FRANKFURT (Reuters) – A surge of new capital from investors like pension funds into the market for specialized insurance risks could threaten financial systems and needs to be closely watched, the European Union insurance watchdog EIOPA said on Thursday.
Low interest rates on traditional bonds have encouraged pension and hedge funds to pour money into insurance-linked securities (ILS) like catastrophe bonds and other securitized insurance investments to obtain higher yields and diversify away from financial market risks.
Catastrophe bonds are used by the insurance industry to transfer financial risks of extreme events like earthquakes or hurricanes to investors, who receive an annual return in exchange for agreeing to cover damages they consider very unlikely.
The European Insurance and Occupational Pensions Authority (EIOPA) said the increasing inflow of funds into the insurance marketplace expected over the coming years raised concerns, particularly if investors did not have the ability to analyze the underlying risks and complexity of the insurance market.
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