Allowing firms to use internal models to calculate their solvency requirements is an example of how Solvency II meets the needs of the UK insurance sector. UK insurers are many and varied – from Lloyd’s and the wholesale London market, to motor and household insurers, to large life companies with significant annuity books, to specialist providers and mutuals. The Solvency II standard formula works well for many of these firms. But no standard formula – however well designed – can work for all of them. That is why the PRA has now approved 22 partial or full internal models and several more are in the pipeline. The UK is unusual within the EU in having insurance companies with large annuity books – and insurers are increasingly purchasing the legacy annuity obligations of defined benefit pension schemes that corporate sponsors have closed to new members. Solvency II seeks to balance the need for companies and regulators to take account of all the underlying economic risks of annuity obligations – for example, changes in market prices of assets and long-term interest rates used to discount liabilities – with the need to avoid excessive volatility in capital positions, which would create the potential for procyclical investment behaviour by firms as market prices move. Where insurers have long-term, ‘buy and hold’ investments backing long-term, sticky annuity liabilities, the so-called Matching Adjustment allows them to filter out movements in the market price of risk.
The aim is not to infringe on FINMA’s jurisdiction. Instead, FINMA and the SNB need to clearly define how the new responsibilities and tasks arising from the urgent need for more rigorous analysis and regulation of systemic risk should be divided between them. At this point, I also want to stress that this macroprudential task does not call into question the SNB’s primary mandate, which is the maintenance of price stability. Instead, it supports the long-term fulfilment of this mandate. The SNB has also expressed its opinion – along the lines of this proposal – on the recommendations made by the business audit commissions of the National Council and the Council of States in their report on the financial crisis. 2  BIS Review 173/2010  SNB balance sheet risks In my following remarks, I would like to look at the SNB’s balance sheet risks. As the Chairman of the Governing Board, Philipp Hildebrand, has already mentioned, it was primarily the large-scale purchases of foreign currency that contributed to the expansion of our balance sheet to its current level of approximately CHF 280 billion. Of this amount, CHF 260 billion is made up of currency reserves, which comprise not only foreign exchange, but also gold and the IMF’s special drawing rights. If we add to that the SNB’s loan to the stabilisation fund, over 95% of our assets are denominated in foreign currency. Not only is the balance sheet longer as a result, it also carries more risk.