solvency ii : striking the balance − speech by sam woods given at bank of england webinar published on 08 july 2022 sam woods talks about reforms to the regulation of insurance providers. he says the key aims of the reforms are to make the insurance sector work better for the uk economy and to safeguard policyholders. speech introduction the uk ’ s post - brexit review of insurance regulation is entering a critical phase, with important decisions shortly to come for us, government and parliament. with that in mind i thought it would be useful to highlight some of the key points from the prudential regulation authority ’ s ( pra ’ s ) perspective, while hm treasury ’ s current consultation on solvency ii is ongoing, with a particular focus on the main point of contention between us and parts of the industry. my main message is this. following brexit we have a once - in - a - generation opportunity to reshape insurance regulation to work better for the uk. we can do this while loosening parts of the regime which were over - calibrated by the eu and making it easier for insurers to invest in a wider range of assets, but we also need to strengthen it in one area in order to avoid risks to the millions of current and future pensioners who rely on insurers for their retirement income. the combined effect of these changes should support the government ’ s objectives for competitiveness, growth and investment in the economy. overview following our exit from the eu, we have been examining the main bit of prudential insurance regulation ( solvency ii ) to see how it can be tailored to work better for the uk, working with the treasury. [ 1 ] the treasury has set three objectives for the review, which we support : a competitive insurance sector, investment to support growth and policyholder protection. while the details of the review can appear technical and abstract, the stakes are real. a stable insurance sector backstops the livelihoods of millions of policyholders, in particular current and future pensioners who rely on insurers for their retirement incomes. the insurance sector is also a major part of the wider financial sector, and an important source of finance for the real economy including productive and green investment. brexit gives us an opportunity to rewrite the insurance regulations we inherited from the eu – and in doing so help drive further investment in the economy. but we need to be clear that this is not a free lunch. if changes simply loosen

seignorage on our banknote issue has been passed directly and immediately to the government. this is not generally the case abroad, at least in european countries - west or east - where profits, a fraction of seignorage, are passed only periodically to government. ( the uk is also unusual in that foreign exchange reserves, and any profits earned on them, belong to the government rather than to the central bank, although the bank of england does of course have responsibility for managing the reserves ). european integration 3 maxwell fry, charles goodhart and alvero almeida, central banking in developing countries, routledge, 1996, pages 97 - 99. - 10 - looking at the european continent as a whole, it is interesting that, whereas the common history of central and eastern european countries over the last half century has produced broadly similar central banks in the different countries - at least in those which are contemplating accession to the european union - the central banks of the existing member states are a disparate bunch. what remains to be seen is how far the advent of economic and monetary union may induce more homogeneity and, indeed, reduce costs. it ought to be the case, after all, that one monetary policy is cheaper to administer than 15, or 25. the european central bank will appear a much more concentrated creature than the central banks we have been looking at. it will be responsible for the issuance of euro banknotes ( known to the cognoscenti as bridging finance ) but beyond this, in terms of the diagram i have been using, the ecb will be almost uni - dimensional ( figure 7 ). according to the maastricht treaty its independence in setting interest rates will be unparalleled. but it will not supervise banks ( not even as an agent ) and it will not manage government debt. it is agreed that those functions will remain firmly with the national central banks ( or other relevant agencies ). in payment systems the ecb will be responsible for only the tip of the iceberg, that is target, the system linking the various national payment systems of eu member states. this narrow focus is no accident : the ecb ’ s task is to maintain monetary stability, and its design reflects that. the european system of central banks, collectively, will do much more than that, of course. discussions between eu central banks on how monetary policy will operate within the emu are well advanced, and the european monetary institute published a report