And we should expect the aggregate impact of individual firms’ decisions in a sector that at the end of 2019 held assets in the region of £ trillion – a figure broadly equivalent to UK GDP in the same year – to be an important influence on speed of recovery and adaptation. But what does the insurance sector do for the economy? If I asked the person on the street about the role of insurance, I’d expect them – once they’d raised the common complaint about insurers putting premiums up every year and telling a story about a particular claim – to speak about the protection it provides to households and businesses against the financial costs resulting  2  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  2  from the occurrence of various risks to their physical property, health, loss of earning power or other unexpected losses. (Though maybe not using quite those words!.) This is a very important function. Efficient transfer and pooling of risk reduces aggregate risk and by freeing individuals from risk allows them to avoid reducing consumption in favour of excess saving. And it allows businesses to put capital to work in their areas of expertise and opportunity, without having to worry about – or reserve for – risks that they are not equipped to manage or diversify, and so will not be adequately rewarded for. It has particularly high value in current circumstances. Excess saving, reduced consumption, and heightened risk aversion would be detrimental to economic recovery.
The contrast between the last two charts could not be more striking: in Switzerland, the secured interbank market progressively took over from the collapsing unsecured market to achieve record volumes of activity in the week following the Lehman Brothers collapse. Clearly this market showed its resilience and fulfilled its function, which no doubt helped prevent a credit crunch materialising in Switzerland. Note that later developments (starting in late autumn 2008) were strongly marked by the abundant liquidity situation created by the SNB swap agreements with other central banks and later by the interventions in foreign exchange markets. As a result, demand for short-term liquidity by market participants disappeared. Preliminary evidence strongly suggests that a key factor in the relative performance of the Swiss and US repo markets lies in the quality of the collateral backing repo transactions.6 In the US, as emphasised in a BIS study, repo markets had doubled in size since 2002, with gross amounts outstanding at year-end 2007 of roughly USD 10 trillion.7 These markets ended up financing up to one-half the total assets of the major investment banks. This growth in volume was based on a widely broadened collateral basket, including corporate bonds, bonds issued by agencies, mortgage-backed securities and other lower-rated collateral. In March 2008, following the Bear Stearns rescue, confidence waned and market participants immediately ceased accepting any collateral other than Treasury and agency securities.