paul fisher : confronting the challenges of tomorrow ’ s world speech by mr paul fisher, executive director for insurance supervision of the bank of england and deputy head of the prudential regulation authority ( pra ), at the economist ’ s insurance summit 2015, london, 3 march 2015. * * * thank you for inviting me to speak to you today. as many of you will know i have been covering as executive director of insurance, in addition to my responsibilities as deputy head of the pra, since august last year whilst a search was made for a permanent appointment. at long last i will be passing the baton over to sam woods at easter. so this is likely to be my final speech made as insurance director. i would like to take the opportunity to offer up some personal observations about the current and prospective state of the insurance industry, as well as comment more generally on the role regulation will play in “ confronting the challenges of tomorrow ”. the insurance sector, by absorbing and laying off risk, plays a fundamental role in fostering a stable economy. a successful industry is therefore key to achieving the bank of england ’ s financial and monetary stability objectives. and as society and its economy evolve, it is vital that the insurance sector also responds to that changing environment. tomorrow ’ s world inevitably brings change. some changes can be forecast, or guessed by extrapolating from what we know today. but there are, inevitably, the unknown unknowns which will help shape the future. that means that a successful industry needs to be both dynamic and robust. uncertainty generates challenges but also represents opportunity. i want to discuss these risk / reward trade - offs and the importance of understanding the potential for new exposures that changing risk profiles can bring. insurance fulfils important social functions : the provision of income security in retirement ; income protection whilst in work ; funding for health care services and preserving the continuity of businesses subject to unexpected shocks. indeed, in some areas, insurance is compulsory such as with motor insurance and employers ’ liability. disruption to these functions is unlikely to be tolerated by wider society, not only because of the social benefits, but because risk transfer and pooling are crucial for sustainable economic growth and development. it is for this reason that the need to protect the interests of policy holders and to preserve long - term critical cover is so important. although one cannot be sure what the future may bring, we can learn from past mistakes to avoid their repetition. that is particularly apposite given that the residual

, with reconciliation to the net and gross values of all fair - valued assets and liabilities. this initiative can be seen as a first, but important, step towards quantifying the intrinsic uncertainty around the valuation of banks ’ asset portfolio. for perhaps the first time, it provides confidence intervals around banks ’ balance sheets – what some have called diamond ( 1984 ). in the language of knight ( 1921 ). epstein and wang ( 1994 ). financial services authority ( 2011 ). these buckets would provide additional granularity, and allow greater comparison across banks, over and above the classification employed by, for example, the ifrs levels 1, 2 and 3. bis central bankers ’ speeches “ confidence accounting ”. 9 the stage is now hopefully set for such principles to be rolled out across europe. for example, the european banking authority ( eba ) is developing binding technical standards on a prudent valuation methodology by end - 2012. these developments are a significant departure from past practices in reporting bank balance sheets. at present, this prudent valuation information will form part of the regulatory return, which may be publicly disclosed. but in time, it would be desirable if it formed part of banks ’ reported annual accounts to maximise investor transparency and consistency. this would parallel the approach used in other realms of public policy to capture economic uncertainty – for example, the “ fan charts ” for inflation and gdp published by the bank of england. bank liabilities and maturity mismatches a second dimension along which banks ’ balance sheets are different is the structure of their liabilities. typically, these have a considerably shorter duration than their assets – in others words, banks engage in maturity transformation. this is one of the main reasons for separate regulatory and resolution rules for banks. but it has a bearing, too, on appropriate accounting rules. to see why, consider a bank with 50 - year assets funded by overnight deposits. the bank intends to hold these assets to maturity. under current rules, holding intent, alongside the characteristics of the assets themselves, is the arbiter of valuation. so those intentions would enable the bank to hold the asset in its banking, rather than trading, book for regulatory purposes. but the liability structure of banks means that holding ability may in practice matter much more than holding intent. for the stylised bank, its 50 - year best intentions could be invalidated within 24 hours. in that event, amortised cost would be a very misleading valuation convention. the bank