The combination of low short-term rates and asset purchase programs has driven yields on long-term sovereign debt to historically low levels (Figure 2). In large parts of Europe and Japan, short- and long-term yields remain near zero, a full decade after the onset of the financial crisis. Economic developments since this unprecedented monetary stimulus provide valuable insights into the efficacy and limitations of monetary policy. On the positive side of the ledger, advanced economies have seen steady growth and significant declines in unemployment, with rates today near, or in many cases well below, those seen before the crisis (Figure 3). Bold monetary policy actions surely played an important role in averting far greater catastrophes and aided economic recovery. However, this success was achieved only after a disappointingly slow recovery and many years of economic hardship. And, despite the improvement in the real side of economies, inflation rates have persistently been below central banks’ goals (Figure 4). The fact that inflation has been running below target in most advanced countries—the United Kingdom being the most prominent outlier—suggests that this challenge is not due to factors specific to a single country. Instead, there are more systemic factors at play. Investors view these low inflation readings not as an aberration, but rather a new normal. This is evidenced by a broad-based decline in market-based measures of longer-run inflation expectations since the mid-2000s, with the UK again providing the exception (Figure 5).

However, that confidence must be tempered by a proper understanding of model limitations and assumptions, which the use test indeed also requires. Insurers should try to de-mystify models as much as possible and avoid any sense that they are “black boxes”. They need to understand for what purpose a model has been developed and the boundaries of its legitimate application. Criticism of the model ought to be welcomed and followed up: for example, arising from independent validation. Stress testing should be used to explore and improve understanding of model weaknesses. Management should challenge the outputs of complex models using other simpler models, rules of thumb and expert judgement. 7 For example, internal model estimates of capital can be compared to simpler standard formula or leverage measures. We encourage insurers to develop their own model drift measures and not limit themselves to the PRA’s metrics. To take another example, in a rapidly changing world, it is good practice for insurers to pay close attention to claims 6  Model risk: illuminating the black box, British Actuarial Journal, 22 August 2017, R. Black, A. Tsanakas, A. D. Smith, M. B. Beck, I. D. Maclugash, J. Grewal, L. Witts, N. Morjaria, R. J. Green and Z. Lim. 7 In the Dog and the Frisbee, 2012, Andy Haldane and Vas Madouros explained how simple rules of thumb often outperform complicated models in complex, uncertain environments. https://www.bankofengland.co.uk/paper/2012/the-dog-and-the-frisbee  7  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  7  experience as a risk indicator.