LONDON (Reuters) – British regulators see no case tointervene to stop a wave of money moving into insurance-linkedmarkets such as catastrophe bonds, saying that the developmentshould not be overstated.

Billions of dollars from investment funds have flooded into theinsurance sector, hunting for better yields, allowing insurers andre-insurers to spread risk and drive down prices.

One increasingly popular instrument is so-called catastrophebonds, which are sold by insurers to share risks they take on forcovering natural disasters.

John Nelson, chairman of the Lloyd's of London insurance market,said last month that the trend helped to fund expansion but that itcould undermine the sector's stability if not properlysupervised.

“It's important not to overstate these developments,” JulianAdams, the sector's top regulator in Britain, said in a lecture atLloyd's of London on Wednesday.

“Some of these alternative structures have been a feature of themarket for almost 20 years, so it's hardly a completely newphenomenon,” Adams, deputy chief executive of the Bank of England'sPrudential Regulation Authority (PRA), added.

Such changes may pose questions for some incumbent firms'existing business models, but these on their own don't make a casefor regulatory intervention, he said.

However, Adams pointed out that firms will have to analysecarefully whether enough collateral has been collected to covertheir contracts.

The PRA is also looking at the extent to which insurancecompanies are taking on leverage and how the influx of money mayaffect business models and risk-taking, he added.