In this connection, however, it can also be pointed out that the Euro lost more than one-quarter of its value against the US dollar from the beginning of 1999 until it bottomed out, and since that time has risen once more by just over one-fifth. The Central Bank is not unconcerned about the exchange rate, but has limited means of influencing its development, as has been explained. There is only so much the Bank can do to restrain currency fluctuations. A substantial lowering of interest rates could possibly force the exchange rate down somewhat, but this would mean sacrificing other and more important objectives for precious little gain. The joint declaration issued by the government and the Central Bank in March of 2001 states that the Bank will intervene in developments on the foreign exchange market through buying and selling foreign currency if it deems this to be necessary in order to achieve its inflation target, or if it is concerned that exchange rate fluctuations could threaten financial stability. There is no cause for so doing at present. As I mentioned, the primary objective of the Central Bank’s monetary policy is to foster price stability. Price stability is recognised to be a prerequisite for long-term economic growth and thus improved welfare. The Central Bank has lightened its monetary restraint substantially in recent months. In the course of ten months, the policy rate has been cut very significantly, resulting in a real policy rate which is lower now than it has been since 1996, as I mentioned.
Pricing, underwriting and reserving in wholesale general insurance and reinsurance markets  Our primary prudential concern about current market conditions is that pressure on pricing will lead to weakening of underwriting standards, under-reserving against risks and insurers being tempted to take short 4  cuts on capital. On underwriting and reserving, Anna Sweeney’s ‘Dear CEO’ letter , published a few months ago, set out nine areas where our supervisory review work had suggested weaknesses, including:   Formulating business plans based on loss ratio (and future reserving assumptions) which appear optimistic given current market conditions and historical performance. In particular, we have seen a number of examples of insurers expecting improvements in claims experience due to portfolios changes, leading them to exclude historical years of poor performance from reserving benchmarks without good supporting evidence.   Insufficient use of technical pricing models, even for lines of business where such models are generally considered to be more developed and reliable.   Slow reaction to emerging loss development, with insurers taking false comfort from reserving benchmarks which appear to show business as still profitable despite emerging underwriting results.   Diversifying into new lines of business (for example, casualty classes) despite insufficient underwriting expertise or oversight. Aggregate analysis for a sample of London Market insurers suggests that initial estimates of reserves were inadequate for more recent years of account, with insurers needing to strengthen reserves over the past couple of years.