In general insurance, we are currently running a stress test designed to identify concentrations of exposure to a number of possible natural and man-made catastrophes. Perhaps more worrying is the potential for hidden concentrations. More than 25 years after asbestos-related claims contributed to the near collapse of the Lloyd’s of London market, insurers continue to face related losses. 5 6  http://www.bankofengland.co.uk/pra/Documents/solvency2/matchingadjustmentletteroct2014.pdf http://www.bankofengland.co.uk/pra/Pages/publications/ss/2017/ss317.aspx 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  7  A peril with potential for hidden exposures is cyber . Sizing cyber exposures across the industry is therefore difficult. But it is clear that the risk is growing. To give one estimate, the Lloyd’s Business Blackout scenario – analysing the implications of a cyber attack on the US power grid – puts global insurance losses to $  Yesterday we published a supervisory statement setting out our expectations for the prudent management of 8  cyber underwriting risks . It distinguishes affirmative from non-affirmative or ‘silent’ exposures, where the insurer has not explicitly included (or excluded) cover. We expect insurers to take steps to bring non-affirmative exposures within risk appetites agreed by their boards. Possible ways of achieving this include: introducing robust wording exclusions, offering explicit cover with additional premium and attaching specific limits to cover. Finally, we have also been considering how we might respond to a large loss affecting many insurers that could change market conditions. We have worked closely with the industry and Lloyd’s over the past few months following our consultation last year.

To be clear, though, we are not opposed to use of longevity reinsurance, including to non-UK counterparties, provided risks are properly managed. We set out our expectations in a Director’s letter more than a year ago. It asked insurers to pre-notify the PRA of new longevity risk transfer and hedging arrangements, including the insurer’s proposed approach to risk management. We consulted on the content of the letter and 3  published Supervisory Statement 18/16 on ‘Solvency II: longevity risk transfers’ . This allowed us to track activity and has been a source of useful information to supervisors. Our supervisory approach has not changed since. Through a programme of in-depth supervisory reviews, we are gaining assurance on insurers’ risk management. We will then review our expectation to be notified ahead of transactions. With insurers transferring more longevity risk and the associated returns, the profitability of writing annuities depends increasingly on the mix of assets chosen to back them. Yields on government bonds are low and spreads on corporate bonds narrow. Insurers are therefore searching for yield in less liquid, direct investments. These include equity release mortgages, commercial property and infrastructure financing. Based on supervisory information, around 25% of annuities are backed by such direct investments currently. But insurers have plans for that proportion to increase to 40% by 2020. These assets can be a good match for long-term annuity liabilities. Moreover, increasing investment in real assets may have wider economic benefits. However, they often lack observable market prices and external credit ratings.