times claims that the PRA is concerned that the surge in demand and influx of outside capital into insurance and reinsurance could result in products being sold too cheaply, without pricing in the true underlying risks. The PRA is also concerned that insurers may not realise that when they pass on risk through reinsurance, or other alternative reinsurance instruments, they may not be aware what exposure they hold onto.
In our view the best way for the PRA to have any fears allayed is for major firms in the reinsurance, ILS and alternative reinsurance capital space to educate it on risk transfer, collateralized protections, how instruments like catastrophe bonds fit into an overall reinsurance program, the investor landscape, retention, program layers and other concepts such as aggregate, multi-year, triggers etc.
The Times quotes the recent comments made by Lloyd’s chairman John Nelson (it’s worth reading his follow-up comments too) and again mentions the word ‘bubble’. The Times itself could perhaps benefit from some education on how insurance and reinsurance works and the way the capital markets intersect with reinsurance and risk and capital come together in the ILS space.
If the UK’s major financial services regulator was not aware of the recent growth of alternative reinsurance capital, the growth of the catastrophe bond market and the influence this has had on pricing and market dynamics it would be worrying. Now the market needs to engage with these regulators, ensure they understand how the ILS and alternative reinsurance markets work and cooperate to ensure a stable and secure market continues to thrive.
You can read the Times article here if you are a subscriber.