Scandinavian insurers are bracing themselves for the new wave of competition. Fennell Betson reports

The severe financial problems that hit a number of Finnish life and pensions insurers earlier this decade and resulted in liquidations and rescues, has led to a more streamlined sector. It is also a much more concentrated one. The rationalisation, says S&P, has resulted in four large groups, Pohjola, Varma-Sampo, Fennia and Tapiola. Ilmarinen, which is the country’s largest pension insurer, bucking the trend elsewhere, changed its status from a limited liability company and became a mutual insurer, but retained its link to Pohjola, despite no longer being a subsidiary.
The top five groups are reckoned to control two thirds of life premiums. Altogether, 13 groups operate in the life market. The two largest life insurers on a 1997 premium volume basis, according to S&P, are Merita and Arum, both subsidiaries of banks. Bancassurance has expanded rapidly in recent years. On the pensions side, of the six companies active, the top three handled over 80% of premium income in 1997. While group pension premiums have declined since 1995, personal pensions growth has been strong and maintained its momentum into 1998, thanks to wage rises.
Following the earlier problems, S&P finds the capitalisation of the Finnish life insurers varies from good to extremely strong. It also reports that solvency levels have remained “reasonably stable” despite the rapid premium growth in the mid-1990s. The technical interest reserve being used in group pensions business was reduced to 3.5%, the increased reserving requirements will result in downward pressures for insurers in this market. The trend to greater fixed interest and equity investment is at the expense of real estate and other illiquid assets. But the outlook for the industry is increased pressures on the players, due to reducing yields on assets, slackening growth and more competition. But, S&P adds, having been through restructuring, the industry is well placed to meet these challenges.

A decade of restructuring, is how the 1990s has proved to be for the Swedish life insurance industry. This is particularly since the moves to deregulation and the dismantling of entrenched monopolistic-type arrangments. But it was the moves to allow banks to own insurers which may have resulted in the most marked changes in the marketplace. The 1992 deregulation triggered a wave of consolidation that has continued. Currently, the top five life and pensions groups control 72% of the market, according to S&P, with the largest 10 insurers holding a 94% market share of premium volumes. Bancassurance distribution is in the ascendant.
New insurance legislation could see the industry facing further changes to provide policyholders with greater transparency, more competition and better product innovation, according to S&P. Investment regulations could be changed, enabling insurers to invest some 20% of assets for technical reserves to be invested outside Europe, though within the OECD area. Nonetheless, the industry has performed strongly and saw premiums rise 21% in 1997, a particular performer being the unit-linked contracts, which doubled in volume and now represent nearly a third of annual premium income.
The industry is extremely strongly capitalised, notes S&P. This is due to the accumulation of unallocated surplus that will ultimately be distributed to policyholders, a process that insurers say is under way. The result will be a reduction in capital levels. These levels have enabled the industry to build up strong equity assets, as they are able to withstand market fluctuations in values. Shares and mutual funds stood at 48% of non-linked assets, well above the 38% in fixed income. These equity levels are higher than the norm for European insurers, says S&P.

Leaving to one side the 30 multi-employer pension fund operators, which are regulated like insurers, the life and pensions market consists of some 55 companies. But the top five life and pension groups, headed by PFA Pensions and Danica Group, accounted for 57% of the market. While foreign insurers are active in the market, their penetration has been minimal so far.
Following deregulation, Danish insurers took on the banks, by setting up their banking subsidiaries. But, comments S&P, these ventures lacked the “breadth of distribution of existing banks and were not successful”. However, the banks’ incursions into insurance were not always successful either. Though bancassurance has grown, it is certainly not as dominant as in other markets and broker distribution is on the increase, now responsible for some 15% of sales. Life premium growth has been steady rather than spectacular over the past few years. S&P gives the thumbs up to the life industry’s capital strength, reckoning that capital levels are 3.3 times the minimum required by EU solvency margins.
Despite the penalties imposed on fixed interest investment due to the ‘real interest tax’, bonds have been the primary investment medium. But, says S&P investment in shares and mutual funds has more than doubled since 1993. This is a trend that it expects to continue, as insurers strive to maintain returns for policyholders.

The consolidation of the market and the creation of combined banking and insurance groups started early in the 1990s following deregulation. On the product side, the banks and asset managers were allowed to sell personal pensions plans in 1997, formerly the preserve of the insurance industry, which was allowed to provide pure savings products, as well as offer unit-linked contracts. Insurers are waiting eagerly for the outcome of the pension reform discussion under way currently, as they have been lobbying for the introduction of defined contribution plans.
Last year saw the limit on share investment for insurers increase to 35% from 20%. But with the strong liquidity requirements for life policies since these can be surrendered virtually without penalty and at short notice, S&P says that Norwegian insurers are obliged to follow a more liquid investment strategy than insurers in other countries.
Overall, it finds that the life insurers there have “very strong risk-adjusted capitalisation”, as well as good earnings, partly attributable to improvements in efficiency.