19 November 2013

Risk.net: Swedish insurers to suffer capital hit as regulator approves rule changes

On November 12, the Swedish financial regulator, Finansinspektionen (FI), passed new rules changing the way the discount rate for valuing insurance liabilities is calculated. It also made changes to the so-called ‘traffic light methodology', a tool for supervising insurers' capital requirements when under stress.

The new rules will require insurers to add a risk margin to their technical provisions, similar to Solvency II, to account for the sum a third party would claim in order to assume their liabilities. If an insurer is unable to exactly calculate the risk margin to match its individual profile, FI will set the additional charge at 5 per cent of their best estimate of liabilities.

These changes will reduce insurers' regulatory capital levels and some companies will struggle as a result, say experts. Per Johan Gidlund, Stockholm-based Solvency II specialist at KPMG Sweden, says: "This will have a reasonably large impact for insurers and will result in a reduction in risk capital, [which] calculations have indicated [equal up to] 3 per cent of assets under management. For smaller players, or companies struggling with an already tight solvency, [they] might have a hard time meeting the requirements of the traffic light [system] because of this 5 per cent rule."

The changes will enter into force on December 31, 2013. Insurance Sweden, the industry trade body, had been lobbying for a delay in the implementation, but it now looks unlikely that this will happen.

There are also concerns about how the FI's new discount curve will clash with Solvency II's ultimate forward rate and extrapolation methodology.

The Swedish approach rejects the Smith-Wilson extrapolation method chosen by the European directive in favour of a linear methodology that extrapolates rates beyond the 10-year last liquid point using a blend of real market rates and an ultimate forward rate set at 4.2 per cent.

The FI surprised the industry by setting a higher than anticipated 35-basis point credit risk deduction from the swap curve to the discount curve for occupational pensions and a 55bp reduction for private pensions. An earlier version of the proposal initially set the adjustment at 10bp.

Håkan Ljung, Stockholm-based chief risk officer at Skandia, says the difference in the extrapolation methodologies will be an extra complication for Swedish insurers.

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