. use of internal models can be an effective means of harnessing the better knowledge a firm has of its own risk profile to set risk - sensitive capital requirements. but there are limits to our ability to model capital requirements. these are more acute where the event – for example, a credit default or a windstorm – being modelled happens infrequently and historical data is therefore scarce, where events cluster rather than occur independently or where the underlying process behind the event – for example the structure of the economy or the natural environment – may have changed, so that history is an unreliable guide to the future. in such circumstances, significant uncertainty about model outputs may call for a more prudent approach. and the temptation to add additional parameters, making models more and more complicated, can often have the perverse effect of weakening model performance. this is why, in addition to scrutinising the technical components of models, we also look at the way they are used within firms. only a good model can play an important role in a firms ’ system of governance. our expectations of their quality are high as solvency ii specifies that they become an embedded part of the risk management system of a firm. it is therefore not only important for us to rigorously assess them but that senior management have ownership of these models and continuously do the same. the bank of england takes model approval very seriously indeed and we will not hesitate to hold back approval for the use of models where there are risks that cannot credibly be modelled or data are insufficient. throughout the implementation of solvency ii, we have worked hard to ensure that progress in the regulatory agenda is not synonymous with unnecessary impediments on your ability to grow and evolve your businesses. at all times, though, insurers must be capitalised to deliver policyholder protection, and this must be commensurate with the risks they take. a priority in this area is the revitalisation of robust securitisation markets in europe, many of which have yet to recover from the crisis. we have been working with the ecb and other european authorities with the goal of encouraging securitisation as a means for lenders to diversify funding and reduce concentrations – but not to arbitrage capital regulations. a growth in “ real money ” investors, such as insurers, will increase the diversity of funding providers to the real economy, avoiding the pre - crisis reliance on an unstable, leveraged investor base. a key goal

is to improve transparency, simplicity and consistency so that investors can understand the risks associated with securitisations. for simple, transparent and consistent securitisations, we are prepared to review whether post - crisis regulatory requirements for investors and originators are too onerous. that includes solvency ii, where we welcome a recalibration of capital requirements for such simple, transparent and consistent securitisations, particularly at longer maturities. the bis central bankers ’ speeches ongoing participation of insurers – a major source of long - term finance – in this debate will be key to achieving results. we have got to a stage now where the path to solvency ii is clear. we have come a long way from the uncertainty that has seemingly dominated the past few years. but we need to remain conscious of the new challenges and opportunities that are on our horizon. alongside the european process the wheels have been turning in the international space. a common set of global standards for systemically important insurers are being worked on as we speak. throughout the development of these standards, the bank of england will continue with its strong history of international engagement. we have made great strides in europe with solvency ii and we aim to ensure the complementarity of upcoming global standards with what we have achieved with solvency ii. continued interaction with the industry is an essential part of good policy making so i ’ d like to again thank you for your participation today. i hope that we can continue to work together towards achieving a policy outcome at all levels that fulfils our objectives and in turn ensures the stability, resilience and ultimately the prosperity of the insurance sector in the uk. bis central bankers ’ speeches