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.

3  https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/new-insurer/new-insurer-start-up-unitguide.pdf?la=en&hash=310E7B09C241113F97CDDCC36F339DAF90911057 4 https://www.bankofengland.co.uk/prudential-regulation/letter/2018/market-conditions-facing-specialist-general-insurers-feedback-fromrecent-pra-review-work  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  Chart 3: Progression of claims by accident or underwriting year  Responses to Anna’s letter have acknowledged almost universally the concerns raised about the wider market. The quality of insurer’s individual responses has, however, been more variable. Where we have concerns over a firm’s response to our Dear CEO letter, we will follow these up, including with the Board where appropriate. Insurers must have effective controls to assess and monitor pricing and reserving adequacy. We also expect boards to consider seriously the sustainability of their business plans. Capital management, market risk sensitivities and disclosure  A further concern for prudential regulators is that insurers will take more risks with capital, seeking to improve ‘return on equity’ by lowering equity if they cannot boost returns. Of course, that can be perfectly legitimate if insurers genuinely reduce risks. But amber lights flash when I read stories about brokers setting up teams to help insurers ‘optimise’ capital, including through ‘innovative’ use of reinsurance. We will also be alert to insurers seeking to reduce capital requirements through aggressive changes to internal models or over-optimistic business plans. This includes using our internal model output data to compare across insurers and monitoring model ‘drift’ indicators, such as the ratio of internal model to standard formula capital requirements.