There are two aspects to this: we recognise that life insurers can be an important source of long-term, stable financing for corporates, infrastructure and mortgages – this is an important function that we want to see maintained; but we also must consider the wider financial stability angles, avoiding undue influence on the asset allocation behaviour of insurers. Solvency II should not materially drive investment decision making except in so far as it helps to make certain that insurers fully understand the risks that they take. The Prudent Person Principle will seek to ensure that the industry understands and is capable of managing its investment risks. Specifically, insurers must be able to demonstrate that they can properly identify, measure, monitor, manage, control and report on their investment risks and not place reliance upon information provided by third parties. Investment choices should be made in the best interest of policy holders and beneficiaries. Those running a business are best placed to make business decisions. That being said, the PRA does have the benefit of perspective. The PRA has the ability to look across the industry and can also draw upon the expertise of specialists working across the different areas of the Bank of England. Whilst on the subject of the role of management, we understand that there has been some uncertainty around our expectations of the non-executive director role for firms that have internal risk models. Non-executive board members need not be technical experts in risk modelling.

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.