It is difficult to put a starting date on the financial revolution which I am attempting to describe - I mean the era of sophisticated asset and liability management techniques, of ever more exotic derivative and hedging products, and so on. But I guess it got going during the 1970s. Why not before? It seems that for most of the preceding postwar years banking and finance enjoyed a rather cosy and protected existence around the world. Capital controls and domestic regulation tended to constrain the scope for competition or diversification; many domestic banking sectors were cartelised to a significant degree, or in some cases state controlled; cross-border migration was, for one reason or another, rather rare. All in all, the incentive and scope to innovate were weak by today’s standards. The environment changed quite quickly when national administrations began to deregulate their financial sectors at the micro level and to free up movements of capital at the macro level. Just as importantly, the electronic data processing revolution began to open up avenues for financial engineering that could never have been dreamt of before. In the dealing rooms of London - then as now the world’s leading international financial centre - professional mathematicians moved in alongside, or even displaced, the “barrow boys”. Perhaps I should explain that the barrow boy stereotype was a Cockney young man from the east end of London with probably no very accomplished formal education but with strong mental arithmetic and trading skills, acquired from working on market stalls.

However, each board collectively should understand the key strengths, limitations, and judgements within their model. Over-reliance on a single measure can be misleading. Therefore, we want non-executives to have the right tools and sufficient knowledge to be able to challenge model outputs, rather than follow them slavishly. Benefits to be gained through the implementation of a harmonised regime I have discussed the increased flexibility to be afforded firms in business and investment decisions and the expectations placed upon insurers in their knowledge and understanding of the risk exposures and their models. But I would also like to consider the benefits to be gained through the implementation of a harmonised regime. The benefits of Solvency II do not come from the improved prudential regime alone. Insurance markets across the EU have been fragmented. The move towards a more cooperative framework will widen existing opportunities and help create new ones. The new framework seeks to introduce a level playing field across the EU, with risk-based capital standards and robust valuation practices that, together with enhanced disclosure rules, encourage the effective exercise of market discipline through the increased provision of information. From a systemic point of view, a more coherent and understandable regime should enhance confidence in the European insurance industry. This is particularly important at a time where weak real growth is leading to low levels of inflation and interest rates. BIS central bankers’ speeches  3  Financial markets have become increasingly interconnected and that trend has only been slowed temporarily by the global financial crisis.