PRA traces a narrative ark towards higher flood defences

Insurers quizzed by the Prudential Regulation Authority on climate change risks will be tempted to answer "it all depends". A few new duck ponds around Tewkesbury would threaten nobody's solvency. A downpour accompanied by a procession of representative fauna towards a big boat built by a man called Noah would be a different matter.

Insurers will know better than to answer facetiously. Prudential regulators are not noted for their sense of humour. Moreover, the industry will wish to appear conciliatory in response to the thin end of what could prove to be a largish wedge.

The PRA says it has no current plans to increase capital requirements in response to rising temperatures. However, the glide path towards a safer, more stagnant industry has been traced in advance by banking. Here stress tests, such as the past weekend's Asset Quality Review, come thick and fast. So do hikes to capital buffers.

European insurance watchdog Eiopa already includes catastrophe scenarios in its own stress testing of insurers. Despite much grumbling, insurers look set to meet solvency standards at a lower cost to shareholders than risky old banks have.

However, the UK has a taste for beating continentals at their own regulatory game. For example, the PRA is this week expected to propose a minimum leverage ratio of 4 per cent or more for large UK banks, compared with 3 per cent from Basel.

Catastrophe cover is just one strand in the business of Lloyd's of London. Some syndicates will be heavily exposed, particularly to US hurricanes. But bad storms can benefit underwriters in the medium term by raising premium rates. Big consumer-focused insurers are protected by their diversity from all but the worst natural disasters.

The answer "it all depends" hinges more than anything on the response of governments to climate change. Their inability to agree targets for carbon output augurs badly. So does the reluctance of the UK government to cover flood risks that insurers shun. In probing the financial risks of new deluges, the PRA should start with the Department of the Environment, the body that prompted its enquiries.

Frayed formula

Formula One has become safer for drivers but remains as perilous as ever financially. The Marussia team has followed Caterham into the arms of the administrators. The starting grid at the US Grand Prix in Austin, Texas this weekend will look distinctly underpopulated as a result.

New investors may yet revive Marussia and Caterham under new liveries. If they don't, F1 may find itself experimenting with how few teams - there are just nine at present - add up to compelling entertainment.

The race series, controlled by Great Brinksman Bernie Ecclestone, has flirted with cost caps of the kind deployed in football. But restraint isn't in the make-up of this playboy sport.

F1 is reckoned to produce revenues of more than £1bn per year before sponsorship, split half-and-half between the organisers and the teams, with race winners receiving more than also-rans. Chris Aylett of the Motorsport Industry Association says "the solution should be sharing revenues more fairly".

Lombard likes the idea of an official Team Underdog, whose cars would trundle slowly round the circuit in the wake of Ferrari, Mercedes and Red Bull. F1 and its top teams need losers to make Lewis Hamilton and Sebastian Vettel look good. They should be prepared to pay for them.

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Barbecued beast

Salamanders can supposedly play with fire without getting burnt. That has not applied to oil explorer Salamander Energy, whose shares are two-thirds below their post-crisis peak at 93.5p, valuing the group at £242m. Even that modest worth has external support - rival bid approaches from Ophir, another London-listed explorer, and a consortium led by Cepsa of Spain. A scarcity of new reserves and a low oil price has left the sector out of favour.

Ophir had about $1.3bn of cash at the last record date. That leaves it well-equipped for bottom fishing, although chief executive Nick Cooper had an all-share merger in mind when fruitlessly wooing Premier Oil earlier this year.

The episode suggested cash may succeed when persuasion fails. That should be particularly true when your target is in talks to sell a 40 per cent stake in its main asset - an oilfield in the Gulf of Thailand - to a Malaysian investor for $280m.

Slow progress with the disposal has fuelled rumours it could be in trouble. If Malaysia's Sona Energy withdraws, Ophir or Cepsa may be able to buy the whole of Salamander for a price lower than the stake sale implies. Macquarie analysts suggest an offer could come at 103p per share, which would attribute no value for exploration upside.

jonathan.guthrie@ft.com

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