Charalampidis and Guillochon (2020) and Guerrieri et al (2020) also consider Covid in multi-sector models. See Cantore et al (2020) for a brief introduction to the epimacro literature. 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  that incomes have been relatively stable may not be as unrealistic as it might have been. It’s in any case useful, I think, to try to separate the direct effects of the pandemic on spending from its second-round impact, via incomes and economic risk. It’s these direct effects that these simulations  Chart 5a: Two stylised paths for the pandemic, one  attempt to represent. Chart 5(a) plots two  more persistent than the other  stylised paths for infection risk, one of which lasts a lot longer than the other (blue versus red). Our hypothetical consumer understands these dynamics and reacts accordingly in Chart 5(b). Consumption of the risky good, which at the start is assumed to account for around a quarter of the total, follows (inversely) the path of the infection. Spending on non-risky things moves in the opposite direction – there’s a degree of expenditure switching in both cases – but it’s more significant, and the initial and corresponding fall in aggregate spending less marked, in the blue case, when the virus is expected to persist for longer. Thus the response of consumer spending in aggregate is either drawn out but relatively limited (blue) or sizeable but shorter-lived (red).
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.