make sure that a firm ’ s approach to risk management is sound and that their policy holders are adequately protected. i believe solvency ii will help to do this. it will introduce greater risk - sensitivity ; co - operation across jurisdictions ; and consistency in approach. being a risk - based regime means that insurers should be able to evolve and adapt to capture all risks they are exposed to and the qualitative risk assessment introduced under pillar ii will further support this move towards a more responsive, reflective and adaptable solvency regime. this in turn will mean that insurers will need to think carefully about the risks they are exposed to and how this is captured and managed. this does not mean that solvency ii should dictate firms ’ business models. rather, market forces and expectations of policy holders will inform insurers ’ pricing and strategies. as referred to earlier, there is much we can do to prepare for the future by learning from mistakes of the past. one such area where this should be borne in mind is in the use of risk models which will play a huge role in solvency ii for the larger, more complicated firms. firms need to be able to understand their models and their limitations, and be able to challenge them. as the governor said last year : “ the dangers of using poorly designed models were made all too clear in the banking sector. so the bank won ’ t hesitate to withhold approval of inadequate or opaque models ”. there are many things i could say about solvency ii, but i want to concentrate on what it means for the future. one particular aspect is that it sensibly allows for a smooth transition, over a period of 16 years in some cases. it is recognised that for insurers ( particularly life insurers ), solvency ii with the introduction of a “ going concern ” regime, is a considerable shift. in particular, firms will have to hold a risk margin to ensure that the insurance liabilities reflect the value for which they could be transferred to a third party. to allow for the gradual introduction of the risk margin, firms will be able to make a transitional deduction from their bis central bankers ’ speeches technical provisions. together, the various transitional measures within solvency ii should ensure a smooth progression, avoiding the market dislocation, volatility and increased costs that could result should a number of firms have to augment their capital base at the same time. they rightly recognise that the underlying risks have

effects of the great financial crisis are still being felt across the global economy. one of the things we appreciate very well at the pra is that insurance business is very different to banking, and i have seen that at first hand over the past six months or so. i have also seen that there are lessons to be learnt from the banking crisis that can directly read across to the world of insurance. let me express a clear personal opinion ; financial crises of the past were often, in large part, created by the people at the top making poor decisions – people not possessing the right information ; not having due regard for risk ; not being properly incentivised. significant failures have often had their roots in poor governance with insufficient checks and balances to the decisions of powerful individuals. strong, effective systems of oversight and risk management are paramount in meeting the pra ’ s objectives for the safety and soundness of firms and insurance policyholder protection. not surprisingly, governance issues are consistently at, or near the top, of the pra ’ s agenda whether for banks or insurers. i can safely predict that this focus is not about to lessen any time soon. firms in tomorrow ’ s world need to aim for governance best practice. bis central bankers ’ speeches the recent banking crises further illustrated that one of the most obvious ways in which financial stability can be undermined is through disorderly firm failure and the consequent disruption of financial services. the pra ’ s stance is that unsuccessful business models need to be allowed to fail, but that failure should be in an orderly manner so as not to disrupt the provision of core financial services. and i think we would all agree that the taxpayer should not be asked to bail out a failed firm. one difference from banking is that failing insurers usually do exit in an orderly manner. actually, about a third of the pra ’ s authorised firms are in run - off. but that is in part a testament to the successful regulatory regime that the uk has been running for the insurance sector. and, whatever the regime, we cannot be certain this will be the case in every conceivable circumstance. for this reason, the pra continues to place the resolution arrangements for insurers on both the domestic and international agendas. the banking crisis further taught us all that we need to be looking at potential storms ahead and not to be misled by periods of fair weather. for the pra this means it will assess firms not just