There are many aspects of the reform package that the PRA is taking forward this year through its own consultations. This package includes some new supervisory measures to help the PRA maintain safety and soundness and policyholder protection. These new measures provide additional tools and clearly complement our existing set of supervisory powers. As a reminder, the measures set out by HMT are:  Page 7  to require insurers to participate in regular stress testing exercises prescribed by the PRA and to allow us to publish individual firm results; to require nominated senior managers with formal regulatory responsibilities and sanctions under the Senior Managers Regime to attest formally to the PRA whether or not the level of the fundamental spreads (FS) on their firm’s assets is sufficient to reflect all retained risks, and that the resulting MA reflects only liquidity premium, on the basis of a rigorous assessment of the characteristics and valuations of assets held in their matching adjustment portfolios, including the results of the stress testing exercises described above; to allow insurers to apply a higher FS where they conclude that the standard allowance is insufficient taking into account the work undertaken to support the attestations set out above; and to update the MA rules as appropriate to reflect the Government’s decision to widen the eligibility requirements to include assets with highly predictable cashflows. We are approaching the development of these supervisory measures with input from subject expert groups with a membership drawn from industry and the PRA.

This introduces a wrong way risk as the quality of the collateral portfolio is likely to deteriorate as the financial condition of the reinsurer falls. 3. Collateral management: The latter two risks are magnified by the increasing use of less liquid assets in collateral portfolios such as structured products, commercial mortgages and private credit. Here, credit rating, valuation and matching adjustment (MA) eligibility uncertainty might exist which may not be adequately mitigated by valuation haircuts and margining practices. 4. Management actions: On recapture, insurers have to estimate the cost and mitigating effect of the management actions potentially available to them. This might include the cost of entering replacement contracts, asset portfolio rebalancing with potentially high transaction costs, unpredictable prices as market liquidity dries up, and unwinding or replacing large crosscurrency hedging exposures. These bring material uncertainty, as estimates of the costs and benefits in stressed conditions are inherently difficult to predict accurately. Taken together, these four elements are significant and should factor into the industry’s risk appetite for using third party capital and their asset origination capabilities. Senior managers therefore need to reflect on these inherent uncertainties when making business decisions. They need to approach these arrangements with caution and consider carefully whether their risk management processes are able to deal with these risks adequately. With responsibilities for pension payments for millions of policyholders for decades into the future, insurers need to demonstrate they can execute these transactions prudently and manage their risks over the whole life of the contracts.