Solvency II regulation is likely to play a
major role in reshaping the Nordic life sector, according to a new
report from Fitch Ratings.
Although unit-linked business is growing in
importance in the Nordic region, the rating agency says traditional
policies with investment guarantees still accounted for around
two-thirds of all premiums written in the region in 2010.
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Fitch notes that Solvency II poses a threat to
traditional business because of the higher capital charges that are
being proposed for contracts with investment guarantees.
This is because under Solvency II, life
insurers will have to review the economic viability of
continuing to offer non-unit-linked
products.
However, as such policies constitute such a
large share of the market, demand is unlikely
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As insurers adapt to Solvency II, changes can
be expected in the composition of their assets.
Risk-off
Fitch expects Nordic insurers to further
de-risk their investment portfolios, driven by Solvency II’s high
capital charges, in particular for equities.
It explains that in 2010, equity investments
made up between 25% and 40% of total assets for both non-life and
life, excluding unit-linked insurers in Sweden, Finland and
Denmark. Fitch says the picture is similar in Norway.
In contrast, for end-2009, European insurance
groups (both life and non-life) held only about 8% of investments
in equity investments, excluding unit-linked, said the rating
agency.
Nordic Total Direct Life Premium Income
Note: Finland excludes statutory pension
Source: Insurance Europe
The report notes that the relatively large
market risk faced by Nordic insurers is further illustrated by the
fact that market risk contributed proportionately more to the basic
standard capital requirement (BSCR) under the fifth quantitative
impact study (QIS5) for the Nordic countries (with the exception of
Denmark) than for the European market – for both the life and
non-life markets.
This was largely a result of relatively high
equity exposure.
“For the first time, Solvency II will require
insurers to hold regulatory capital explicitly for asset risk,”
says Fitch. “Insurers will have to consider the risk to their
reported solvency position from short-term, one year,
mark-to-market fluctuations in asset values and hold regulatory
capital to cover the impact of a one-in-200-year event in the asset
markets.
“In response to this, insurers are likely to
consider changing their investment strategies to benefit from
better risk-adjusted return.”
It adds that insurers are the largest
investors in Europe and, as a proportion of national GDP,
investments by Nordic insurance companies are higher than for
Europe as a whole, and are particularly high for Denmark and
Sweden.
Key to success
Fitch says the key to success for providers of
traditional life products in the Nordic region will be scale and
cost efficiencies. The agency therefore predicts a gradual
consolidation of life insurance companies that offer
guarantees.
It adds: “This effect is likely to be more
pronounced in Denmark and Sweden, because the markets are less
concentrated.
“Some life companies may stop writing new
traditional policies altogether, a decision taken for instance by
Swedish insurer Lansforsakringar, choosing to focus solely on
unit-linked business. This could present opportunities for
consolidation of closed books of business.”
Fitch also expects some market participants to
develop hybrid products with partial guarantees,
for example when clients approach retirement
that could offer sufficient risk-adjusted return under Solvency
II.
Commenting on the findings, Bjorn Norrman,
associate director at Fitch Ratings, said: “Life insurance policies
with investment guarantees still account for two-thirds of premiums
in the Nordic region.
Scale and cost efficiencies will be paramount
to long-term survival for insurers offering this business, with
consolidation likely as a result.”
The report concludes: “Changes to asset
allocation strategies by Nordic insurers are therefore likely to
affect demand and pricing in local capital markets, although the
effects are likely to be long-term and gradual in nature.”
Aside from the impact of Solvency II, Fitch
believes the Nordic life market will continue to offer long-term
profitable growth opportunities as a result of strong economic
growth prospects, rising life expectancy and a growing awareness by
individuals that state pensions and social welfare must be
complemented by occupational and private pensions and short-term
savings.
