funds directly onto their balance sheet thereby exposing customers directly to the risk inherent in those balance sheets. our job at the pra is to make sure that insurance companies keep their promises to pay policyholders and do not let them down, often when they need that money the most. insurance companies undertake an activity that matters, often critically – for the corporates that rely on protection of insurance for the day - to - day running of their businesses, and for individuals who invest a significant portion of their wealth in insurers over their lifetime, or who rely on insurers to protect them against financial disasters. it is for these very basic reasons that we are interested in insurance as a matter of public policy. however, we cannot justify regulation of an industry just because its activity is important. the aim of regulation is always to correct some sort of market failure. the insurance industry has many characteristics that could lead to the market producing a sub - optimal outcome, if left alone. first, the insurance business model is unusual in that it has an inverse production cycle – insurers typically receive premia upfront for a service that may or may not have to be bis central bankers ’ speeches rendered in future ( claims ), the cost of which is difficult to calculate. policyholders rely on the insurance company to set aside appropriate provisions to satisfy future claims, but the market may not always be a reliable mechanism for ensuring that insurance companies do not grow excessively by taking on too much risk. insurance obligations are often long - term and so policyholders trust insurance companies with their money for considerable periods of time. it is possible that the behaviour and incentives of an insurance company evolve in a way that does not take account of the interests of policyholders, not least because the best interests of the shareholder and the policyholder are not perfectly aligned. the receipt of premia before claims have to be paid can introduce perverse incentives for struggling insurers in particular. for instance, faced with the prospect of failure, there is a risk that insurers begin to invest in high - return but riskier assets, or rely on unsustainably priced new business to ride the tide, without being called to account by the market 1. this looks dangerously like a “ gamble for resurrection ”, which might in some circumstances be a rational strategy for shareholders but is unlikely to serve policyholders well. moreover, the inability of policyholders to transfer their policy or amend the terms of what is essentially an infungibile

ben s bernanke : community banking and community bank supervision in the twenty - first century remarks by ben s bernanke, chairman of the board of governors of the us federal reserve system, at the independent community bankers of america national convention and techworld, las vegas, 8 march 2006. the references for the speech can be found on the board of governors of the federal reserve systema€™s website. * * * good morning. i am pleased to join you today to discuss matters of mutual interest to the federal reserve and community banks ; to learn more about your business ; and, i hope, to meet many of you in person. community banks have long played a critical role in the u. s. economy, and this is no less true in the twenty - first century. today, i will begin by making some observations, based in part on research done at the federal reserve and elsewhere, about the health of community banks and their evolving role in our economy. community banks are generally doing quite well, and i expect that good performance to continue. but community banks also face a changing business environment that presents a number of important long - run challenges. in the second portion of my remarks, i will speak a bit about how the federal reserve, as the supervisor of many community banks, is also adjusting to a changing environment, and i will review some of the key financial risks facing community banks. developments in community banking by a wide variety of indicators, the overall performance of community banks in recent years has been quite strong. average return on equity ( roe ), for example, following a decline associated with the 2001 recession, remains solid and indeed has shown a slight upward trend. return on assets for community banks as a whole demonstrates a similar pattern and has stayed well above traditional benchmarks of strong performance. net interest margins remain higher than those of the largest banks, and this gap has even widened since 2003. various measures of loan quality for community banks have been robust, and bank failures have been rare. equally important, both our on - site examinations and our off - site surveillance system, which uses statistical models to attempt to flag emerging weaknesses at community banks, detect signs of potential problems at very few banks. consistent with this view, community bank capital ratios remain impressively high, and community banks'ability to attract deposits continues to be a source of strength. one strong indicator of the continued health of community banks is the rate at which new banks continue to be created. for example, if