The PRA is well aware of the need to have regard to facilitating long-term productive investment in the economy when pursuing its statutory objectives.5 Insurers active in the bulk purchase annuity market tell us that they intend to continue this diversification into direct investments, targeting on average a c.40-50% share of total assets backing annuity obligations, significantly higher than before Solvency II. Overall, I think the PRA’s implementation of Solvency II works well for annuity business. That is why we recommended adoption of a similar framework for superfunds. Solvency II does though have one significant flaw as a regime for annuities business: the design of the risk margin. Particularly in relation to long-dated insurance risks, such as longevity, the risk margin calculation is too sensitive to interest rates. As a result, the risk margin is too high when interest rates are low and too low when they are high. With interest rates currently low, insurers have responded to a too-high risk margin on annuity business by reinsuring longevity risk on new business offshore. Meanwhile Transitional Measures on Technical Provisions (TMTP) offset the risk margin on the pre-Solvency II back book. The irony is that UK insurers do not hold an especially high level of risk margin (net of TMTP) on their annuity books in practice. This outcome is unwelcome from our perspective because UK insurers are increasingly exposed to offshore reinsurers and TMTP is higher than it otherwise would be, giving the impression that UK insurers are more reliant on transitionals to meet capital requirements.

What does that take? Let's reframe the core components of operational risk – people, process, and technology – using a resilience lens.15 People are resilient when they are ready and able to adapt to change by adjusting priorities, replanning, and refocusing activities and resources. Resilient staff work with shared purpose across organizational siloes, operate effectively in environments of uncertainty and ambiguity, and are empowered to develop creative and innovative solutions. Processes are resilient when they are robust to changing internal and external conditions, including issues with suppliers, inputs, processing, outputs, and customers. Resilient processes provide clear signals of their operating state, have the right level of automation, and continue to function under stress. Technology systems are resilient when they are flexible, robust, and able to be recovered rapidly. And then the overall organization is resilient when these three components – people, process, and technology – work together effectively. Resilient processes and technology should support the ability of the staff to successfully manage in normal times and during disruptions. What are some concrete steps to strengthen resilience? In terms of processes, an important first step is to identify the processes that are critical to achieving organizational objectives. Gains are often found through simplification and automation of manual processes, especially when combined with performance metrics and risk metrics that provide real-time measures of process health.16 For technology, modernizing technology and software development processes can be a key area of focus.