We are currently managing through disruption of a significant scale, and the current crisis may exacerbate business model challenges that insurers will need to confront over the medium and long term. This pandemic is likely to raise questions for customers around the value provided by insurance products; we are already seeing significant coverage questions being raised around business interruption and travel policies in particular. There is a critical role for insurers to adapt and ensure they are able to meet customers’ insurance needs whilst managing their commercial operations, particularly during the transition out of the crisis and into the longer term. Firms should take early steps to assess what changing customer behaviours or expectations could mean for their current business models. Although it’s difficult to see beyond the immediate crisis, this pandemic is reinforcing two important things. There are a number of measures contained in Solvency II that have effectively mitigated the pro-cyclical effects caused by the disruption to financial markets. And second, the importance of the fundamental principles of the regime during a systemic event – those that require prudent capital and risk management. These can be expected to endure in any future version of our regulatory regime and will be critical for insurers to successfully navigate the complex landscape of emerging risks.
A key challenge of the Covid-19 crisis for us has been isolating the signal – the increased risk to insurers and their policyholders – from the noise caused by markets finding their way with very sharp but temporary overreactions. 1  https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/insurance-risk-management-in-a-changing-world-speech-by-charlottegerken 2 Category 1 & 2 life and non-life insurers regulated by the PRA 2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  Solvency II contains several measures that were intended to or have otherwise leant against the pitching and rolling of financial markets. These include the Matching Adjustment (MA) and the transitional measure on technical provisions (TMTP); also the Standard Formula Symmetric Adjustment of the Equity Capital Charge (the symmetric adjustment), the Volatility Adjustment (VA), and the Ladder of Intervention. In addition to benefiting financial stability, these measures have helped to filter out the noise in financial markets, supporting the PRA in assessing that insurers are adequately capitalised for fundamental risks in their business and protecting policyholders. The MA is, for UK life insurers, the most material Solvency II long-term guarantees measure, and has been the most significant in the current crisis. The MA is intended to enable insurers to hold assets to maturity and avoid changes in spread from impacting their solvency. When appropriately cash-flow matched, their locked-in funding means that annuity writers are unlikely to have to sell assets prior to maturity, even in a severe stress.