Lloyd's chairman warns on "systemic risk" of capital rush The chairman of Lloyd's of London has warned of the danger that a rush of capital into the insurance industry will cause "systemic problems" akin to those of the banking sector during the financial crisis. John Nelson, head of the historic insurance market, spoke out about the risks of adverse consequences from non-traditional funding of insurance, which he said was occurring "on a scale not seen before." "We all vividly remember the systemic problems which arose in the banking industry . . . where capital became detached from the underlying transaction of risk," he said. The insurance industry must avoid these traps. His comments come as low interest rates encourage mainstream investors stung by weak returns from traditional assets to pour capital into the insurance industry in a hunt for yield. Tens of billions of pounds of fresh funding from investors such as pension funds - especially into reinsurance, or insurance for insurers - has helped keep premiums for consumers and businesses low. However, some insurers fear the industry may not be pricing risks appropriately which could leave inexperienced investors at risk of big losses. Insurance "can be a dangerous business for those who do not understand it," said Mr Nelson on Wednesday. Meanwhile, some capital providers - notably US billionaire investor Warren Buffett's Berkshire Hathaway - have begun passively following the decisions taken by other insurers - a contrast to the traditional model under which underwriting syndicates take an active decision on whether or not to take on a policy. Some underwriters at Lloyd's, especially smaller insurers, are concerned that such passive schemes could put them under pressure. "Some of the structures being used could undermine some of the qualities of the insurance model," said Mr Nelson in his speech to a City audience. All of us in this industry . . . need to be extremely watchful on this. We have seen the consequences in other parts of the Financial Services industry [without adequate supervision] - and the pain that it caused to worldwide markets, to economies and to the underlying customers. Mr Nelson said fresh sources of funding "properly deployed, provide opportunity as well as a threat" given the expected increase in demand for insurance as emerging economies grow. The non-traditional sources of capital are a source of competition for traditional underwriters at Lloyd's and put pressure on the prices they can charge policyholders. Aon, which brokers the Berkshire Hathaway scheme, has said the arrangement provides a welcome source of additional capital and keeps its clients" premiums low while insurance buyers can opt out of it. Lloyd's came close to collapse in the 1990s but has since recovered and was lauded last night by Andrew Bailey, a leading regulator. The "successful market" was "based on sound prudential fundamentals," said Mr Bailey, who heads the Bank of England's Prudential Regulation Authority.