Indeed, where the PRA judges it is necessary to intervene, we will seek to do so at an early stage. Firms should be open and straightforward in their dealings with the PRA and we in turn will take a risk-based and proportionate approach. This is being put into practice. For example, enhanced communication is particularly pertinent as we transition to the Solvency II world. From April, firms will be able to make formal applications and we don’t need a crystal ball to predict a very busy year for both regulator and regulated. The PRA has had an extensive on-going dialogue with firms, giving detailed feedback on, for example, their internal model developments or their matching adjustment applications. Just over a week ago we issued guidance on how equity release mortgages might be structured for use in the matching adjustment. Right now, the PRA is aiming to provide both general and individual firm feedback, recognising the importance of timely communication allowing firms to prepare thoroughly. As a consequence of the financial crisis, financial regulation in all its forms has been through a major transition. In the UK we have seen the split of prudential and conduct regulation, the establishment of a single Insurance Directorate at the PRA with an insurance specific secondary objective, and we have moved forward in our application of “judgement-based regulation”. The next few years will be about embedding this new approach through Solvency II.
Actually, about a third of the PRA’s authorised firms are in run-off. But that is in part a testament to the successful regulatory regime that the UK has been running for the insurance sector. And, whatever the regime, we cannot be certain this will be the case in every conceivable circumstance. For this reason, the PRA continues to place the resolution arrangements for insurers on both the domestic and international agendas. The banking crisis further taught us all that we need to be looking at potential storms ahead and not to be misled by periods of fair weather. For the PRA this means it will assess firms not just against current risks, but also against those that could plausibly arise in the future, carrying out increased business model analysis. For insurers, this involves monitoring emerging risks and taking preparatory steps to deal with what may result, with firms holding capital commensurate to their evolving risk profile. This approach is embedded as part of Solvency II, for example with the requirement for each undertaking to conduct a forward looking assessment of its own risk and solvency needs. The fallout from the global financial crisis has accentuated the need for an open, two-way dialogue between regulator and regulated. This is especially true in times of change or stress. To ensure policyholder protection, regulators need to be alert to emerging risks and this is best achieved through a “cards on the table” approach.