Other significant market movements leading capital positions to 8  deteriorate include a fall UK property prices, downgrades in credit ratings of corporate bonds , a fall in UK equity markets and widening in the spread between sterling interest rate swap and gilt yields. But life insurers’ capital positions are not especially exposed to a widening of credit spreads, partly because of the insulating effect of the Solvency II Matching Adjustment. The interest rate sensitivity is primarily due to the risk margin. Risk margins for annuity writers increase by 40%-50% for a 100bps fall in interest rates, which the PRA believes to be excessive. Insurers do not  5  https://www.bankofengland.co.uk/prudential-regulation/publication/2018/financial-management-and-planning-by-insurers-ss https://www.bankofengland.co.uk/prudential-regulation/publication/2017/solvency-2-data-collection-of-market-risk-sensitivities-ss 7 The aggregate solvency ratio (defined as aggregate Own Funds of the firms in this survey as a percentage of aggregate SCR) was 150% as at YE2016 and 156% as at YE2017. For definitions of the market variables, see https://www.bankofengland.co.uk//media/boe/files/prudential-regulation/regulatory-reporting/insurance/market-risk-sensitivities-instructions.pdf. 8 More specifically, the impact of 20% of assets by market value downgrading from the current Credit Quality Step (CQS) to the next CQS. A CQS refers to rating agency ratings. 6  7  All speeches are available online at www.bankofengland.co.uk/speeches  7  typically hedge the risk margin. For insurance liabilities written before the introduction of Solvency II, the risk margin can however be offset by Transitional Measures on Technical Provisions (TMTP), which allow any increases in reserves due to the introduction of new Solvency II requirements, such as the risk margin, to be phased in over sixteen years.

That Supervisory Statement also set out some of the factors we expect boards to take into account in setting a risk appetite for capital, including: the quality of capital resources; the results of stress and scenario testing; levels of uncertainty in forecast earnings; inherent uncertainty in the technical provisions; credit ratings and market reputation; any non-linearities and discontinuities that may arise due to combinations of adverse events; recovery options available; and the potential impact of firm failure on policyholders. Central to setting capital risk appetite is the sensitivity of the balance sheet to changes in key risk drivers, including changes in market and underwriting conditions, and the emergence of large claims. Since the introduction of Solvency II, the PRA has been collecting data from large UK life insurers on the sensitivity of their capital positions to movements in key UK market variables, including interest rates, credit spreads, credit rating downgrades and property prices. across firms at year-ends 2016 and 2017. 7  6  Chart 4 below shows the averages of these sensitivities  Individual insurers’ positions fall in a range around these  averages. The most material sensitivity is to changes in interest rates. A large fall in interest rates would lead to a  reduction in capital surplus over the SCR.