John Nelson, chairman of Lloyd’s of London said recently that the insurance industry (try substituting insurance for banking and 2013 for 2008) needed to be “extremely watchful” and added “Insurance can be a dangerous business for those who do not understand it.” Apparently he was talking about “sidecars” but not the ones that do not exist anymore. Rather, about underwriting vehicles that non-insurers can invest in.
According to an article in The Times by Miles Costello, the Prudential Regulation Authority (PRA) is monitoring a cartload of cash coming into the insurance market from hedge funds and pension schemes. Such entry is effected by buying securities that insurance underwriters issue to pass on some of the risks taken on. In a way, so far so good but Guy Carpenter, an insurance broker and consultant, has said that $10 billion has entered the market this month and in total this “alternative” capital now accounts for an estimated $45 billion of insurance risks related to property alone.
Although the PRA does not regulate hedge funds or pension schemes, it is concerned with insurers and the worry is that due to demand, the securities might be sold too cheaply. Such a mispricing of risk resonates with the both the fifth anniversary of the bankruptcy of Lehman Brothers and the righting of Concordia last night off Tuscany. When insurers reinsure, some of the exposure remains in their hands.
Wholesale mortgage market of 2008, sub-prime – sounds familiar? Surely not again.
JGS 17th Sept 2013