Sweden
Financial Sector Assessment Program Update-Detailed Assessment of Observance on Insurance Core Principles
Author:
International Monetary Fund
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Publication Date:
16 Sep 2011
eISBN:
9781463903534
Language:
English
Keywords:
ISCR; CR; holding company; risk assessment; risk management; internal audit; liability insurance; business plan; insurance intermediary
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The staff report highlights that the insurance sector in Sweden is well developed and mature. The captive insurance segment is mainly driven by tax advantages. This assessment provides an update on the significant regulatory and supervisory developments in the insurance sector of Sweden since 2002. The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place at the time of the assessment.

Abstract

The staff report highlights that the insurance sector in Sweden is well developed and mature. The captive insurance segment is mainly driven by tax advantages. This assessment provides an update on the significant regulatory and supervisory developments in the insurance sector of Sweden since 2002. The assessment is based solely on the laws, regulations, and other supervisory requirements and practices that were in place at the time of the assessment.

I. Assessment of Insurance Core Principles

A. Introduction and Scope

1. This assessment provides an update on the significant regulatory and supervisory developments in the insurance sector of Sweden since 2002. The current assessment was conducted by Su Hoong Chang (Insurance Supervision Advisor contracted by the International Monetary Fund (IMF)) during March 9–22, 2011. Sweden undertook an initial Financial Sector Assessment Program (FSAP) in 2002, which included a formal assessment of its observance with the Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS) in 2000. The Swedish authorities have largely addressed the recommendations arising from the 2002 assessment (Appendix I).

2. The current assessment is benchmarked against the ICPs issued by the IAIS in 2003. This update assessment also took account of the relevant IAIS standards and guidance that complements the ICPs, including the ICP materials adopted by the IAIS in October 2010.1 These are noted by way of additional comments, where appropriate, and have no impact on the rating of the ICPs.

B. Information and Methodology Used for Assessment

3. The level of observance for each ICP reflects the assessment of the essential criteria only. Advanced criteria are not taken into consideration in assessing observance of the ICPs but are noted, where applicable. Each ICP is rated in terms of the level of observance as follows:

  • “Observed”—where all the essential criteria are observed or where all the essential criteria are observed except for those that are considered not applicable.

  • “Largely observed”—where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.

  • “Partly observed”—where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.

  • “Not observed”—where no substantive progress toward observance has been achieved.

4. The assessment is based solely on the laws, regulations and other supervisory requirements and practices that are in place at the time of the assessment. Ongoing regulatory initiatives are noted by way of additional comments. In particular, the parliament has passed a new Insurance Business Act (IBA), which will come into effect on April 1, 2011. A comprehensive self-assessment and other pertinent information provided by the authorities facilitated the assessment. The assessor also met a number of Swedish insurers as well as industry and professional associations, and has benefitted from their valuable inputs and insightful views.

5. The assessor is grateful to the authorities for the full cooperation, thoughtful logistical arrangements and co-coordination of various meetings with industry participants. In-depth discussions with and briefings by officials from the Swedish Financial Supervisory Authority (FI) facilitated a robust and meaningful assessment of the Swedish regulatory and supervisory regime for the insurance sector.

C. Overview—Institutional and Macro Prudential Setting

Market Structure and Industry Performance

6. The insurance sector in sweden is well developed and mature, with an insurance density (premium per capita) of US$3,540 and insurance penetration of 8.2 percent, compared to the average for Europe of US$1,862 and 7.6 percent, respectively.2 Around 50 percent of household financial assets are held in life insurance products.3 The insurance industry had about 19,700 employees as at end-2009, of which more than 14,000 were employed by nonlife insurers.

7. The total number of insurers conducting business in Sweden has remained relatively stable (Table 1). The net reduction of 9 insurers over the five years period from 2006 to 2010 was mainly attributable to a significant increase of 20 captive insurers, offset by the exit of 17 nonlife insurers and 14 livestock insurers. There have been a number of acquisitions since 2004,4 with increasing level of foreign ownership. Prior to 2000, life insurers offering unit-linked policies (ULP) were required to set up specialized unit-linked insurance companies. Although this requirement had since been waived, most life insurers still maintain their unit-linked subsidiaries. Friendly societies are small insurers owned by policyholders and some societies insure occupational pension funds. Livestock insurers are also small players, with aggregate assets of about SEK10 million as at end-2010.

8. The captive insurance segment has grown markedly over the last 10 years, driven mainly by tax advantages. Captive insurers are typically owned by large commercial groups and municipalities to insure/reinsure selected intra-group risks. About 130 Swedish industrial groups have established captives, of which 30 are domiciled in Sweden. Factors contributing to the growth of captives include legislative amendment facilitating licensing of captives and deferral of tax in respect of premiums paid to captive (re)insurers. In addition, captive subsidiaries of Swedish parents are eligible to make tax-free transfers to/from their parents. Of the 49 licensed captives as at end-2009, 33 are pure captives, i.e., they do not write any third party liability risks while 16 captives write liability insurance involving third party claimants, mainly general liability insurance and some third party motor liability insurance. Eight of the captives are licensed to write direct insurance and four are authorized to conduct reinsurance activities while the rest conduct both direct and reinsurance business.

Table 1.

Sweden: Number of Licensed Insurers and Intermediaries

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Source: Fl’s Swedish Data - FSAP.

9. The number of insurance intermediaries 5 has increased significantly since 2006. Sweden implemented the European Union (EU) Directive on Insurance Mediation (2002/92/EC) in 2005, which requires intermediaries to be licensed and supervised. Industry feedback suggests that it is easier to obtain an insurance intermediary license to market collective investment schemes, which contributed to the high number of insurance intermediaries. Bancassurance is one of the main distribution channels of life insurance products. Of the four large Swedish banks, three are registered as “tied intermediary” (see ICP 24) of their related insurance subsidiaries and one is licensed as an insurance intermediary.

10. The Swedish insurance industry is concentrated. While there are a large number of small local nonlife insurers and friendly societies, the market is dominated by a few large insurers/groups. All major banks have insurance subsidiaries and some large insurers have their own bank subsidiaries. Notably, the number of insurance groups more than doubled from 23 to 60, as at end-2010.6 The five largest insurance groups accounted for approximately 50 percent of total assets as at end-2009.7 The top five life insurers accounted for 61 percent of assets of the life sector while the top five nonlife insurers have about 55 percent market share in terms of gross premiums in 2009.

11. Assets held by the insurance industry as at end-2009 totaled SEK 2,967 billion, of which life and unit-linked insurers accounted for 77 percent (see Table 2). Assets held by insurers represented 95 percent of GDP as at end-2009.8 As at end-2009, insurers were the largest investor category in the Swedish bond market. Insurer’ investments in bonds have been increasing steadily and reached SEK 1,125 billion as at end-2009 (see Figure 1), or approximately 50 percent of the total amount outstanding.

12. Life and unit-linked insurers offer a diversified range of products, the bulk of which relate to pension insurance. Traditional policies range from pure protection policies such as term insurance to policies that combine both protection and investment, i.e., savings with guarantees and where the insurer determines the investment policy and distribution of surplus. ULPs are generally issued in respect of occupational pension insurance, private pension insurance, endowment and capital pension insurance.9 ULPs are, in effect, investment products as life insurance coverage is not mandatory and policyholders bear all the investment risks. The analysis of new life insurance business is presented in Table 3. The occupational pension market is dominated by insurers owned by employers’ organization and trade unions. Foreign risks written by life and unit-linked insurers are immaterial.

13. Motor insurance is the dominant class of nonlife insurance and Swedish nonlife insurers write a significant level of foreign risks 10(see Table 4). Motor insurances accounted for 22 percent of total premiums written in 2009 while foreign risks made up 34 percent. The dominance of motor insurance is partly attributable to the comprehensive range of social insurance and the increasing use of captive insurance by large industrial groups. The bulk of the foreign risks were written by foreign branches of Swedish nonlife insurers. Although insurers are required to report foreign risks accepted to FI, there is no analysis of foreign risk by lines of business or geographical location. In Sweden, the market for credit insurance and surety insurances dominated by branches of European insurers.

Table 2.

Sweden: Assets Held by Swedish Insurers

(In SEK millions)

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Source: Fl’s Swedish Data - FSAP.
Figure 1.
Figure 1.

Sweden: Investors in the Swedish Bond Market

(In SEK billions)

Citation: IMF Staff Country Reports 2011, 282; 10.5089/9781463903534.002.A001

Source: Riksbanken, the Swedish financial market 2010.
Table 3.

Sweden: Analysis of New Premiums—Life

(In SEK millions)

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Source: FI’s Swedish Data - FSAP.
Table 4.

Sweden: Analysis of NonLife Premiums Written in 2009

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Source: FI’s Swedish Data—FSAP.

Others include marine, credit, aviation and animal insurances.

14. Insurers’ investments are mainly concentrated in bonds and equities, representing 37 percent and 52 percent of total assets as at end-2010, respectively (Table 5). In particular, life insurers held 56 percent of their assets in equities (mainly in respect of ULPs) and are heavily exposed to equity risk, as evidenced during the crisis in 2008. Their equity portfolios have recovered with the market rebound since 2009. Investments in equities rose by another 15 percent (SEK 202 billion) in 2010 to reach SEK 1,539 billion as at end-2010, partly attributable to higher market valuation. The significant bond portfolios expose life insurers to interest rate risks.

15. Both life and nonlife insurers are susceptible to developments in global financial markets through their holdings of foreign investments, which totaled SEK 933 billion (32 percent of total assets) as at end-2010. Swedish insurers held approximately SEK 665 billions of sovereign bonds as at end-2009, of which 78 percent were issued by Swedish government. Another 9 percent and 7 percent were issued by authorities in Germany and the United States, respectively. The level of sovereign bond has remained largely unchanged in 2010, and the main exposure was to German sovereign bonds.

16. Life insurers’ investments are sensitive to interest rate changes, but the impact is even greater on their technical provisions. Long-term interest rates have been declining and reached a record low in 2010 (Figure 2). Lower interest rates increase insurers’ technical provisions mainly due to the discounting rate used to calculate the present value of insurers’ policy commitments. On the asset side, there are reinvestment risks due to scarcity of suitable long-term investments11 to match their long-term commitments. Swedish life insurers invest more than 30 percent of their assets in debt securities, with significantly shorter maturities compared to their long-term liabilities. Based on FI’s calculation in 2009, a one percent decrease in interest rates for all maturities would mean an increase in the value of life insurers’ liabilities by around SEK150 billion. The Swedish interest-bearing assets would only increase SEK 35 billion, so the net effect would be SEK115 billion given a one percent decrease in the discount rate.12

Table 5.

Sweden: Analysis of Insurer’s Assets

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Source: Swedish Insurance in Figures by Statistics of Sweden.

Note 1: This analysis includes investments of ULPs totaling SEK 578,386 million.

Figure 2.
Figure 2.

Sweden: The Yield on 10-Year Swedish Government Bond, 10-Year Swedish Interest Rate Swap, and 5-Year Swedish Covered Bond

Citation: IMF Staff Country Reports 2011, 282; 10.5089/9781463903534.002.A001

Source: Financial Stability Report 2/2010, Riksbank.

17. Insurers’ solvency levels were hit badly in 2008 but recovered in 2009 (Table 6). Life insurers’ solvency was hit badly in 2008 due to a combination of falling asset prices and a sharp fall in interest rates.13 While their solvency ratios have recovered somewhat in 2009 (Figure 3), some life insurers are close to solvency intervention level and are monitored by FI closely. While the impact of the financial crisis on nonlife insurers was more moderate, both the overall operating income and solvency ratio dropped in 2008. The overall solvency ratio for nonlife insurers improved in 2009 and FI’s assessment is that there is only a minor solvency risk 14(Figure 4). In contrast, the solvency ratios for reinsurers and captives have been declining since 2007, and a number of captive insurers are subject to closer monitoring by FI. Notably, the reported solvency ratios are computed under the Solvency I regime and not sufficiently risk-sensitive. FI supplements its solvency assessment using the Traffic Light model through prescribed stress testing (details under ICP 23).

18. The key risks for nonlife insurers include intense competition and exposures to catastrophic risks. Competition amongst the many players in the Swedish nonlife insurance industry exerts significant pressures on their premium ratings. FI noted that over the period 2005 to 2008, nonlife insurers experienced a real decrease in earned premiums after adjusting for inflation.15 While some insurers have already exited the market in the last few years, enhanced regulatory requirements for governance and risk management under the EU Solvency II regime to be implemented in 2013 may lead to further industry consolidation. Nonlife insurers’ exposures to catastrophic weather conditions are not negligible and insurers expect increasing risk exposures to catastrophic weather conditions. Insurers may limit their exposure through policy conditions, which could also be cushioned by contingency reserves held as part of their own funds. Going forward, new business opportunities are mainly in products bordering the social insurance system.

Table 6.

Sweden: Capital and Solvency of Insurers as at End-2009

(In SEK millions)

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Source: FI’s Swedish Data—FSAP.

Solvency ratio = available solvency margin/required solvency margin.

Figure 3.
Figure 3.

Sweden Solvency Ratios—Life

Citation: IMF Staff Country Reports 2011, 282; 10.5089/9781463903534.002.A001

Source: Risk in Financial System October 2010, FI.
Figure 4.
Figure 4.

Sweden: Capital & Solvency—NonLife

Citation: IMF Staff Country Reports 2011, 282; 10.5089/9781463903534.002.A001

19. A prolonged low interest climate is a significant challenge for life insurers, with risks of unintended consequences arising from their investment strategies. Life insurers are exposed to interest rate risks on both the asset and liability sides of their balance sheets (paragraph 16 above). In particular, FI noted that insurance savings invested in life insurers and occupational pension funds amounted to SEK1,900 billion as at end-2009. More than 70 percent of these savings are linked to commitments based on long-term interest rate guarantees.16 A potential concern is that if insurers decide to manage their financial risks by selling shares and purchasing interest-bearing assets, it would put more downward pressure on both the stock market and interest rates resulting in a vicious circle. Such a scenario may also have systemic implications for other financial market participants.17 Life insurers are also confronting intensive competition from other investment products, compounded by the eroding tax advantage they used to enjoy.

Institutional Framework and Arrangements

20. FI is the integrated supervisor for the financial sector in Sweden, supervising about 3,700 entities: banks, credit institutions, investment firms, fund managers, trading platforms, exchanges, insurers, insurance intermediaries and mutual societies. It is a central administrative authority with the mandate to promote stability and efficiency in the financial system as well as to ensure effective consumer protection.

21. FI is accountable to the Ministry of Finance (MoF) and its annual budgets are funded by the MoF. FI is a governed by an eight-member Board of Directors appointed by the government. The Director-General (DG) is the head of FI. The Swedish parliament is the only public body with the authority to adopt new laws or to amend existing legislation. The specific act authorizes the government to issue further regulations in an ordinance. The government is responsible for formulating and issuing financial sector legislations and regulations and may authorize FI to issue secondary regulations, only if it is specifically provided for under the relevant law or primary regulations.

22. FI supervises only private insurance business and social insurances are not subject to FI supervision. Social insurance is an integral part of the Swedish social security system, providing financial protection for disability, work injury, illness, and old age (state pension). Försäkringskassan is the agency that administers social insurance. While FI supervises the activities of life insurers in respect of occupational and private pension products, it collaborates closely with Pensionsmyndigheten, which administers the public pension segment.

23. To enhance collaboration amongst regulatory/supervisory authorities in Sweden, the MoF, the Riksbank, FI and the Swedish National Debt Office (SNDO) have signed a Memorandum of Understanding (MoU). The objective is to establish guidelines for consultation and the exchange of information between the parties in the areas of financial stability and crisis management. The MoU also provides for cooperation between the Riksbank and FI and their respective accountabilities. Pursuant to the MoU, a Domestic Standing Group 18 was established to facilitate consultation and information sharing.

24. The key legislation governing private insurance activity in Sweden is the IBA and the Foreign Insurance Business Act (FIBA). IBA and FIBA set out the regulatory requirements for the establishment of insurance entities, rules pertaining to their operations and the supervisory mandate of FI. The IBA is supported by implementing regulations and guidelines that elaborates FI’s supervisory expectations. The Insurance Contracts Act (ICA), which entered into force on 1 January 2006, regulates the legal relationship between insurers and insureds as well as other legitimate claimants. In general, any insurance clauses less favorable for consumers than those set forth in the ICA are invalid. A separate Motor Insurance Act applies to mandatory motor third party insurance.

25. The authorities are taking proactive measures to address the key lessons learnt from the financial crisis in 2008/9. Sweden has set up a government commission to review the lessons from the current crisis, including supervisory capacity building.19 In particular, the crisis highlighted that greater clarity is required on the respective roles of the various agencies for financial stability and the supervisory tools that they are empowered to use.20

Key Findings and Recommendations

26. The Swedish regulatory framework has a high level of observance with the ICPs (Table 7). The regulatory regime is broadly in line with EU Directives governing licensing, solvency, insurance intermediaries and consumer protection. FI has also introduced the Traffic-Light model, a framework for stress testing, to better understand insurers’ risk exposures and facilitate early intervention. FI adopts a systematic supervisory risk assessment process to prioritizing and planning supervisory activities and resources. The new IBA, which came into effect on 1 April 2011, provides broader powers to FI to issue secondary regulations to address a number of supervisory gaps. The impending implementation of Solvency II will strengthen FI’s risk-based supervision, subject to the adequacy of supervisory resources.

27. The coverage and robustness of FI’s prudential supervision should be strengthened. FI has no legal authority to establish and assess fitness and propriety of senior management of insurers during the licensing stage and on on-going basis. There is no regulatory requirement for insurers to report their reinsurance strategies and programs, outsourcing arrangements and off-balance sheet exposures including derivatives transactions. Supervision of insurance groups needs to be strengthened in the areas of reinsurance, risk concentrations and group risk management. FI has been focusing its supervision on the top 12 to 13 insurers while smaller insurers are inspected on an exception basis. Notably, FI has started a process to cover the smaller insurers on a 5-year cycle. It is advisable that FI formulates a risk-based supervision approach based on both the impact and probability of failure, supported by appropriate baseline supervision.

28. There is scope for additional regulatory requirement to enhance protection of policyholders. FI has not issued regulations or guidelines on conditional bonuses 21 setting out how life insurers are expected to exercise their discretion in the distribution of surplus in an equitable manner, the basis for computing technical provisions and related disclosures to policyholders. The possibility of transferring policies by policyholders has increased in recent years, primarily due to the introduction of a mandatory option of transferring in 2007 and voluntary transfer of policies with regard to private collective insurances. It is recognized that most transfers of traditional policies are likely to result in lower benefits to policyholders due to the reduced assumed yield rates over the years. While the reduced benefits may be compensated by lower administration costs and products that are more suitable to the risk profiles of policyholders in some cases, it is timely to study the net impact on policyholders to ensure that their interests are not compromised. The authorities are advised to review whether existing regulatory measures are adequate to ensure that policyholders are given proper advice in their best interests in respect of policy transfers.

29. The authorities are advised to review the continued involvement of the government in institution-specific supervisory issues. The IBA explicitly provides for government’s involvement in institution-specific issues such as license approval or revocation, issuing reprimands or imposition of administrative fines, or where an insurer fails to comply with an order by FI. While such involvement is intended for “matters of principle or special importance,” the IBA does not specify the circumstances. The authorities explained that the government does not get involved as a matter of practice. Nonetheless, the possibility of intervention may compromise FI’s independence.

30. It is important that FI is adequately resourced and empowered in order to effectively discharge its supervisory mandates. FI’s insurance supervisory staffs are competent and qualified. However, due to inadequate resources to supervise a large number of insurers, FI had to make difficult compromises and has been unable to implement appropriate baseline supervision. Going forward, there are also significant resource implications arising from the implementation of Solvency II and supervision of cross-border insurance groups/conglomerates. The FI had a narrow scope in issuing binding secondary regulations to address emerging supervisory issues on timely basis. In this regard, the new IBA which provides FI with a broader mandate to issue secondary regulations is a positive development. The authorities are advised to carefully consider whether the level of legal protection available to the FI and its staff is at the level envisaged by ICP3.

Table 7.

Sweden: Summary of Compliance with the ICPs

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Summary of Grading

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Table 8.

Sweden: Recommendations to Improve Observance of ICPs

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Authorities’ response to the assessment

31. The Swedish authorities welcome the assessment of the regulation and supervision of the insurance sector. on the whole, we share the views expressed in the assessment as well as the grading of observance of the Insurance Core Principles. The recommendations given will be used to improve the regulation and supervision of the Swedish insurance sector.

32. Several of the issues raised will be dealt with once the new regulatory framework for the insurance sector, i.e. Solvency II, is implemented. Sweden is also participating in ongoing work carried out by IAIS on Internationally Active Insurance Groups, which will contribute to further development of the supervisory standard. Additionally, regulation regarding transfer of policies as well as other life insurance related issues is currently under national review.

II. Detailed Principle-by-Principle Assessment Methodology

Table 9.

Sweden: Detailed Assessment

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An approved auditor (Sw. godkädnd revisor) is authorised by the Swedish Supervisory Board of Public Accountants (Sw. Revisorsnämnden) for a period of five years. The qualifying criteria include: a university degree in economics; at least three years recognised practical experience; passed an examination of professional competence; and of good repute and otherwise be fit and proper.

A chartered accountant (Sw. auktoriserad revisor) is also authorised by the Swedish Supervisory Board of Public Accountants for a period of five years. In addition to the standards set out above, a chartered accountant must have at least five years recognised practical experience and pass an advanced examination of professional competence.

3 There are two regulated markets in Sweden: NASDAQ OMX Stockholm and Nordic Growth Market.

There were four MTFs in Sweden: First North, Nordic MTF, Burgundy and Aktietorget.

The term Swedish bond market refers to the market for bonds issued by Swedish issuers in SEK. Bonds issued in other currencies are converted into SEK. As a rule, issuances conducted in other currencies are converted into SEK via derivatives, primarily currency swaps. Insurers were the largest category of investors in the SEK bond market, accounting for approximately 50 percent of the outstanding in the bond market as at end-2009.

“Who we are and what we do” FI, 2009 (FI website).

FI’s strategic goal is to be the best in the Nordic countries and the Baltic Sea region in areas such as customer satisfaction, processing times and electronic reporting.

Essential criterion 3c) states: “The legislation grants sufficient powers for the effective discharge of supervisory responsibilities.”

There are five major categories of institutions: 1) banks, savings banks and securities companies; 2) credit institutions; 3) Insurance undertakings, friendly societies; 4) stock exchanges, authorised marketplaces and clearing houses; and 5) Fund management companies.

A Report on the Mandate, Structure and Resources of the Swedish Financial Supervisory Authority by Professor Howell E. Jackson James S. Reid, Jr., Professor of Law Harvard Law School.

There is a separate unit with 6 staff responsible for assessing and approving internal models of supervised entities and intermediaries are supervised by a separate unit with 7 staff, who are also responsible for a large number of funds.

For example, FI revoked NGM’s license on 1 October 2009. The Stockholm County Administrative Court later ruled that NGM’s license to operate a regulated market and trading facility would not be revoked. NGM was issued a warning instead and a financial penalty of SEK 4.5 million to the Government in accordance with FI’s proposal. Source: “Who we are and what we do” FI, 2009.

General secrecy provisions regarding financial markets are set out in chapter 30 of the Public Access to Information and Secrecy Act.

The Risk Assessment Process, dated 2011-1-27 by FI.

FI started to develop and the traffic light model in 2005, taking account of the lessons learnt from the sharp decline in the stock market during the period 2000-2002, and the subsequent drop in interest rates that weakened insurers’ financial strength.

The capital buffer used in the traffic-light model consists of subordinated debt, untaxed reserves and shareholders’ equity.

However, the small local non-life insurers and company-linked pension foundations are not included in the traffic light reporting system (Source FI’s FAQ—General).

The 2010 Supervisory Report describes the lessons learned from the financial crisis as well as general issues regarding consumer protection on the mortgage market, the advice of insurance intermediaries and how the interests of the customer are protected in investment funds and insurers.

A protocol relating to the collaboration of the supervisory authorities of the member states of EU. It concerns the application of Directive 1998/78/EC on the supervision of insurance undertakings which is part of an insurance group.

The revised Siena protocol outlines the minimum requirements for the exchange of information between the insurance supervisory authorities within the EEA.

A protocol which provides a framework for the cooperation of competent authorities in the implementation of Directive 2003/41/EC on the activities and supervision of Institutions for Occupational retirement provision that operate cross-border.

CEIOPS list of groups for which a College of supervisors is in place.

Chapter 2 of the IBA sets out detailed provisions regarding the formation and incorporation of an insurance company limited by shares and a mutual insurer. An insurer who is not formed in accordance with these provisions cannot be granted a licence.

Defined in Chapter 1, Section 9i of the IBA.

Financial supervision includes monitoring the solvency, technical provisions and debt service coverage.

The certificate from the home supervisor provides details regarding available solvency margin, required solvency margin and the composition of the minimum guarantee fund or equivalent.

In 2009, FI issued a reprimand against a Swedish non-life insurer and imposed a fine of SEK 5 million. FI had found, inter alia, that its corporate governance and internal controls were inadequate. The management structure and accountabilities were complex and ill-defined. In addition, it had failed to submit quarterly and annual reports on an accurate and timely basis. The insurer took remedial action, as required by FI.

An insurer should endeavour to ensure that employees do not use risk hedging strategies or insurances to mitigate the effects of an adjustment/cancellation of a deferred payment.

FI found a non-life mutual insurer had committed a breach of applicable laws and regulations, including accounting procedures and the submission of quarterly and annual reports to FI. FI issued a warning and imposed a fine of SEK 2,000,000.

In 2007 a friendly society, received a red light in the Traffic Light model. FI’s investigation revealed that the friendly society had incurred borrowings in order to purchase real estate, which is unlawful. FI ordered the friendly society to take corrective measures.

In May 2009, FI issued a sanction against a Swedish non-life insurer for inadequacies in corporate governance, internal controls, and reporting to FI. This was followed up by an on-site inspection during 2010.

Arising from an inspection of a Swedish life insurer in 2009, FI ordered the insurer to submit a financial recovery plan. The insurer stated in the plan that its assets would be returned on or before a specified date. FI deemed the plan to be insufficient and decided to prohibit the insurer from disposing its assets without the consent of FI until the specified date.

Before declaring that the licence of the insurer above was revoked, FI issued a decision preventing the insurer from entering into any new insurance agreements.

FI revoked the licence of life insurer and appointed an administrator to conduct the business on behalf of FI until the court ordered the insurer to enter into compulsory liquidation.

During the financial crisis in 2008 and 2009, FI ordered a number of insurers to give at least 48 hours’ notice before carrying out any transaction involving the transfer of assets to their parent companies.

A Swedish life insurer had, inter alia, transferred a substantial sum of assets covering technical provision to a Swiss bank account of a third party, which was subsequently pledged as security in favour of the bank. There was a real risk that the assets might never be returned and that the registered assets would not be sufficient to cover all claims. FI and the liquidators, however, managed to arrange a portfolio transfer to another insurer.

Related party transactions to be reported include: items that may be included on own funds (e.g., subordinated loans), investments, loans, reinsurance and agreement for shared expenses.

An undertaking within a conglomerate may not be exposed to financial risks or other risks which are large enough to threaten the solvency or the financial position of a regulated undertaking within the conglomerate. Material risk concentrations and including reinsurance risk concentrations shall, on an annual basis, be reported to FI. (Cpt 5 s7, s8 &s11 of SSFCA and FFFS2006:6).

An insurer within a conglomerate shall adopt risk management processes and internal control mechanisms which are adequate having regard to the collective risk situation of the conglomerate. (Cpt 5 s13 of SSFCA).

CEIOPS: List of groups for which a College of supervisors is in place.

The group has been divided into three insurance groups (part of Old Mutual): Skandia Nordic, Skandia U.K. and Skandia Leben. There are ongoing discussions with concerned authorities due to the reorganization on the appropriate lead supervisor.

Include non-operating holding companies, operating holding companies and non-regulated operating entities.

Traffic Light results of a non-life insurer suggested that its technical provisions were insufficient. FI conducted informal discussions with the insurer, who then injected capital and increased the technical provisions. The insurer was subsequently sold to another insurer.

The practice of managing a business so that decisions and actions taken with respect to assets and liabilities are coordinated

FI’s Supervisory Report for 2010.

Example: A decline in equity prices normally only affects assets in the balance sheet. However, if the insurer has a conditional bonus in its actuarial provisions that depends on the value of its shareholdings, the change in actuarial provisions resulting from the decline in the share price must be included. The same applies to all asset-price changes that affect both assets and liabilities.

A tied intermediary is defined as a natural or legal person who has entered into an agreement with one or several insurers regarding the mediation of insurance products.

FI issued a warning against a tied intermediary and imposed a fine of SEK 800,000 for failing to comply with obligations under the SIMA and FFFS 2005The intermediary did not meet the requirements regarding knowledge and experience, the business was not carried on in accordance with good insurance mediation practice and it had failed to adopt customer complaints procedures.

FI found that an insurance intermediary had failed to act in accordance with good insurance mediation practice and imposed a fine in the sum of SEK 700,000.

Regulation (EC) No. 2006/2004 of the European Parliament and of the Council dated October 27, 2004.

Standard on Disclosures Concerning Technical Performance and Risks for Nonlife Insurers and Reinsurers (October 2004), Standard on Disclosures Concerning Investment Risks and Performance for Insurers and Reinsurers (October 2005) and Standard on Disclosures concerning Technical Risks and Performance for Life Insurers (October 2006).

Fourth Follow-up Report on Sweden, October 2010: http://www.fatf-gafi.org/dataoecd/58/30/46253171.pdf

In 2006, FI conducted a survey of 126 financial companies on a cross-sectoral basis. Each company had to respond to approximately 80 questions concerning their AML/CFT regime. Through this exercise, FI assessed levels of compliance and the possible risks. Review of all 828 insurance intermediaries in 2006 resulted in many insurance intermediaries having to make corrections to their internal procedures for AML/CFT. In 2007, on-site inspections of three major life insurers led to corrections to their internal procedures for AML/CFT.

Appendix I Key Recommendations of the 2002 FSAP AND Their Implementation

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1

At the time of assessment, the IAIS was in the process of updating the ICPs and the corresponding standards, and guidance material. The IAIS has issued some ICP materials at its October 2010 general meeting, which may be revised for alignment and consistency when the revised ICP will be adopted in October 2011.

2

Swiss Re Sigma 2/10.

3

Swedish Insurance Federation.

4

2006 - Skandia (a life insurer) was acquired by Old Mutual plc of U.K. and South Africa.

2007 - SPP (an occupational pension insurer) was acquired by Storebrand ASA of Norway.

2009 - TrygVesta of Denmark acquired Moderna (a nonlife insurer), which now operates as a Swedish branch.

5

Insurance intermediary is defined as a person who presents or suggests insurance contracts or carries out other preparatory work before the execution of an insurance contract; enters into insurance contracts on behalf of a third party; or provides assistance in the management and performance of insurance contracts. (Cpt 1 s1 of SIMA).

6

In 2007, FI found that 47 insurers failed to report that they were part of insurance groups. (FI Report 208:16).

7

Skandia, SEB, Folksam, AFA and LF Liv.

8

The financial system’s total assets amounted to about 550 percent of GDP, of which 65 percent belonged to the four largest banking groups.

9

Some life insurers offer pension products exclusively.

10

Foreign risks are those that do not qualify as Swedish risks (i.e., risks located in Sweden or where the insurers are residents in Sweden or having a permanent establishment in Sweden.)

11

The average maturity of life insurers’ assets is typically shorter than their liabilities, which can stretch more than 40 years, e.g., whole life policies or annuities. Maturing assets have to be reinvested and there is a risk the interest rate of the new investment may be lower than anticipated.

12

Risks in the Financial System 2009, FI.

13

Overall, life insurers recorded a net loss in 2008 with a negative return-on-equity of 48 percent.

14

As of June 30, 2010, 68 percent of nonlife insurers had a solvency ratio of more than five. A small number of insurers reported a solvency ratio of less than two. No insurer had a solvency ratio under one. Stress tests under the Traffic Light model also showed that nonlife insurers have good margins and a relatively stable ratio of more than 3, on average.

15

Risk in Financial System 2009, FI.

16

“The average guaranteed interest rate in the companies’ portfolios is currently around 3.5 percent. Many agreements are 15-20 years old and promise a guaranteed interest rate of 5 percent, while new policies normally have a rate of between 2 percent and 2.5 percent.”

17

“Risk in Financial System”—October 2010, FI and “How life insurance companies can affect financial stability”—Financial Stability Report 2/2010, Riksbank. ICP 20 below outlines FI’s proposal to use interest smoothing rate under the impending Solvency II regime.

18

The Group comprises the State Secretary (MoF), an executive board member of the Riksbank, the Director General of FI; and the Director General of the SNDO.

19

The review covers: the division of labor on micro and macroprudential regulations among the relevant authorities; macroprudential tools; bank resolution framework and deposit insurance scheme; international reserve management; and supervisory capacity building.

21

Some life policies provide for conditional bonuses that are not guaranteed but would vary according to the investment performance of the underlying assets.

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Cover IMF Staff Country Reports
Sweden: Financial Sector Assessment Program Update-Detailed Assessment of Observance on Insurance Core Principles
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 282
Publisher:
International Monetary Fund
ISBN:
9781463903534
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781463903534.002
  • Figure 1.
    View in gallery
    Figure 1.

    Sweden: Investors in the Swedish Bond Market

    (In SEK billions)

  • Figure 2.
    View in gallery
    Figure 2.

    Sweden: The Yield on 10-Year Swedish Government Bond, 10-Year Swedish Interest Rate Swap, and 5-Year Swedish Covered Bond

  • Figure 3.
    View in gallery
    Figure 3.

    Sweden Solvency Ratios—Life

  • Figure 4.
    View in gallery
    Figure 4.

    Sweden: Capital & Solvency—NonLife

Figure 1.

Sweden: Investors in the Swedish Bond Market

(In SEK billions)
Figure 2.

Sweden: The Yield on 10-Year Swedish Government Bond, 10-Year Swedish Interest Rate Swap, and 5-Year Swedish Covered Bond
Figure 3.

Sweden Solvency Ratios—Life
Figure 4.

Sweden: Capital & Solvency—NonLife