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 other words, why is inflation higher than what we have experienced historically, and is monetary policy responding in an optimal way? Implications for Inflation First, it is important to recognise the complex interplay of demand and supply factors underpinning the recent price developments in Singapore. Demand-side pressures on prices have built up as domestic economic activity rebounded strongly from the Great Recession of 2008/09. Regional demand has been firm, supporting the continued expansion of many of our services industries, while strong employment conditions in Singapore have underpinned robust consumption growth for a range of goods and services. Sustained low global interest rates and capital inflows have supported the demand for housing – a point I will return to later. At the same time, supply-side factors have become more significant, with the immediate constraints in labour and housing markets pushing up domestic costs. These reflect structural capacity constraints in the economy. Policy measures are being put in place to help the economy transit to a more sustainable model of productivity-led growth, as Singapore’s reliance on foreign workers is reduced. As the economy adapts and productivity growth rises, price pressures are likely to subside and provide a lift to real wages, making Singaporean workers better off. Implications for monetary policy My second observation is that the monetary policy stance has to be carefully calibrated to take into account the multiple influences on consumer prices. Monetary policy should act decisively to ease short-term inflationary pressures driven by strong demand, through applying an appropriate constraint on overall economic activity.