More capital boosts market capacity, but can also test underwriting discipline. Putting the right ideas to work As supervisor, the Bank of England is monitoring closely how these new risks are being managed and how your business models are evolving. 2  BIS central bankers’ speeches  At the same time we’ll be implementing reforms. Reforms to promote a more resilient insurance sector without standing in the way of an effective insurance sector, and without imposing unnecessary impediments on your ability to evolve your business models in response to the challenges I described. To borrow the theme of this conference we will be “putting the right ideas to work”. Today I want to highlight three of them: •  Tailored, consistent and robust capital standards;  •  Holding the right people to account; and  •  Global standards for globally systemic insurers. With those right ideas, we are promoting a resilient, innovative insurance industry that supports the real economy. Right idea 1: tailored, consistent and robust capital standards The first right idea is to implement tailored and consistent capital standards to ensure the safety and soundness of insurers. Resilience against unexpected losses requires risk-based capital standards and robust valuation practices. The UK’s Individual Capital Adequacy Standards deliver this and were one reason why the UK’s insurance sector weathered the crisis so well. The Bank of England wants the principles behind ICAS to be applied as widely as possible; to establish as level a playing field as possible. That is why we support Solvency II.

That sorry experience highlights the need to understand all the activities in which insurers are engaged, including on occasion substantial business beyond the boundaries of traditional insurance. Regulators have grouped those activities as “non-traditional” and “non-insurance” – including business involving extensive use of market instruments, like derivatives, and instruments that engage in substantial maturity transformation. Where this type of business is carried out in scale or across borders, risks to the system can be substantial. The crisis also showed how particular insurance markets can affect systemic stability. BIS central bankers’ speeches  5  The Monolines demonstrated how sub-sectors that are excessively concentrated or undercapitalised can amplify shocks. The failure of multiple insurance companies in response to economic stress can disrupt the provision of critical economic functions. It can also suddenly transfer risks to other parts of the financial system that may be ill-equipped to manage them; or shift assets around in a way that can amplify and spread distress. As I said previously, the insurance sector is systemic in a positive way. Insurance companies have different risk bearing capacities than many other financial institutions. They play a stabilising role by deploying funds over a longer time horizons, in a manner less vulnerable to sudden outflows. The resilience of large insurers is therefore important to safeguard that positive contribution to the global economy. The starting point for the application of global standards has been the identification of systemically-important insurers.