too sensitive to interest rates. as a result, the risk margin is too high when interest rates are low and too low when they are high. with interest rates currently low, insurers have responded to a too - high risk margin on annuity business by reinsuring longevity risk on new business offshore. meanwhile transitional measures on technical provisions ( tmtp ) offset the risk margin on the pre - solvency ii back book. the irony is that uk insurers do not hold an especially high level of risk margin ( net of tmtp ) on their annuity books in practice. this outcome is unwelcome from our perspective because uk insurers are increasingly exposed to offshore reinsurers and tmtp is higher than it otherwise would be, giving the impression that uk insurers are more reliant on transitionals to meet capital requirements. the availability of longevity reinsurance has limited any drag on growth in the bulk purchase annuity market. although one possible effect has been to make it more expensive for pension schemes with a high the chancellor ’ s letter to the governor of 8 march 2017 setting out recommendations to the prudential regulation committee ( prc ) about aspects of the economic policy of the government to which the prc should have regard when considering how to advance its statutory objectives includes “ the government wishes to ensure financial services markets make a positive contribution to sustainable economic growth in the uk economy in the medium and long term, through the facilitation of finance for productive investment and as a productive sector of the uk economy. ” all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx proportion of younger members to achieve an insurer buy out. this is because reinsurers have had a lower appetite for deferred than in - payment annuities. although i hear that this might have changed recently. as sam woods wrote to nicky morgan in june of last year6, the pra does not currently see a durable way to implement a change in the risk margin with sufficient certainty for insurers to be able to rely on it for pricing, capital planning and use of reinsurance. we continue to keep this position under review. current issues despite the diversification into direct investments, corporate bonds are likely to remain the largest category of assets backing u. k. insurers ’ annuity liabilities. partly because the matching adjustment benefit to holding sub - investment grade bonds is

##udential - regulation / publication / 2019 / solvency - ii - equity - release - mortgages - part - 2 all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx looking ahead over the next several decades, climate change is a new reason why individual house prices might diverge from the national average. climate scientists predict a rise in sea levels. flooding from rivers and surface water run - off is likely to increase. more frequent droughts will bring more widespread subsidence. an important recent paper by climate wise – a group comprising representatives from insurers – considered the consequent risks to uk property lenders. 9 the paper argued that flood insurance is likely to become more expensive and continued availability of cover cannot be assumed. within insurance, climate change physical risks are often seen as primarily an issue for general insurers. but the life insurers ( as well as the banks ) have the long - dated property lending exposures. using catastrophe models, the paper estimates a 25 % increase in the number of uk properties at significant risk of flooding by 2100 if global temperatures warm by 2°c and a 40 % increase if they warm by 4°c. the models suggest that this risk is unevenly distributed across the united kingdom, with coastal regions most affected ( chart 8 ). to conclude, the pra ’ s implementation of solvency ii works well as a prudential regime for uk annuity writers. but we do need to make the risk margin less sensitive to interest rates. since the introduction of solvency ii, around £60 billion of risk has transferred from defined benefit pension schemes to insurers. meanwhile insurers have switched around £20 billion of the assets backing these annuities into direct investments, such as infrastructure finance, commercial real estate lending and equity release mortgages. the pra welcomes both trends. we will continue to supervise insurers closely to ensure that they have the necessary capabilities to take on this business and are calculating appropriate reserves and capital against the associated risks. physical risk framework : understanding the impacts of climate change on real estate lending and investment portfolios climate wise all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx chart 1 : transfer of pensions risk from uk company defined benefit schemes to uk insurers source : hymans robertson annual risk transfer