Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
The stability of Finnish insurance market could be affected by lower investment income and new type of competition.

High solvency levels and a lack of foreign competition in the Finnish insurance market has led rating agency Standard & Poor's to establish a stable outlook on the market, indicating that most insurers' financial strength ratings are unlikely to change.

However, negative developments in insurers' investments and competition from new distribution channels such as the internet could affect the market's mid-term health.

The market's pre-tax profit more than doubled in 1999, largely due to a three-fold increase in investment revenues that compensated for the market's poor combined ratio (at 110%) and low premium growth.

The low premium growth – less than 1% after reinsurance ceded – was largely the result of a 10% drop in worker compensation premiums. This was due to the government, which controls the pricing of worker compensation business, levying higher premiums in 1998 to strengthen the market's claims provision. Other sectors, nevertheless, did register good growth in 1999 – for example, motor at 14% – and premiums are generally healthy.

Finland's small population has meant that it has not been a primary goal for foreign competition, which tends to target larger markets. Consequently, the market has been able to protect the growth opportunities in its life business and successfully stave off price competition in the more mature non-life market.

A lack of brokers in the market and historically strong ties forged between Finnish insurers and the country's large corporate businesses also contribute to making the Finnish market hard for foreign insurers to enter. Worker compensation business is of primary importance to Finnish insurers and so they develop relationships with businesses to protect it.

Nevertheless, the market's mid-term stability could yet be hit by a downturn in investment revenues in 2001. The dramatic fall in the price per share of Finnish mobile communications group Nokia, for example, will put particular pressure on insurers' investments. Most large Finnish insurers have a significant shareholding in Nokia and the company's predicted fall in sales growth in 2001 could contribute to a downturn in insurers' investment income.

With a comparatively low income per capita, low-cost internet products could begin to build in popularity among policyholders. New internet products are a potential future threat to Finnish insurers because of the net's lack of geographic boundaries. Even without a physical presence in Finland, foreign insurers could begin to gain market share over the internet.

The insurance market
With the market being quite small and market shares remaining relatively constant, the larger players seem to be interested in expansion eastwards into the relatively untouched markets of the former Soviet Bloc. The main players already dominate the Finnish market with the five largest groups commanding 89% of it. According to the Federation of Finnish Insurance Companies, the Sampo Group held 33.5% of the non-life market in 1999, the Pohjola Group 24.0%, the Tapiola Group 14.2%, Enterprise Fennia 9.5% and the Local Insurance Group 7.7%. In recent years, both Sampo and Pohjola have looked to restructure their non-life businesses.

In October 1999, the Finnish government approved the merger of the country's largest insurance group, Sampo, with the state-owned bank Leonia.

The new group is known as the Sampo Group, with the shareholders of the pre-merger Sampo controlling 60% of the capital and the remainder being held by the state, although the state has gained parliamentary authorisation to reduce its stake to 20%. The merger came into force on December 31, 2000.

Also in October 1999, Sampo acquired Skandia of Sweden's holding in Pohjola, increasing its stake to 23.6%. In May 2000, Sampo agreed to sell its stake in Pohjola to Ilmarinen, following Pohjola's decision to focus on non-life business (see below).

With effect from March 31, 2001 Sampo Enterprise Insurance Company and Industrial Insurance Company merged into Sampo Insurance Company, whereupon the latter company discontinued its insurance business, renounced the licence required for that purpose and surrendered its insurance portfolio to two new non-life insurance companies. The names of the new companies are Sampo Insurance Company and Sampo Industrial Insurance Company Ltd. The former was given the retail and corporate customers' portfolio, and the latter the major customers' portfolio.

In May 2001, Sampo announced that it was to acquire Norway's Storebrand Group and to place Sampo's non-life business in If P&C Insurance (If), alongside the non-life portfolios of Sweden's Skandia and Norway's Storebrand.

As a result of these developments, Sampo is set to become the majority owner of If and thereby the largest non-life insurer in the Nordic region. If is likely to be floated on the stock exchange in 2002, although it is possible that a non-Nordic group may acquire it in the interim.

In recent years, Pohjola Non-Life has been through a period of uncertainty, which has resulted in a loss of market share. In 2000, it was set to become the third partner, along with Sweden's Skandia and Norway's Storebrand, in the new Nordic property and casualty insurance group If. But in May of that year Pohjola took the decision to leave If, following a review of the company's strategy by its major shareholders.

One of those shareholders, Sampo, subsequently sold its shares to the other major shareholders, Ilmarinen, Suomi Mutual and Okobank. Pohjola Group subsequently took the decision to focus on non-life insurance and sold its life operations to Suomi Mutual. In May 2001, Pohjola announced that it was to acquire A-Vakuutus Mutual Insurance Co, a specialist transport insurer.

Tapiola General Mutual underwrites a mix of personal lines insurance and risks for medium-sized businesses. Enterprise-Fennia focuses on commercial risks rather than personal lines.

The Local Insurance Mutual specialises in motor insurance and provides reinsurance for local mutual property insurers in rural areas.

Market features

Compulsory insurance
There are four lines of statutory non-life insurance in Finland:

  • worker compensation
  • motor liability
  • patient insurance
  • environmental impairment insurance.

    The two largest classes of compulsory non-life insurance in Finland are worker compensation and motor liability insurance, accounting for a combined total of 41% of gross premiums written. Premium rates for worker compensation insurance have been approved each year by the Ministry of Social Affairs and Health, based on proposals by insurance companies. This requirement was abolished from 1999 onwards. Worker compensation insurance can only be written by companies which have a licence from the Ministry. Following amendments made in Finnish legislation at the beginning of 1997, Finland opened up statutory employment accident insurance to international cross-border competition in 1999.

    Third-party liability insurance
    From the beginning of 1995, motor third-party liability insurance may be carried on in Finland on the basis of a licence granted in a European Economic Area (EEA) country. The law requires that compulsory motor not only covers third-party liability but also provides compensation for injury to the driver and passengers of the vehicle responsible. All insurance companies granting third-party motor insurance in Finland must be members of the Motor Insurers Centre which is primarily liable for damage by uninsured or unidentified drivers for which it charges a levy on all companies underwriting motor business.

    Environmental Impairment Insurance Act
    The Environmental Impairment Insurance Act protects against damage and injuries sustained in cases where it is not possible to recover compensation in full from the business that caused the damage or injury and no compensation can be collected under the liable party's liability insurance, if any. Environmental impairment insurance also covers events where the primary liable party has not been identified. This type of insurance is available from all general liability insurers that are members of the Environmental Insurance Centre. Claims are handled by the Environmental Insurance Centre.

    Premium tax
    Premium tax at 22% is levied on all non-life premiums, although there are exemptions for the following classes of insurance:

  • personal
  • credit
  • medical malpractice
  • reinsurance
  • cargo insurance on goods imported, exported or in transit through Finland.

    Besides premium taxes, insurance companies are required to collect a number of other charges for the state, such as road safety charge and fire brigade charge. The rates range between 1.2% and 5.8% of the premium amount.

    The Federation of Finnish Insurance Companies
    The main trade association for life and non-life insurance companies in Finland is The Federation of Finnish Insurance Companies (SVK). As of March 2001, this association comprises 23 general insurers and 20 life insurers as well as six reinsurers and 15 foreign insurers.

    Insurers write the majority of their business via their own marketing network and via a network of licensed tied agents.

    Some business is now being written via independent brokerages, of which there were 37 in April 2000. Brokers must be qualified and are required to obtain professional liability insurance. Both the companies and individuals must be registered and there are currently 95 registered individuals working within these brokers.

    Insurance regulation and supervision
    The regulatory authority is the Ministry of Social Affairs and Health at:

    Kirkkokatu 14
    P.O. Box 33
    FIN – 00023 GOVERNMENT

    Insurance business in Finland carried out by Finnish authorised companies is regulated by two main laws (with subsequent amendments): the Insurance Companies Act 1062/79 of 1979 and the Insurance Contracts Act 543/94 of 1994. Other acts regulate the operations of foreign insurers in Finland and the activities of brokers. Changes have been incorporated in order to bring laws in line with EU directives, which have been implemented in Finland since April 1, 1995.

    The setting-up of an insurance company requires a licence from the Ministry. The application should be accompanied by a plan of operations. The minimum necessary basic capital is as follows:

  • o2.4m (£1.5m) for the transaction of life assurance and the following non-life classes: motor vehicle liability, aircraft liability, liability for ships, general liability, credit, suretyship and miscellaneous financial loss, and
  • o1.2m (£740,000) for the transaction of other types of insurance business.

    The date of the change in currency of required capital amounts from FIM to euro was December 30, 1998.

    The Ministry is also responsible for granting licences to foreign insurers to operate from a branch in Finland. A foreign insurance company which has its domicile within the EEA may, after having informed the insurance supervisor in its own country, start carrying on insurance business via a Finnish branch on the basis of a licence granted to it in its home country. The solvency supervision of foreign EEA insurance companies operating in Finland is the responsibility of the authority in charge of the supervision of insurance companies in their home countries.

    With effect from April 1999, a new regulatory body, the Insurance Supervision Authority, came into being. The Insurance Supervision Authority is located at :

    P.O. Box 449 (Mikonkatu 8)
    FIN - 00101 Helsinki
    Tel: +358 9 415 5950
    Fax: +358 9 4155 9515

    The operational role of the new authority was defined as: “to supervise and inspect the insurance and pension institutions and other agencies operating in the insurance sector.”

    The new authority is responsible for operational supervision tasks, decisions on matters concerning an agency subject to supervision, and decisions and exemption orders to be given on the application of those subject to supervision. The Supervision Authority for small local mutuals is to be abolished and its tasks transferred to the new authority. However, the Ministry of Social Affairs and Health will still be responsible for decisions concerning the founding and the authorisation of insurance companies, drafting legislation, setting of norms concerning the agencies supervised, administrative management and co-ordination of the activities related to the European Union and international co-operation.

    The consumer ombudsman oversees the marketing for consumer insurance and the fairness of contract conditions. The Finnish Competition Authority ensures competition in the insurance industry.

    Currently, life and non-life insurance business must be written by separate companies; however, such companies are permitted to be part of the same group.

    Insurance companies may not engage in any business other than insurance, or hold more than 50% in companies that specialize in other industries, unless approved by the Supervision Authority. This excludes housing and real estate companies, financial institutions, funds or insurance-related companies, which may be up to 100% owned.

    Financial statements must be prepared in accordance with generally accepted accounting principles and companies are required to follow good accounting practice. The accounting regulations relating to insurance companies were changed as of August 1995, with further changes in December 1995, and apply to annual accounts prepared from December 1995. These changes brought the accounts in line with the EU Insurance Accounts Directive.

    A company's financial period must be the calendar year. The annual accounts must comprise an income statement, balance sheet, statement of the source and application of funds, an annual report and notes to the financial statements.

    In the income statement, both life and non-life companies are required to show a statement of underwriting results both before and after accounting for reinsurance. For non-life companies, premiums are accounted for when due and claims are accounted for when incurred.

    Consolidated accounts must be prepared where subsidiaries exist. In general, disclosure requirements are stricter for insurance companies than for other Finnish companies. Annual accounts must be filed with the trade register within six months of the end of the financial year. These documents are available to the public. In addition, companies are required to submit to the Supervision Authority an annual statistical report of their activities and accounts on prescribed forms. This must be done within one month of the shareholders approving the accounts.

    The Supervision Authority can also demand necessary information from a company and has the right to inspect its activities at any time. On the basis of the right to demand necessary information from a company, the Supervision Authority has provided that the annual accounts, together with additional and more detailed information, must be filed with the Supervision Authority at least ten days before the annual audit meeting.

    An insurance company must have at least two auditors elected by the shareholders. At least one auditor must be authorised by the Central Chamber of Commerce and one auditor must be resident in an EEA country.

    Effective from the beginning of 1997, insurance legislation was amended, requiring companies writing compulsory non-life lines, i.e. motor third-party liability business, worker compensation or patient insurance, to make provisions into a new insolvency compensation scheme to be shown in the balance sheet as a specific joint guarantee item from the 1997 accounts onwards. This scheme ensured that policyholders receive compensation in the event of insolvency or bankruptcy and was based on insurance companies' and policyholders' joint liability. A similar solution for voluntary lines of business has not been put in place.

    A task force scrutinising insurers' solvency rules reported in late 1997 and recommended measures to upgrade solvency regulations in order to improve detection of investments risks in not only companies' internal control, but also authorities' supervision.

    There has been considerable discussion over the proposed reform to competition legislation. The proposal required that the insurance industry report all major acquisitions to the Finnish Competition Authority. This would effectively require the reporting of acquisitions twice, as these are already notified to the Supervision Authority.

    In addition, the government rejected the conclusions of a report by the Ministry of Finance on the supervision of the financial sector, which looked into bringing banking and insurance supervision closer together.

    1998 witnessed the full implementation of the housing trade law, notably its provisions on latent defects insurance, and a reform of legislation governing fire and rescue operations.

    The Nordic country of Finland covers an area of 338,150 sqkm and has a population of 5.2 million, with Helsinki, the capital city, accounting for some 546,317. The currency is the Finnish Markka (FIM), but with the move to economic and monetary union adopted by 11 EU countries in January 1999 (Austria, Belgium, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain) the currency will become the euro (o) in January 2003. The agreed central rate is FIM 5.95 = o1 $ 1 = FIM 6.3145 as at December 31, 2000.

    Following the general election on March 21, 1999, Paavo Lipponen, the incumbent prime minister, recorded a modest victory for the Social Democrat party. The prime minister hopes that the continuation of the rainbow coalition will enable Finland to maintain its recent record of robust growth, with the aim of reaching full employment by 2003, while maintaining the fiscally prudent and pro-business policies pursued during the preceding four years.

    Unlike its Nordic neighbours, Finland was in the first wave of participants for stage three of European Monetary Union in January 1999, having been one of the first to fulfil the Maastricht criteria. Finland became a member of the European Union on January 1, 1995, after the Finnish public voted 56.9% in favour of joining.

    There have been minor problems with the process of integrating the EU directives into national law and achieving closer harmonisation with the EU without antagonising Russia, but Finland has otherwise made impressive strides since it joined. Its increased standing within the EU has been recognised with a seat on the European Central Bank and Finland took over the European presidency in the second half of 1999.

    Standard & Poor's Sovereign Ratings

    Publication date: December 5, 2000
    Analyst: David Cooling, London (44) 20 7847 7109; Konrad Reuss, London 020 7847 7102
    Credit Rating AA+/Positive/A-1+

    The ratings on the Republic of Finland are supported by its:

  • Solid macroeconomic policy record – demonstrated by sustained fiscal discipline, lower unemployment, and moderate inflation – accelerating nominal convergence with Finland's EMU partners, and continuing economic diversification.
  • Strong competitive position. Structural reform in factor and product markets that continues to improve Finland's competitive position, supporting export-led economic growth, forecast to average 8% in real terms over the near term.
  • Robust general government finances and continued budget discipline. A general government budget surplus equivalent to 4.5% of GDP is budgeted in 2000, with further surpluses in excess of 4% of GDP per year forecast over the medium term.

    With real central government expenditures expected to remain close to 1999 levels, and robust revenue growth supported by real economic growth averaging 4% over the medium term, additional budget flexibility is expected to be used to lower the tax burden on labour.

    Amid steady economic growth, strong budget balances and modest privatization receipts are forecast to lower the general government debt burden (net of pension fund holdings of Finnish government paper) to 35% of GDP by 2003 from 47% in 1999. At the same time, the central government debt burden is forecast to fall to 46% of GDP from 58%. The ongoing decline in the public debt burden, coupled with moves to increase the effective retirement age in Finland and other reforms to the pension system, continues to improve the long-term sustainability of the government's finances in the face of a population that will age earlier than in other OECD countries.

    The outlook reflects Standard & Poor's view that, over the medium term, the ongoing improvement in Finland's public finances will be sustained, supported by prolonged expenditure discipline and the concurrent decline in the government debt burden and labor market reforms designed to safeguard Finland's competitive position.

    An upgrade of Finland's ratings could occur over the medium term if the government maintains sound fiscal balances and sustains further reductions in its gross indebtedness. Conversely, a relaxation of fiscal discipline or deterioration in Finland's international competitiveness would impede an upgrade.

    Finland insurance analyst contacts:
    David Laxton: London 020 7847 7079
    Simon Marshall: London 020 7847 7080

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