Today I will take a look at some of the tactical steps we have taken around the financial markets and macro-economic impact of Covid-19 on insurers. And go on to more strategic responses to this and other structural changes, focussing on developments in stress testing and scenario analysis. There have been times this year when it’s been hard to resist the temptation to react to unfolding events with the hedgehog’s one big idea. Unfortunately, there have been few places where curling up in a ball would not have left you in the path of a massive juggernaut. Deploying our fox brain we have learned many things and responded tactically to the varying ways the financial markets, macro-economic, and business operational impacts from Covid-19 are affecting us. For example, (1) In the early phases of the pandemic in the UK, the Prudential Regulation Authority (PRA) made a number of clarifications of policy on recognition of credit impairments and the detailed operation of the matching adjustment, in order to avoid perverse, unintended consequences of the interaction between widespread credit downgrades and the regulatory regime.1,2 (2) Anna Sweeney, my co-Executive Director, spoke recently about contract uncertainty and the limits of insurers’ capacity to mitigate systemic, undiversifiable risk.3 Work is underway domestically and internationally on both questions. For example, there are a number of initiatives in the UK and elsewhere to consider the appropriate form of public–private backstops that would enable insurers to continue to offer essential, effective risk pooling to new and recovering businesses.

Operational boundaries are becoming more and more blurred with the much debated argument of a universal versus a segregated banking system. Yet the future landscape of the industry in regard to business operations of financial institutions is increasingly more challenging as technological competition encroaches on all fronts. Electronic trading platforms for bonds, accessible to both banks and securities houses, will gradually erode the role of these intermediaries. Customers can easily access a trading platform, searching for the best quotation to serve their needs and investment horizons. These electronic trading platforms can easily service the traditional customers of banks and securities firms, such as pension funds, provident funds, mutual funds and insurance, without the need for an intermediary network of dealers. Traditional dealers, accustomed to the OTC market trading environment and relationship with their customers will need to prepare themselves for a new market niche for the future. These could include upgrading their research capabilities to provide better research materials for their customers, enhancing efficiency of operation, so as not to be marginalized in the new competitive environment. No doubt processing simple loan applications and bank lending will remain the bread and butter of the financial industry for some time, but competition will inevitably be stronger with new entries and market participants. The challenge of adoption of international practices When a country plunges into a serious crisis, which I may say in the case of Thailand was a crisis of both macroeconomic imbalance and of confidence, drastic measures have to be imposed on all fronts.