the introduction of the risk margin, is unlikely to promote either of the pra ’ s objectives of safety and soundness and policyholder protection. we believe the opposite – that an orderly transition should support those objectives, because much life insurance business ( and particularly those lines of business most impacted by the risk fuller explanation of the new solvency ii regime bis central bankers ’ speeches margin ) is long - term in nature. this business will continue to exist – and will therefore be regulated – under the new regime, despite having been priced on a set of assumptions derived under the existing regulatory regime. further, the long - term nature of much life insurance business should reduce some of the risks associated with resolving financial institutions, and therefore elements of a going concern regime can be phased in more slowly than would otherwise be the case. at the same time, an orderly transition will promote financial stability. recent changes in the microstructure of some financial markets have reduced liquidity and made them more susceptible to disorderly trading even in response to small shocks. it is not yet clear how much impact solvency ii will have on the asset side of insurers ’ balance sheets, but given that uk insurance firms manage in the region of £2 trillion in assets, it would seem wise to implement the new regime carefully. in my view there is only one serious argument which could push us in the other direction. if the sector was undercapitalised under the current regime, then allowing a gradual transition to the new standard would present a risk. this was exactly the position we found ourselves in with the banking sector when implementing crdiv, the european vehicle for basel iii. the financial crisis had made it abundantly clear that our capital regime for banks was wholly inadequate. so we decided to move quickly, to promote safety and soundness and financial stability. we are in a different place with insurance : we consider that the levels of capitalisation secured under the current regime are consistent with our objectives, and therefore, unlike in the banking case, we see a low risk to those objectives in allowing firms plenty of time to adapt to the new standard. european legislators foresaw this and therefore ( very sensibly in my view ) included within the directive transitional measures which allow firms significant breathing space as they adapt to the new regime. as a safeguard, the benefit from the transitional deduction from technical provisions ( tdtp ) is capped to make sure financial resources cannot drop below those required under the current uk regime as a result of

risksensitive approach to determining capital – many of which are embedded within solvency ii. the success of these principles was demonstrated by the resilience of the sector during 2008 but solvency ii moves beyond our current regime. so although there has been no change in our view of the type of risks that firms are exposed to, and we do not intend to use solvency ii to increase the aggregate level of required capital across the industry, this is not the same as saying that the surplus capital positions of individual firms will not change with the arrival of solvency ii. it is a different regime, with a different shape to icas. firms will therefore see movements in their regulatory capital positions. for some firms these positions will be tighter, for others looser. this brings me to the second myth : that we intend to re - create the icas regime under the guise of solvency ii. let me be clear : solvency ii will be the foundation of our supervisory approach and we will fully embrace the change that accompanies it. although solvency ii bis central bankers ’ speeches incorporates many of the features of icas, the shape of the new regime is different. the eu is moving to a harmonised, risk - based, transparent, and “ going concern ” regime. this means some significant changes to the shape of the balance sheet and our assessment of financial resources. for the uk in particular, the move to a going concern regime represents a fundamental departure from the current set - up, in which a firm is required to calculate financial requirements under the assumption that, following a stress, it writes no new business and instead “ runs off ” its existing business over time. solvency ii looks at the insurance industry through a different lens and views insurers as “ going concerns ”, such that it is assumed that insurers will continue to operate after a stress. to achieve this, solvency ii introduces the concept of the “ risk margin ” which is intended to capture the cost of transferring a set of liabilities from one insurer to another. the risk margin is a fundamentally new component of our regulatory framework and we will ensure that firms meet it. 1. this is a source of some tension at the moment, because the construction of the risk margin is such that, in particular for life business, it becomes much larger when risk - free rates fall. so the current environment of low rates means that the risk margin is large – and when and if rates rise, it will