However, that debate is for another day: the risk margin and its calculation are part of the law and our job is to implement it. More specifically, the directive is clear that the Solvency Capital Requirement (SCR) and the risk margin are separate concepts: put simply, firms have to survive a 1-in200 stress, using the capital held to meet their SCR, and then have the risk margin available to provide for the costs incurred in an orderly transfer of liabilities. It is obvious that in this respect Solvency II is more demanding than the ICAS regime, even if other elements of the regime are not. A related source of tension is our use of the Quantitative Indicator (QI) framework as part of our assessment of internal model applications. This framework describes a set of judgements, based on evidence and analysis that provide an assessment of the most common risks faced by UK insurers, such as longevity risk for life insurers, and how they relate to each other. Many of the areas covered by the framework involve a significant degree of judgement, and accordingly we are flexible in how we use the framework and consider it just one input into our consideration of whether firms’ models meet the tests and standards for approval under Solvency II. The way we use the QI framework has also been, and continues to be, informed by evidence and practices presented to us by firms.
Unlike the 1980s, the build up of debt in recent years has been in an environment of low inflation and low interest rates. The interest ratio, that is, interest expenditure as a share of disposable incomes, is much lower now than it was then. Although the level of households' debt ratios is not necessarily worrying, it is nevertheless the case that a borrowing level rising by more than 10 per cent a year is not sustainable in the long term. In the long term it needs to come down and be more in line with nominal disposable incomes. The Riksbank is assuming that household borrowing will continue to increase, but at a slower rate than before. The fact that interest rates have been raised contributes to this, as does the fact that economic activity is entering a calmer phase. The interest ratio has recently begun to rise but is still at an historically low level. The expected  BIS Review 60/2008  1  slowdown in household borrowing will mean that the interest ratio also increases at a slower rate in future (see figure 3). The chances are good that household borrowing and house prices will have a soft landing. Although borrowing is still increasing at a rapid rate, there has nevertheless been some slackening and this is expected to continue. House prices fell slightly in the first quarter of this year compared with the final quarter of last year. However, on an annual basis the increase was just over seven per cent.