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Regulator to speak out over Cat bond risks
by Sarah Miloudi on Sep 30, 2013 at 07:44
The Prudential Regulation Authority (PRA) is set to speak out over the possible risks associated with catastrophe bonds.
It is understood that the PRA, which regulates the City alongside the Financial Conduct Authority, is looking closely at the quality of collateral and has concerns about the rush of money pouring into the sector.
Typically, insurance linked security deals, or ILS, which include catastrophe bonds, are fully collateralised and backed by assets that can be seized in the event of a default.
Cat bonds are issued by insurers so they can hedge exposure to natural disasters such as earthquakes and severe storms, but according to the Financial Times the PRA is examining the collateral used in such arrangements.
It is estimated that over the next five years around $100 billion of funding could come from alternative sources, and increasingly, pension funds are being attracted into the catastrophe reinsurance sector because they model the likely risks without lengthy underwriting.
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