For business exposed to long-term risks (such as the future default experience of a buy-and-hold investment portfolio) such a short horizon can only make sense if it is based on stresses applied to transfer values – with those transfer values already reflecting the long-term nature of the risks. So the SCR is not a substitute for proper valuation of liabilities. 8. While this is an illustrative example, it is closely based on actual assets in the regime today. 9. Technically, it’s the yield on the bond that is used. 10. Data as at end-2020. 11. This is true in aggregate, though some individual firms will be impacted more or less depending on their business models. 12. This is based on data from the ‘rates up’ sensitivity tested in the Quantitative Impact Study, available at: Review of Solvency II: Quantitative Impact Study (QIS) | Bank of England 13. Longevity risk is the financial risk insurers face when policyholders live longer than expected. Off-shoring that risk means passing it on to a reinsurance firm outside the UK. 14. Our Discussion Paper can be accessed here: DP2/22 – Potential Reforms to Risk Margin and Matching Adjustment within Solvency II | Bank of England 15. For more on this exercise see: Review of Solvency II: Quantitative Impact Study (QIS) | Bank of England
As it becomes clearer that the international environment really is improving, and that external demand really is picking up, then we can look forward to better balanced and generally stronger growth in our own economy. That will in due course mean that domestic demand growth - and consumer demand growth in particular - will need to moderate if we are to avoid a build up of inflationary pressure. But let me be quite clear - that's not a warning, still less is it a threat, as some more excitable commentators suggested earlier this year. It is - as I explained elsewhere recently - essentially a matter of arithmetic! It's quite possible, even quite likely, that the necessary moderation of consumer demand - and I emphasise the word moderation - will come about of its own accord, given the gradual increase in unemployment we are currently seeing, and the build up of household debt. And provided it does not happen too abruptly, that would be the best possible outcome. But if consumer spending were not to moderate of its own accord, we would, in the context of strengthening external demand, clearly need at some point to consider raising interest rates to bring that moderation about. I don't suggest that the timing of any such move is imminent - that would obviously depend upon the timing and the strength of the recovery abroad.