The supply might come from lifeinsurance companies, who benefit from increased longevity to the extent that fewer early deaths mean lower claims, and financial intermediaries collecting the savings of those younger investors prepared to bear some of the longevity risk of the old.24 How close private markets can get to providing the optimal amount of risk sharing is hard to say. Private annuity markets which could pool individual longevity risk are small. For collective longevity risks, the burden of unexpectedly high longevity for a particular cohort should be spread over as many generations as possible. In theory, this provides a potential role for government to share risks across generations. 18  Fanny Dashwood is claiming that annuities lead to “moral hazard” to use the modern jargon: the provision of an annuity changes behaviour in a way that increases life expectancy. 19  See Yaari (1965) and Davidoff et al. (2003). For a discussion of pension arrangements in the US see Diamond (2003, 2004). 20  For a theoretical study of annuity provision under adverse selection, see Brugiavini (1993). 21  Finkelstein and Poterba (2004), for instance, note that 65 year old men who voluntarily buy annuities live about 20 percent longer than other men. Pauly and Zeng (2003) found that in the United States adverse selection made it impossible for a private market in prescription drug insurance to function.
We therefore aim to agree a glide path to the new level, which, depending on circumstances at the time, could involve a multi-year transition period of incremental increases. But let me emphasise one perhaps rather obvious but nevertheless vitally important aspect of this – that a clear path to profitability (whilst meeting full capital requirements) is a necessary condition for success in this part of the climb. Two other points are worth emphasising here. The two factors that invariably provide a harness to firms that are successful in climbing the competitive and regulatory mountain are the quality of their governance and the strength of their relationship with the PRA. Our expectations of boards are high – and rightly so. Good, proactive governance is key to delivering a sound and well-run business. And, I should note, the opposite is often a leading indicator of a firm in trouble, and the root-cause of firm failure. In addition, just as mountain guides require an increasingly diverse set of skills as they ascend the varied terrain of the mountain, so too does the board. This means the board composition will invariably have to change as the firm grows, not only to become predominantly independent but also to ensure sufficient diversity of specialisms to support the executive and hold it to account. Relationships with the PRA need to be open, honest and constructive too. And for local entities of international groups, this is true not only for the local entity but for our relationship with the group and home state supervisor.