And Solvency II sets tests and standards that we must enforce. As models can be highly complex, this is necessarily an intensive process. As you would expect, we are reviewing our approach in the light of experience, including seeing if we can streamline in some areas without compromising standards. We do already seek to focus on the most important risk drivers, including assumptions made about diversification across risks. This includes assessing the expert judgements firms have applied against our own estimates in key areas such as (in the case of life insurers) credit, longevity and interest rate risk. But these are not rigid standards. If firms can provide credible evidence that a different number is appropriate for them, we will accept it. And our estimates are usually in the pack of firms’ estimates. We are not enforcing a higher standard of prudence than required by Solvency II. For the same reasons, we take a robust approach to approving major changes to firms’ internal models. We have now completed the first round of such modifications and my observation is that firms proposed  4  Financial Stability Report , Bank of England, December 2016, chapter on ‘Risks to financial stability from insurers’ investment behaviour’. 5 Solvency II: Matching adjustment – illiquid unrated assets and equity release mortgages – CP48/16, Prudential Regulation Authority, December 2016. 6 Solvency II does include provision for supervisors to set temporary capital add-ons reflecting management and governance failings.
As a result, key elements of it, such as the Matching Adjustment, were designed with the needs of the UK industry in mind. The PRA’s implementation of Solvency II has been robust but proportionate, consistent with our statutory objectives. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Appendix: Drivers of changes in UK annuity rates  10  Chart 1: Annuity rates, risk-free rates and  Chart 2: Relationship between annuity rates and  corporate bond spreads since 2007  risk-free rates  Percentage points  Per cent Risk-free rate (rhs) 8 Annuity rate (rhs) Corporate bond spread (lhs) 7  6  5  Annuity rate (Per cent) 8 Pre-SII (2007-15) Since SII (2016)  6 4  7  5  3  4  6  3  2  2 1  5  1  4  2017  2016  2015  2014  2013  2012  2011  2010  2009  2008  0  2007  0  0 1 2 Risk-free rate (Per cent)  3  4  5  6  Sources: Bank of America Merrill Lynch, Bloomberg,  Sources: Bloomberg, sharingpensions.co.uk and Bank  sharingpensions.co.uk and Bank calculations. calculations.