changing risks and the search for yield on solvency ii capital speech given by david rule, executive director of insurance supervision association of british insurers, london 6 july 2017 all speeches are available online at www. bankofengland. co. uk / speeches regulatory change has dominated our insurance supervision agenda for the past few years. today i want to talk mainly about risks. our supervisory work is similarly shifting gear. as solvency ii becomes business as usual, we will spend more of our time understanding the risks that insurers are taking and, where necessary, responding to them. i do though want to make a couple of initial points about solvency ii. first, we are making good progress, working with the abi, in identifying improvements to our implementation of it. this follows up the commitment made by sam woods to the treasury select committee in february. amongst the areas we are working on are our processes around model changes and the matching adjustment ; and regulatory reporting. we are working within the bounds of the eu legislation and i do not anticipate any headlinegrabbing initiatives. but i am confident that we will identify a number of practical changes that will make a difference to insurers and supervisors on the ground. second, we will continue to update our approach in the light of new information. for example, it does appear that the rate of improvement in life expectancy of older people has slowed in the united kingdom. annuity writers should be cautious in changing their longevity assumptions. for example, the annual data can be volatile because of factors such as the failure of flu vaccines. moreover, the slowdown in the rate of improvement in life expectancy appears less marked amongst wealthier people, who are represented disproportionately in annuity portfolios. nonetheless, we have concluded that we should make some changes to our quantitative indicators in the light of recent longevity experience. these indicators are used by supervisors as one input into our review of whether insurers ’ models meet solvency ii tests and standards. third, we will soon complete the first full cycle of solvency ii reporting. later this year, i plan to hold roundtables with insurers, investors and analysts to discuss solvency and financial condition reports ( sfcrs ). we are also reviewing whether an ongoing requirement for audit of every year ’ s sfcr is proportionate for the smallest insurers. it would be unhelpful for the pra to be too prescriptive about

the depth of content of sfcrs. but it strikes me that some areas could be made more consistent. for example, changes in solvency capital requirement coverage could be broken down to show what is attributable to changes in capital, to changes in modelling and to changes in risk assumptions. insurers need to explain fully to policyholders, investors and others what lies behind their solvency ii ratios. this is particularly true in more complex areas like internal models and the matching adjustment. otherwise we run the risk of a loss of confidence in those numbers in a crisis. now i will turn my attention to risks in the life and general insurance sectors. i will also describe the supervisory work we are doing in response. in different ways, both life and general insurers are adapting to source : ons statistical bulletin : national life tables, uk : 2013 - 2015 https : / / www. ons. gov. uk / peoplepopulationandcommunity / birthsdeathsandmarriages / lifeexpectancies / bulletins / nationallifetablesunitedking dom / 20132015 all speeches are available online at www. bankofengland. co. uk / speeches a world with lower returns on capital. they are also learning how to optimise their activities for the new constraints of solvency ii. put the two together and we can think of a search for yield on solvency ii capital. general insurance risks and supervisory priorities in the general insurance sector, underwriting returns remain soft. on 22 june, i wrote to chief executives with the results of our latest ‘ monitoring the market ’ survey of general insurers. one unsurprising finding was that premium rates had declined in most lines of business. a perhaps more surprising finding was that, on average, london market insurers thought rate adequacy had improved slightly. they appear to be incorporating a more benign view of future losses into their technical pricing. many insurers raised concerns about distribution channels, particularly in the wholesale markets. more generally, our supervisory concerns in the current market include : insurers may be tempted to release too much from prior year reserves to bolster current profits. across the market, reserve releases continue to run at high levels by historical standards. insurers may be underestimating risks, particularly on new business. for example, they may be too sanguine about catastrophe risks, such as significant weather events. terms and conditions are loosen