![](https://static.standard.co.uk/s3fs-public/thumbnails/image/2013/09/02/16/Lloyds-of-London-(c)-Nick-D.jpg?crop=8:5,smart&quality=75&auto=webp&width=1024)
Lloyd’s of London bosses have warned that floods of capital from investors such as hedge funds and pension funds could send the insurance industry into a crisis similar to that suffered by the banks.
Billions of pounds of funds have been poured into the sector in recent years as investors look to offset the impact of lower interest rates. Although this excess capital has driven down prices across Lloyd’s, it has prompted fears the industry may not be pricing its risks properly.
John Nelson Lloyd’s chairman and a former investment banker, last night urged insurers not to repeat the mistakes made by the banking industry in the lead-up to the financial crisis when “capital became detached from the underlying transaction of risk”.
Speaking at the Lloyd’s annual dinner, he said that although the flows of new capital had helped to fund expansion and keep pace with growing economies and rising demand, “insurance of course can be a dangerous business for those who do not understand it”.
Investors are also piling into insurance-linked financial instrument such as catastrophe bonds, which are sold by insurers and reinsurers to share the risk they take on for natural disasters.
“We all vividly remember the systemic problems which arose in the banking industry,” he added.
“Some of the structures being used could undermine some of the qualities of the insurance model, which provides a secure and reliable risk transfer market for specialist risk — and indeed the reliable payment of claims. All of us in this industry, and dare I say it, the regulators as well, need to be extremely watchful on this — we have seen the consequences in other parts of the Financial Services industry - and the pain that it caused to worldwide markets, to economies, and to the underlying customers.”
Bronek Masojada, chief executive of Lloyd’s insurer Hiscox, said: “This new form of capital is not going to disappear and we all need to adapt to it. We’re in an early stage of this cycle and done well it could bring benefits to the whole market but if not regulated properly, yes, it could get out of hand.”
Comment: Beware of this risky business...
![](https://static.standard.co.uk/s3fs-public/thumbnails/image/2012/01/03/09/jim.armitage.lrg_2.gif?quality=75&auto=webp&width=960)
If it all sounds rather familiar, that’s because it is... Investors sitting on billions of dollars looking for quick returns. Low interest rates. A resulting stampede into assets that are complicated to price.
For insurance in 2013, read mortgages and commercial loans in 2007. The difficulties investors have had in recent years finding a decent yield have led them into all sorts of exotic places — Mongolian bonds, anyone? The torrent of capital has led to perversely low prices which will surely come back to bite lenders when those investments go bad.
Read More
As the Lloyd’s market recalls only too well from the 1980s, when too much money floods in and premiums stop reflecting the statistical chances of catastrophes, insurance is just as toxic as a Fab Tourre sub-prime mortgage portfolio. The message from John Nelson to Lloyd’s underwriters is clear: if people are daft enough to lend to you, you don’t have to spend their money. Risk will always out. Price accordingly.