Nelson also highlights passive underwriting as a cause of concern for insurers
Lloyd’s chairman John Nelson (pictured) has warned that a rush of capital into the industry as a result of prevailing low interest rates could cause “systemic problems” similar to those experienced by the banks during the financial crisis.
Nelson said that non-traditional sources of capital were entering insurance “on a scale not seen before” and that this should be a cause for concern.
“We all vividly remember the systemic problems that arose in the banking industry, where capital became detached from the underlying transaction of risk,” he said. “The insurance industry must avoid these traps.”
Insurance investments
Institutional investors, such as pension schemes and life insurers, are investing in insurance in a bid to seek returns amid volatile and low interest rate investment conditions.
Insurance investments are less correlated with other investments used by these institutions and therefore represent an appealing alternative to the more traditional investment products.
Underwriting agreements
Nelson also warned that capacity from passive underwriting arrangements – such as the deal struck between Aon and Berkshire Hathaway, which sees Aon pass a guaranteed 7.5% of its Lloyd’s business to the insurer – is also a potential danger for the market.
He said: “Some of the structures being used could undermine some of the qualities of the insurance model. All of us in this industry need to be extremely watchful on this.
“We have seen the consequences [of inadequate supervision] in other parts of the financial services industry – and the pain that it caused to worldwide markets, to economies and to the underlying customers.”
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