In practice, given the lumpiness and finite nature of this market, I see strong incentives for insurers to stretch their supply capabilities in the short term, to capture as much of the new business while they can, before leaner years arrive. So, let us move to the main course, and examine three areas where we see this stretch arising in practice. An expansion of risk appetites As deals become larger and increasingly focussed on buy-outs of complete schemes, we observe BPA writers expanding their risk appetite, sometimes outside their current core expertise. Firstly, our supervisory work suggests there is an increased appetite to insure deferred pension scheme members: the younger, not yet retired individuals. They bring several additional risks for insurers  Page 4  including much greater uncertainty in the longevity risk, as assumptions have to be made over a much longer period of time, together with risks stemming from policyholder options, such as cash commutation, flexibility on retirement age and transfers outs[6]. This appetite is supported by reinsurers, who provide both pricing expertise and capital. Secondly, the disruption in the UK gilt market last autumn resulted in some pension schemes being overweight in illiquid assets[7] as gilt values fell significantly, and schemes sought to reduce their leverage under liability driven investment strategies[8]. We see insurers increasingly developing solutions to accept illiquid assets as part of the BPA premium, as pension schemes may be reluctant to dispose of these assets in the open market, potentially at a large discount.

In the first instance three groups have been set up covering attestation, widening investment flexibility, and making the MA calibration more risk sensitive through the use of credit rating ‘notching’[17]. I would like to thank all those who have participated in the over two dozen meetings so far, for the broad range of information they have provided, for the lively discussions and particularly for generating constructive options. It is important that we are able to discuss and understand the technical issues, and such open dialogue will improve the policy-making process. The subject expert groups have helped reduce the risk of there being surprises to insurers when we consult on proposals later this year. But we are not front-running the consultation, which will be public and open to all respondents, industry and wider stakeholders in the sector. Building on this approach, next month we will be convening a similar group to think through detailed principles for the stress testing regime, and we are also putting together a group of expert users of insurers’ disclosures which I’ll come back to shortly. The supervisory measures set out by HMT are not independent of the wider operating environment. Rather there will be a strong interplay between market forces, firm behaviour, regulatory requirements, and the increasingly important role that disclosures will play to promote market discipline. This interplay will become even more relevant as the BPA market continues to grow and mature. Indeed, market discipline via greater disclosure has also been brought to the fore by the Solvency UK package.