managers and limited liability shareholders to increase risk if their capital stake drops too low – so called gambling for resurrection. these market failures are addressed not just by capital requirements, but by the interplay between capital and the other two pillars of the regime. goldilocks and the three pillars : how much capital is just right? ‐ speech by anna sweeney | bank of england pillar 3 : market discipline pillar 3 is disclosure of information about a firm ’ s balance sheet risks. market discipline is not wholly absent from the insurance sector either at the inception of or during the course of policies. some policyholders and creditors are able to monitor and react to changes in the creditworthiness of insurance firms. clearly, for those that can, good quality, timely disclosures enhance market discipline. where market discipline is strong, there is less need for stringent regulatory minima. but the strength of market discipline varies widely across the sector, according to the nature of policies and policyholders, as well as being different at the point of purchase and during the subsequent life of a contract – often measured in years not months. moreover, there is another, essential element of the regime that serves to reduce market discipline. this is not a pillar but a net strung between the pillars. large classes of policyholder would suffer significant hardship if their insurer failed, but have either no way of observing that it is courting failure, or no way of switching to a safer firm – often both. annuitants are an obvious example. so such policyholders are offered an unlimited, 100 % safety net by the fscs. certain general insurance products are in the same camp, and not just indemnities covering potentially ruinous liabilities to third parties : indeed, last year we extended 100 % cover to certain building guarantees policies when it became clear that they met the criteria of significant hardship and inability to switch provider. so far so good, and the safety net promotes competition by giving consumers confidence in purchasing insurance and shopping around. but of course the existence of this safety net blunts the policyholder incentive to distinguish between a high risk and a low risk insurer at the point of taking out a policy. paradoxically the stronger the safety net, the stronger the other two regulatory pillars need to be to hold it up. the less the market and policyholders discipline a firm, the more the regulator needs to do it for them, including by policing financial standards. pillar 2 : intervention and risk management pillar 2 contains a range of

regime based on those principles to the uk market. the government has translated [ 1 ] this into three objectives : to spur a vibrant, innovative, and internationally competitive insurance sector ; to protect policyholders and ensure the safety and soundness of firms ; and to support insurance firms to provide long - term capital to support growth, including investment in infrastructure, venture capital and growth equity, and other long - term productive assets, as well as investment consistent with the government ’ s climate change objectives. these are consistent and mutually supportive objectives. safety and soundness underpin the other two objectives : the sector can only be internationally competitive if it operates within a robust and reliable infrastructure, which includes the prudential regime as well as things like the legal system ; and only a financially sound insurance sector goldilocks and the three pillars : how much capital is just right? ‐ speech by anna sweeney | bank of england can make a sustainable contribution to long term investment. conversely, an innovative sector, that supports the wider economy through long term investment, is ultimately a sounder one. tailoring will mean reforms to specific aspects of the regime that are not well - designed or imperfectly calibrated for the uk, and are currently distorting incentives and behaviour. the risk margin is probably the best known example. the concept – a margin over best estimate of liabilities so that they are held on the regulatory balance sheet at an estimate of their transfer value – is sound. but in its current implementation the output of the risk margin formula is too sensitive to interest rates [ 2 ], and when rates are low it is higher than it need be to fulfil its purpose. and this has driven a misallocation of capital, away from longevity risk, a misallocation which is relentlessly increasing as volumes of business not covered by transitional measures grow. overall outcome of the review we are working on these and other specific topics, and looking forward to receiving views in response to hmt ’ s call for evidence which closes later this month. it is important to get these reforms right. but we cannot consider reforms to individual measures in isolation : at the end of the process we have to be confident that the package of measures continues to deliver the right overall level of resilience at firm and sector level and supply of financial services demanded by the economy. that has always been the reality – calibration of individual measures has to derive both from bottom up analysis and top down assessment of their cumulative impact. the fact