But the pooling of savings within Life insurance companies and the willingness of policyholders to commit their savings for the long term also allows those savings to be channelled into new types of investment – ones that would be difficult or impossible for individuals to access directly, but which will play an essential part in the recovery and in meeting the challenges of the 21st century. And our data show that insurers are investing in ever more diverse and novel asset types, which often represent very long-term commitments. A willingness to innovate is to be welcomed. There is nevertheless a flipside to this novelty – the lack of a long history to guide the selection and risk-management of these assets, or to show how they may perform under various possible stress scenarios. So there are new sources of uncertainty to contend with, alongside those that insurers have been managing as their bread and butter for hundreds of years. Insurers, and we as their prudential regulator, have a responsibility to understand and respond to new uncertainties, some of which may play out over a very long horizon, to ensure that policyholders’ trust is repaid. Ensuring adequate policyholder protection is clearly a good in its own right – policyholders are consumers of a financial product, which may be very significant to them and their families, and they deserve to be protected. But it goes further. Securing policyholder protection upholds policyholders’ confidence and trust in the face of uncertainty.
There are a number of reasons why this can be economically attractive for firms: the reinsurer benefits from cross-risk diversification; there may be tax advantages; and so on. But there are also potential regulatory drivers: the balance between the treatment of credit risk underpinned by the MA and the treatment of longevity risk underpinned by the risk margin can incentivise this choice. Whilst it is clear that reform is needed, there remains a choice of method to implement this reform. Internationally, market-consistent regimes have used a variety of different approaches to risk margin calculation. The data we gather in the QIS will help form proposals on the best way to implement reform which meets the objectives of the review. Matching Adjustment Turning to the Matching Adjustment. The Matching Adjustment, or MA, has a clear link to the investment incentives for annuity writers. As such, an MA that works will be a key plank of allowing annuity writers to support the recovery and growth, both by innovating, and by investing in long-term productive assets and in assets consistent with the government’s objectives on climate change. The MA lets a firm recognise an immediate benefit today, from future returns above the risk-free rate that have not yet been earned. So getting the MA right is critical for ensuring the right level of policyholder protection in the UK, and getting it wrong could have very severe consequences.