capital, the pra may consider whether this indicates failings in the governance process by which the insurer sets its risk appetite. 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. 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. other significant market movements leading capital positions to 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 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 the aggregate solvency ratio

area : it is not enough to read about issues, we need to be learning about them first hand from key players and analysing our findings from a financial stability perspective. the fsa also shares responsibilities in this area. they too will be asked for advice by hmt. their starting point is the assessment of the strengths and weaknesses in the individual institutions and markets they supervise, and the potential consequences of problems or failures at individual institutions. an important factor for the bank relates to london ’ s position as a major financial centre. although our specific focus and interest is the systemic conjuncture as it affects the uk, possibilities of contagion in an increasingly global market mean that we have to be alert equally to developments in global capital and financial markets. and it means we have to understand the dynamics and interrelationships of markets ; how new products work ; and the possible behaviour patterns of intermediaries, investors, and borrowers. above all we need to be focused on where major risks are most likely to emerge and the market dynamics if those risks start to crystallise. and we need to distinguish those which are systemic from a myriad of fascinating developments, many of which are just “ noise ” but which could otherwise distract us. b ) risk reduction : oversight of payment systems the second area where we, and typically other central banks, are required to perform is oversight of payment systems. payment systems facilitate economic transactions of goods, services and financial assets and are an essential component of a well functioning financial system. so reduction of risks in these systems, for example through the introduction of our real time gross settlement system, is clearly a priority from a systemic perspective. c ) provision of liquidity and preparation for a financial crisis and thirdly the mou stipulates that we need to be in a position to inject liquidity at all times. this means that we must be able to provide liquidity in normal times, as well as in times of stress or crisis. this puts an increased onus on well developed and tested crisis management plans, and a particular focus on ensuring that we are able to undertake a range of official financial operations in exceptional circumstances. 4. financial stability : parallel processes recognition of these three “ must do ” areas is a starting point in deciding the scope of our financial stability work and in enabling us to fulfil our mou mandate. but it does not provide a clear steer on what we actually have to do to carry out our functions efficiently and effectively.