In some instances, individuals rely absolutely for their future lifetime incomes on the continuity of their insurance cover. To achieve an appropriate level of policyholder protection, insurers must be, and be seen to be, safe and sound. I have said this before but I think it is worth reiterating. The PRA believes the UK industry is in a good position, having had the UK risk-based ICAS regime for around ten years. We are therefore not looking to use Solvency II as an opportunity to raise capital requirements across the board. We do, however, recognise and respect that Solvency II is a maximum-harmonising Directive with a key objective of promoting supervisory co-operation. The PRA is committed to upholding this valued objective and will implement the Directive as intended. We can’t and won’t gold plate. Our approach has been, and will continue to be, proportionate in our supervision. As a judgement-led, risk-based regulator, this principle is already part of the PRA approach. It is not the PRA’s role to make sure no insurer fails. However, we are concerned that any failure is orderly and manageable. We seek this in conjunction with appropriate policy holder protection. For example, when business models become challenged we may seek to secure manageable and orderly wind-down, as has been seen in the past in this sector. In fact, roughly one third of insurers authorised by the PRA are in some form of run-off. More than just a capital regime, Solvency II strengthens the linkage between capital and risk management.
Those challenges include the prevailing low interest rate environment; the consequent influx of alternative capital, especially into reinsurance markets; the transformation to the “at retirement” taxation system in the UK; competition in general insurance from overseas locations, possibly linked to regulatory arbitrage; as well as the new Solvency II regime. I plan to focus my time mostly on Solvency II; but will also touch on the “at retirement” taxation changes. Before that, I would first like to reflect upon the role insurance plays in the wider economy: •  Insurance is a critical cog in a financial services sector which facilitates trade and commerce and the efficient allocation of resources. Without a fully functioning financial services sector, the economy would stagnate. That importance of financial services to growth should be one of the big lessons of the Great Financial Crisis for anyone who did not appreciate the fact previously. More specifically, the insurance sector provides a critical risk-transfer role and is a vital long-term investor in the economy. •  The UK insurance industry is also an end-contributor to UK output and employment – being the largest insurance industry in Europe and third in the world. The UK insurance industry is known for its innovation and entrepreneurialism, typified through the modest beginnings of Edward Lloyd’s coffee house. The role played by the insurance sector in future will be contingent upon maintaining that tradition of competition and innovation and the PRA is committed to support that, not least through our secondary objective in respect of competition.