sam woods : adapting to solvency speech by mr sam woods, executive director of insurance supervision of the bank of england, to the association of british insurers, london, 9 july 2015. * * * it is a great pleasure to speak to you today. i plan to give another speech in a few months ’ time, focussed on the history of insurance regulation and supervision here in the uk. but today i will talk about my immediate priority, which is getting solvency ii over the line for go - live on 1 january 2016. the industry has made a tremendous effort to make the transition a successful one. the circumstances have been difficult, with a delay to political agreement on important aspects of the new regime compressing the time that the industry has had to prepare. the delay has also added to the costs of implementation. however, the time has not been wasted and firms have used it to make important improvements to their own risk and solvency assessments, as well as their internal model applications. today i want to make sure that investors and insurance firms understand the approach the bank of england will take to capital under solvency ii. first, i would like to bust two myths : • the idea that there is some kind of plan within the bank to use solvency ii to increase required capital across the insurance sector ; and • a suspicion that we will somehow keep the current ‘ icas ’ regime alive after 1 january 2016, rather than embracing the new regime. second, i want to make it absolutely clear that we will give firms plenty of time to adjust to the new regime, and that those firms who wish to make use of transitional measures will be given the freedom to do so. myth - busting i have heard from some a concern that we will use solvency ii to increase levels of capitalisation across the sector, or that we are seeking to load the sector with more capital now so that it is baked into the new regime once operational. let me state very simply : there is no such plan within the bank of england. the reason for this is also simple : we think that our current regime secures an appropriate level of capitalisation for the insurance sector and puts us in a good position to make the shift to solvency ii. the icas regime was introduced in 2004 as a response to the stock market falls and subsequent problems faced by uk firms in the early part of the decade. it is based on sound principles, such as market - consistent valuation of the balance sheet and a

stability oversight. so in concluding, let me try to draw together some of the principal themes in what i have been saying. i am naturally well aware that there are many positive features to today ’ s environment. but central bankers are sometimes accused of being pessimists and seeing the glass half empty. in our defence i suppose it is our job to think out what could go wrong and to be ready accordingly. the first message to leave you with is that we are concerned about financial stability because of the potential economic and social costs arising from financial instability. private markets will not always reflect these costs fully and prima facie there is a need for public oversight. second, the degree of complexity and interconnectedness has increased dramatically in recent years. here i would point to market liberalisation, technological advance and the development of a range of new instruments for transferring risk. third, market participants need to be aware that financial stability starts with them. integrity and sensible restraint are the bedrocks of stability. this requires heightened awareness that the leverage in the system as a whole, encouraged by the new risk transfer techniques, contains its own vulnerabilities. fourth, in response to the changing environment, the financial authorities have had to adapt their models and procedures for regulation and oversight. greater disclosure and transparency can be antidotes to the information deficits in an increasingly complex, and sometimes opaque, financial system. international cooperation is at a premium, both in delivering a consolidated view of globally active firms, and in seeking to clarify who is expected to do what when difficulties arise. they need to match this level of technical expertise with the private sector, and to contend with new or heightened risks in such areas as business continuity. fifth, as a central bank, we need to be as clear as we can about the nature of our contribution to the oversight process. at the core is our concern with the maintenance of liquidity, and our capacity to inject it when necessary. much of our financial stability work is aimed at identifying potential liquidity strains, and what responses are likely to be most effective. lastly, whilst the challenges for oversight may be daunting, progress in addressing these challenges is significant. but do not expect a zero risk environment - and do not demand it. fear of failure is the antidote for instability. it will go a long way to underpin the long term health of the financial system. governor lars heikensten “ the riksbank ’ s work on financial stability ” :