But our present degree of knowledge means that, in the terminology of Frank Knight (1921), there is both risk, which can be quantified, and uncertainty, which cannot. The extent of past uncertainty about life expectancy can be seen in the revisions to its forecasts made over the past 20 years by the Government Actuary’s Department. Nor has the financial sector itself proved better at forecasting. Chart 5 shows successive forecasts of expected length of life for men aged 60 published by the Actuarial Profession, a body of life assurance companies and annuity providers. It shows how reductions in mortality were expected by the industry to lead to rises in length of life. For example, the pink line shows the Actuarial Profession forecast made in 1980 that a man who was 60 in that year could expect to live another 20 years. At that time, it was thought that someone who reached 60 in 1999 would live a further 21 years. But by 1999 the forecast was that a man of 60 would live another 26 years. Over a twenty year period, expected length of life was revised up by 5 years. Length of life has risen faster than the industry anticipated, as can be seen by the  5  The first estimates of mortality rates using bills of mortality from the City of London were published by John Graunt in 1662.
Similarly, the advances in financial engineering and improved expertise have allowed the introduction of new hedging instruments to facilitate risk management. Significant enhancements have been achieved in the measurement of market risk where the use of internal value-at-risk models is fast becoming the industry standard. The advances in the quantitative approach to the management of market risks have also expanded to the areas of credit as well as operational risks. Despite the significant data constraints, new research has strengthened the theoretical foundation for internal credit and operational risk modeling. The development of new hedging instruments such as credit derivatives has also increased the use of credit risk transfer mechanisms within the financial system, thus promoting more active credit portfolio risk management. Key developments have also taken place in the area of operational risk. The  BIS Review 21/2004  1  experience of large corporate failures due to fraud and lapses in internal controls has focused greater attention on improving operational risk management in banking institutions. This has prompted the need for banking institutions to provide capital for operational risk and to put in place a more integrated risk management framework on an enterprise-wide basis. The essence of the new accord Ladies and Gentlemen, The efforts of the BIS to introduce an enhanced framework for capital adequacy regulation through Basel II is in the context of these developments. The accord seeks to bring into greater alignment the more advanced concept of capital management into the regulatory equation.