Foreword

It is ultimately the taxpayer who underwrites everything—whether the risk is chronic and long-term, or acute and immediate. This was true during the Great Recession; it is true for most natural disasters; and it was unquestionably true during Covid.

It is clear that the modern state possesses powerful instruments to address societal challenges: a tax balance sheet (HM Treasury) and a debt balance sheet (the Bank of England). But is there scope for a third? A risk balance sheet.

When you consider the individual, such an idea is normal, not obtuse. Individuals have income, debt, and a net worth. They also transfer some of their disposable income to insure the risks that could wipe out their net worth.

Imagine if your house burnt down, and you had a mortgage. Insurance rebuilds it for you. The idea of relying on more debt would be obscene. Yet, that state has income, debt and net worth - but no instrument to rely upon when shocks and risks strike that are not par for the economic course.

At present, there is no formal institution or instrument to operate, regulate, and proactively manage the contingent liabilities that government inevitably bears. Yet such a capability is increasingly necessary—fit for the next epoch of society: global, space-faring, and exposed to an expanding spectrum of risks, from climate change to systemic disruption.

This project sets out the case for such an institution—its necessity, feasibility, and practical design. In doing so, it proposes a world-first instrument for the Government of the United Kingdom to unlock, sustain, and protect growth. It makes the case for an institution whose adversary is not inflation, but risk.

The UK is home to a longstanding, world-leading and historically stable insurance market. This has enabled the transfer of much uncertainty away from the public balance sheet and into the private sector. Long may that continue. Private insurance should remain the first line of defence against risk and the engine of economic recovery.

There is, however, a structural gap. Insurers—aside from a patchwork of reactive, ad hoc interventions—are left to absorb and manage extreme scenarios without a true underwriter of last resort.

This stands in contrast to the banking sector. By historical evolution, the Bank of England—and its central bank counterparts—provides a systemic backstop to the highly commercial and capital-fluid banking system. It also by definition does so for the State. It can influence the money supply and the base rate of return, thereby managing capital, market risk, and ultimately inflation.

Inflation is an existential threat to the value of capital. Risk is the existential threat to the value of enterprise—and therefore to growth. Yet, unlike inflation, risk is not captured in a single, universally understood metric. It is diffuse, often intangible, and frequently underestimated—until it materialises.

Attempting to manage risk and the costs of it with the same instruments we have built to manage the economics of the human condition is flawed.

A risk-focused counterpart to the Bank of England does not yet exist. In the face of generational threats and an increasingly complex, globalised risk landscape, the time has come for His Majesty’s Government to establish an Insurer of State.

James York
Convenor, Insurer of State