(December 13, 2013) — Rising flows into insurance-linked securities, such as catastrophe bonds, has prompted the European pension regulator to voice its concern about whether investors are sophisticated enough to handle them.
During the past year, there has been a significant increase in investments in insurance-linked securities, driven by institutional investors seeking returns in a subdued economic environment.
In its round up of the year, the European Insurance and Occupational Pensions Authority (EIOPA) has warned it had concerns that pension funds and other investors may not have the modelling capabilities and experience to fully analyse the underlying risks of these investments.
“Without adequate supervision, such developments could cause systemic risk,” EIOPA said.
In addition, the regulator highlighted the impact of significant natural events in the past 12 months.
The costliest natural disaster this year was the massive flooding event across Central and Eastern Europe in May and June 2013.
However, economic losses of $22 billion and insured losses of $5.3 billion were still below the 10-year (2003-2012) average and “do not seem to have caused any major financial stability concerns yet”, EIOPA said.
The regulator’s concerns were largely driven by research published this spring by Aon Benfield. As aiCIO reported in April, catastrophe bonds returned 12.7% in the year to the end of March, but there were three high profile blow-ups which resulted in investor losses of $500 million, following severe natural disasters and storms in Japan and in the US.
In addition, the catastrophe bond market is still largely dominated by repeat issuers, something that led to Aon Benfield’s Chris Parry, director and head of international capital markets, to call for more encouragement for new players to enter the ILS market.
Parry also noted that while there is a large supply of capacity, and as such, pricing is very competitive, there were a number of reservations shared by investors and pension funds about entering the European reinsurance market.
“We will overcome these challenges as people become more comfortable with the capital markets and the association with third party capital,” he said.
“It is very much an educational process to get people comfortable with the structures and costs associated with accessing the market. But it is certainly going to move forward if prices continue to come down, as we are seeing at the moment.”
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