Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
Stability of Swedish non-life insurance market could be affected by foreign incursion and increase in litigation

Standard & Poor's has established a stable outlook on the market, indicating that ratings are more likely to remain the same than to change, but there are a number of developing factors that could affect the future profitability of the Swedish market.

Until recently, Standard & Poor's considered the outlook for the Swedish market to be negative, due to intense competition on rates, relatively high expense ratios and a lack of significant growth. However, the intense price competition that marred the region's results in 1999 has forced insurers to make savings elsewhere to improve their bottom line results. Also, companies are now looking into new distribution channels such as bancassurance or the internet. As a result, expense ratios, especially for larger companies, are improving.

The market's overall combined ratio is similarly expected to improve by about five percentage points to around 115% for 2000. Nevertheless, the market remains mature and insurance growth is likely to remain in line with economic growth.

Although the market outlook has been established as stable, the current upturn in the market could be cut short if competition returns and pushes the combined ratio back up again.

One important concern for Standard & Poor's is the possibility of foreign domination of the market. Trygg-Hansa is owned by Royal & Sunalliance and Zurich is also an important local player. If P&C Insurance, the joint venture owned by Sweden-based Skandia and Norway's Storebrand (soon to be joined by Finnish-based Sampo), is due to be floated on the stock market in 2002. However, it is possible that a foreign insurer will step in and buy the company.

The future ownership of If could have an important impact on the market. Should a foreign company enter the market and adopt an aggressive stance towards market share, this could re-create the problems of price competition and reverse the expected positive developments in the market's combined ratio.

Another vulnerable area for the Swedish market is motor insurance, which has seen developments towards a more litigious compensation culture. More frequent instances of litigation may indicate a cultural shift in the social framework surrounding injury claims – such a trend could cost insurers dearly. While whiplash claims, for example, have historically concerned injuries lasting two to three weeks, an increasing number of claimants are now being pensioned off as a result of such traumas.

This rising cost of liability claims is compounded by industry estimates that 10% of all non-life insurance claims in Sweden are fraudulent. Insurers have become more focused on assessing the number of fraudulent claims in Sweden, which has resulted in a higher level of fraud than expected becoming apparent. As a result, major efforts are now being made to combat the problem.

The insurance market
Although there are some 482 companies writing insurance business in Sweden, the trend over the past three decades has been towards consolidation. In the non-life market, the largest four domestic writers, If P&C Insurance, Folksam, Trygg-Hansa and Lansforsakringar WASA Group (LFAB) accounted for 84% of gross premium income in the non-labour market for 2000, according to the Swedish Insurance Federation. The combined market share of foreign insurance companies in the Swedish market was approximately 5%. Sweden is also home to the specialist reinsurer Sirius International Insurance Corporation.

Recent acquisitions
The main merger activity in Sweden and the Nordic region occurred in 1999 when Skandia and Storebrand (Norway's biggest non-life insurer) merged their non-life operations to form a new Nordic property and casualty insurance group, If P&C Insurance (If). This merger greatly increased the total premium income of Swedish insurers although it is worth noting that a significant portion of this – SEK10bn (£658m) – is insurance of Norwegian risks. Pohjola of Finland was also to be part of the new non-life insurer but reversed this decision in May 2000. The campaign launching the If brand in Finland started in January 2001. Also in January 2001, If acquired the Volvia insurance portfolio from Volvo.

In May 2001, Sampo, the parent company of Finnish insurance group Sampo, announced that it was to acquire the Storebrand Group and to place Sampo's non-life business in If – this will give Sampo a 67.5% stake in If. Sampo is seeking to sell Sampo Industrial Insurance and the company is not expected to remain in If.

There has been considerable pan-Nordic consolidation with several groups such as If, Royal & Sunalliance (Codan/Trygg-Hansa) and Nordea (Tryg-Baltica) aiming to be the Nordic giant in the non-life sector.

In January 2000, Folksam acquired the property and casualty portfolio of Salusansvar. The business is being written via a wholly-owned subsidiary, Svenska Konsumentforsakringar, and was purchased with the intention of giving Folksam access to new groups in the salaried employee sector.

In September 1999, S-E Banken (SEB) sold Trygg-Hansa's property insurance business to Codan (Denmark), while retaining ownership of the life operation. As a result, Codan, which is 72% owned by Royal & Sunalliance, became the third-largest property insurance company on the Swedish market, with a market share of just over 15 per cent. Subsequently, Trygg-Hansa has recommenced writing industrial and marine business, a line it sold to Zurich in conjunction with its merger with SEB in 1997.

In February 2001, LFAB announced that it was to acquire corporate and real estate insurer Svenska Brand.

The acquisition of Trygg-Hansa's industrial and marine business by the Zurich Group (Switzerland) from SEB represented the first major attempt by a non-Nordic insurance company to break into the Swedish market and illustrated the increasing globalisation of insurance. According to Swedish Insurance Federation figures for 2000, Zurich (via a a branch operation) is now the fifth largest non-life insurance company in Sweden with a market share of 3.3%. In December 2000,

28 foreign insurers had established agencies or branches in Sweden, up from 22 the previous year.

Market features
Traditionally, non-life business was written through networks of tied agents or direct sales forces. Following legislative changes implemented in 1990, there are now more than 900 brokers and they have taken an increasing share of the market and now account for approximately 20% to 25% of new commercial business. Brokers are licensed by the Finansinspektionen, though from January 1, 1999, insurance brokers registered in an EU country will be able to conduct cross-border operations in Sweden, without registering with the Finansinspektionen. These companies must be independent from insurance companies and are required to purchase professional indemnity insurance.

Compulsory insurances
Compulsory insurances include the following:

  • Third-party motor liability
  • Nuclear liabilities
  • Employers' liability (no fault)
  • Professional indemnity (for insurance brokers)

    Premium tax
    Currently there is no premium tax on insurance products.

    Insurance regulation and supervision
    The licensing of insurance companies in Sweden is controlled by the Finansinspektionen, or Financial Supervisory Authority. The address for the Finansinspektionen is:

    PO Box 7831
    Regeringsgatan 48
    SE-103 98 Stockholm
    Tel: +46 8 787 80 00
    Fax: +46 8 24 13 35

    The Finansinspektionen is an independent state agency under the Ministry of Finance. Its responsibilities are governed by the laws listed below and by government executive orders. It effectively acts as an adviser to the government, which has the ultimate powers of authority.

    Insurance in Sweden is controlled by the following laws:

  • The 1982 Act on insurance business, which regulates the activities of both proprietary and mutual companies, and
  • The 1989 Act relating to the activities of insurance brokers.

    The third life and non-life EU directives were enacted into Swedish law on July 1, 1995. Establishment of a non-life insurance company is at the discretion of the Finansinspektionen. EU minimum solvency requirements have applied since 1995. If a company's position gives cause for concern the Finansinspektionen has a wide range of powers within its control. In extreme cases, the troubled company can be wound up.

    In 1995, the minimum required amount of share capital for a private company was doubled from SEK50,000 (£3,300) to SEK100,000 (£6,600). Private companies were given until the end of 1998 to meet this new requirement.

    Captive companies are permitted. Under EU law and the Foreign Insurers Act 1998, agencies and branch offices of companies domiciled in EEA states are not supervised by the Finansinspektionen but by the regulators of their home states.

    On April 20, 1999, the European Court of Justice laid down that the 5% rule, which limited Swedish insurance companies' shareholdings to a maximum of 5% of a company's votes, contravenes EU directives on insurance. Since the Court of Justice has precedence over Swedish law, this judgment was immediately effective in Sweden and legislation has now been reformed to comply with the directives.

    According to the principle of separation, direct life insurance activities cannot be combined with direct or indirect non-life insurance activities other than accident or health insurance. Direct life insurance activities, in such cases, must be held separate from the non-life insurance activities so that the respective interests of life policyholders and non-life policyholders are not prejudiced.

    The Consumer Affairs Office, the Consumer Ombudsman and the Market Court also have certain legislative powers to protect policyholders.

    Accounting conventions
    Our reports are based entirely upon figures from the published annual reports. The format of these reports is prescribed by the Insurance Business Act, the Swedish Bookkeeping Act and accounting recommendations issued by the Finansinspektionen. Accounts must be submitted within seven months of the financial year end, although typically companies produce this information earlier in the year.

    The new Swedish Insurance Annual Accounts Act took effect on January 1, 1996.

    From January 1, 2001, the council on legislation recommends that accounts should be presented in euros instead of Swedish krona.

    1 Solvency
    EU minimum requirements have applied since 1995.

    2 Asset valuation
    From 1996, equities and real estate are valued at current value. Fixed-income securities may be reported at either amortised cost or current value, but current value must always be disclosed.

    Prior to 1996, investments were carried at the lower of cost or market value. Where we are able to identify the surplus of market value above carrying values, we include this surplus as an adjustment to reported shareholders' funds in our reports.

    3 Technical reserves
    Under Swedish law, non-life companies have to establish the following reserves:

  • Unearned premium reserve. This represents the unearned portion of written premium.
  • Loss reserve. Provision for unsettled claims, including a reserve for incurred but not reported claims. Includes claims adjustment reserve.

    In addition, non-life companies can make allocations to the tax-free safety reserve, which is voluntary. This is a contingency reserve and allocations to this reserve are based upon rules stipulated by the Finansinspektionen. Amounts vary for different lines of business and relate to premium volume and outstanding reserves for that line of business. The reserve can only be used for covering negative technical results.

    Prior to 1991, an equalisation reserve could be used. Since that time no further allocations to this reserve can be made.

    4 Shareholders' funds
    Shareholders' funds in our reports comprise paid-up share capital, guarantee capital (for mutual companies), retained earnings, and tax-free safety and contingency reserves. Where companies are still carrying an equalisation reserve, this is also included as part of shareholders' funds. As mentioned above, we adjust shareholders' funds in our reports to include the surplus asset values above book valuation.

    5 Life assurance
    Under current Swedish law, profits from traditional life assurance activities must be wholly for the benefit of life policyholders. Consequently, we exclude all life business from our report presentation.

    The positive foreign currency outlook reflects Standard & Poor's view that the ongoing improvement in Swedish public finances will be sustained over the medium to long term.

    At the same time, structural reforms in product and factor markets underpin a robust economic outlook.

    An upgrade of Sweden's foreign currency rating could occur over the medium term, if policymakers meet medium-term fiscal objectives, maintain expenditure discipline and continue with structural reforms in product and factor markets to sustain the present economic recovery. Conversely, a relaxation of fiscal discipline or a deterioration in Sweden's international competitiveness would impede an upgrade of the foreign currency rating.

    Sweden insurance analyst contacts:
    David Laxton London +44 20 7847 7079

    Simon Marshall London +44 20 7847 7080

    Dominic Skeet London +44 20 7847 7054

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