That means that a successful industry needs to be both dynamic and robust. Uncertainty generates challenges but also represents opportunity. I want to discuss these risk/reward trade-offs and the importance of understanding the potential for new exposures that changing risk profiles can bring. Insurance fulfils important social functions: the provision of income security in retirement; income protection whilst in work; funding for health care services and preserving the continuity of businesses subject to unexpected shocks. Indeed, in some areas, insurance is compulsory such as with motor insurance and employers’ liability. Disruption to these functions is unlikely to be tolerated by wider society, not only because of the social benefits, but because risk transfer and pooling are crucial for sustainable economic growth and development. It is for this reason that the need to protect the interests of policy holders and to preserve long-term critical cover is so important. Although one cannot be sure what the future may bring, we can learn from past mistakes to avoid their repetition. That is particularly apposite given that the residual effects of the great financial crisis are still being felt across the global economy. One of the things we appreciate very well at the PRA is that insurance business is very different to banking, and I have seen that at first hand over the past six months or so. I have also seen that there are lessons to be learnt from the banking crisis that can directly read across to the world of insurance.
This is because Solvency II caps the amount of transitional benefit a firm may derive. Bearing in mind this cap, and the benefits to be gained from a smooth transition, the take-up of transitional measures should be seen as a viable option for firms to take to assist with their capital planning, and are a feature that the UK authorities strongly supported during the development of Solvency II. They are there to be used where appropriate. As we shift to a Solvency II world, I think it is worth bearing in mind that, like a smartphone, regulation tends to get new “updates” and “apps” in response to changes in the external environment. Indeed, the path of the future is in global policy development, including the insurance capital standard (ICS) under the aegis of the International Association of Insurance Supervisors (IAIS) which will look to develop risk-based global standards. Insurance business is fast becoming globalised and interlinked. It naturally follows that so too should regulation. Introducing global capital standards would enhance global cooperation, ensure a level playing field and limit regulatory arbitrage. For this reason, the PRA supports the development of global capital standards and the establishment of a long term vision in order to achieve a single insurance capital standard predicated on a single valuation basis which is genuinely comparable across jurisdictions. Concluding remarks Insurance sits at frontline of innovation and, as seen with climate change and digitisation, insurers can be directly exposed to changes in regulation, public policy and other shifts in society.