In more stressed market conditions complexity and lack of transparency might lead investors to turn away from regulatory measures of risk and rely on simpler but cruder approaches. Progress towards an International Capital Standard should help. More generally, it is vital that insurers maintain discipline in underwriting, reserving and capital management, notwithstanding tough trading conditions in some parts of global insurance markets. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  Appendix: Breakdown of insurer capital generation used for PRA business model analysis This Appendix sets out a generic break-down of the change in an insurer’s capital surplus over the Solvency Capital Requirement (SCR) from one reporting date to the next, used by the PRA to understand how an insurer generates Solvency II capital. The example shown is for a life insurer. Separate reporting of capital generated from new business as opposed to existing business is key. Supervisors also find it valuable to see this split by material product line. Separating out the effect of the Risk Margin and Transitional Measures on Technical (TMTP) provisions means supervisors can see the underlying business returns. Experience variations and changes in operating assumptions are combined into one line item, alongside the line for economic variance. Each combines several possible items to show the result of market factors or those items under management control. Here this also includes the insurance assumptions built into the pricing of business and feeds into the assessment of management forecasting. This item could sensibly be split further at the cost of simplicity.

Long-term interest rates rose in the US and emerging market yields increased even more, reflecting a reversal in risk appetite. The prospect of Fed tapering became a key consideration for monetary policy in emerging market countries. In most countries monetary policy remained tight in order to lean against excessive currency depreciation; a few countries raised their policy rates in an attempt to stem capital outflows. For some countries, as economic activity softened and inflation fell, monetary policy may have ended up being tighter than intended as a result of tensions caused by policy spillovers. At this juncture, the key question is how to design or adjust policy frameworks to cope better with global interconnectedness while preserving monetary policy independence. I hope the conference will help shed further light on this. In doing so, we have to be mindful that global liquidity conditions will continue to largely depend on the macroeconomic conditions of the reserve-issuing countries. Currently the US dollar dominates the international reserve system as a safe asset. The continuation of this role rests on some basic requirements. A reserve-issuing country has to illustrate a good track record of prudent macroeconomic policy. And as recent events have reminded us, there is a large fiscal element to this. One cannot separate the status of a reserve currency from the solvency of the sovereign. The use of the US dollar as an international store of value and medium of exchange very much depends on the continued credibility of the US Treasury in honoring its debt obligations.