On the general insurance side, average motor and household premiums and changes in premiums were not in our assessment affected by the introduction of Solvency II. In both motor and household, rates hardened in 2015 due to greater loss experience, and UK motor insurers were particularly 4  affected by the reduction in the ‘Ogden rate’ . Risk-free market interest rates and corporate bond spreads continue to be the dominant driver of annuity prices – this relationship does not appear to have changed since Solvency II came into effect. The limited impact of Solvency II on pricing should not surprise us, given 5  that the running costs of the new regime represent 0.07% of insurance premiums in the UK, which you could think of (for instance) as 35p on an average motor policy premium last year of £  As we get more experience of operating Solvency II, however, it is right that we make our implementation of the directive work better. That means, for example, reducing unnecessary costs and complications which have no prudential benefit. We are therefore consulting on an extensive package of reforms for the part of the Solvency II framework over which we have discretion. We are making a series of proposals to give firms greater confidence in using the MA. We propose to reduce the amount of time firms (and we) have to spend on discussing and agreeing minor changes to internal models. And we will cut reporting requirements, particularly for smaller firms.
With regard to prices, inflation increased slightly more than expected in 2001. This can be partly explained by unexpected price increases on, for instance, fruit and vegetables; the price of these product groups will probably continue to increase slightly more than expected in the short term. Imported inflation has increased more than expected in both the producer and consumer areas, which could be due to the exchange rate’s effect on prices being slightly higher than assumed. However, price increases have also been broader and higher than expected for other goods and services. My view of the current situation So how do I assess the situation in which we find ourselves today? Firstly, I feel that confidence in the future and willingness to take risks appear to have recovered from the shock of 11 September. But what will happen to inflation? There are three reasons why inflation should fall this year. The first is that growth in demand and utilisation of resources were both lower than expected last year, which subdues price pressure for the near future. The second is that inflation expectations are disposed towards a decline in inflation, according to recent surveys. And the third is that the krona has appreciated slightly, which means a lower risk of imported inflation. On top of this, the effects of last year’s price rises on certain goods and services, including food and energy, will gradually abate. However, there is also a risk that the price rises will not abate on their own.