innovate and grow, and individuals to plan for the future. for the system to work, policyholders need to have confidence that the promises made to them by insurers are going to be met. and we in the pra have been clear that having left the eu, our approach to policy making will continue to have robust prudential standards at its heart, to safeguard uk financial services and policyholders. some types of cover, such as employer ’ s liability, might only be called upon years after the original policy was written. having cover is essential to allow certain businesses to operate and such cover has, in the past, provided vital compensation to beneficiaries who have been affected by asbestos and other harms that may take decades to fully become known. it is so important, for everyone involved, that insurers will still be there, standing ready to pay these claims when they arise. 1 / 6 bis central bankers'speeches annuities represent another kind of very long term and important promise. policyholders may entrust the results of a lifetime of work and careful saving to an annuity provider ; there are currently more than ten million such annuity policies in the uk2. these policyholders do this knowing that there are no refunds, and no chance to switch provider once they are committed. they are placing a huge amount of trust in their insurer ’ s promise to make payments to them for years into the future. for many customers, these payments may form a substantial portion of their retirement income. this enormous trust that policyholders place in their insurers has several significant benefits to the wider economy. i already mentioned how risk transfer allows innovation and growth, and smooths consumption. but the pooling of savings within life insurance companies and the willingness of policyholders to commit their savings for the long term also allows those savings to be channelled into new types of investment – ones that would be difficult or impossible for individuals to access directly, but which will play an essential part in the recovery and in meeting the challenges of the 21st century. and our data show that insurers are investing in ever more diverse and novel asset types, which often represent very long - term commitments. a willingness to innovate is to be welcomed. there is nevertheless a flipside to this novelty – the lack of a long history to guide the selection and risk - management of these assets, or to show how they may perform under various possible stress scenarios. so there are new

singapore taiwan south korea thailand hong kong malaysia indonesia philippines 86 88 94 96 9886 88 94 96 it may be useful to recall, also, the old distinction between risk and uncertainty – it was the latter ( whose characteristic is unpredictability ) rather than the former that was relevant, and perhaps we should not be surprised that uncertainty premia can shift dramatically. ( d ) a disequilibrium process these capital - receiving emerging countries were being transformed at such a pace that it is not sensible or realistic to see the process in terms of the usual textbook notions of returns equilibrated at the margin and smooth allocation of resources, particularly capital. systems were in flux, and production functions were changing continuously. this general notion manifested itself in various ways, but three examples will illustrate the issue. the first example of apparent disequilibrium in capital flows was identified nearly two decades ago – the feldstein / horioka paradox ( 1980 ) – there seemed to be too much correlation between domestic saving and investment rates in individual countries, with the implication that capital flows between countries were smaller than would occur in a well integrated world. so here, perhaps, is another clue to the puzzle. it is not so much that capital flows rose suddenly to achieve abnormally high levels, but that they were – for some reason – less than optimal earlier, and so the big increase was a move towards a more normal or equilibrium situation. 18 these are asset or stock equilibria. when these ill - defined and easily changeable temporary equilibria are displaced by a shift of confidence, the flow requirements to shift from the old to the new stock equilibrium may be very large ( and very disruptive ). second, profits ( or even expected profits ) were not equilibrated across countries. for a sustained period ( through the 1980s ), excess profits had been earned, illustrated by equity returns and high domestic real interest rates in indonesia, korea and thailand. indeed, the constant revisiting of the feldstein / horioka result has found less correlation between domestic saving and investment rates over time, implying increasing international capital integration ( fujiki and kitamura 1995 ; ghosh 1995 ). - 12 - graph 7 asian share markets december 1987 = 100 index index indonesia thailand malaysia philippines south korea 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 source : datastream. table 4 : average real interest rates * south korea thailand indonesia # malaysia philippines 1980 – 89 1990 –