Swedish insurers – a category which includes most of the country’s pension providers – have become less resilient, while prolonged low interest rates could lead to solvency problems, Sweden’s financial services authority has warned.
In its second financial stability report this year, Finansinspektionen (FI) also made the ominous suggestion that pensions and insurance firms could be even weaker than the solvency regulatory framework showed them to be, since the rules did not properly reflect interest rate risk.
Erik Thedéen, FI’s director general, said in the report’s foreword that pension companies, like other investors, increased the risk in their investments when interest rates continued to be low.
“In an environment with long-term low interest rates, a sharp fall in asset prices could lead to solvency issues among these companies,” he said, adding that this could result in them finding it more difficult to meet their obligations to future pensioners.
He said his agency was working to increase resilience in the financial system, including a move to tighten the capital requirements on banks’ lending to commercial real estate; efforts to ensure pension companies had capital requirements that reflected their risks, and continued monitoring of risk-taking in the financial markets.
The long-term resilience of Swedish insurance and occupational pension institutions had decreased as a result of sharply falling market rates in 2019, FI said in the report.
For a long time, it said life insurers had held almost twice as much capital as required by the traffic-light regulatory model, but falling market rates in 2019 had increased the value of commitments.
“Therefore, the most recently reported solvency and traffic-light ratios, as per the third quarter, are slightly below the levels reported at the end of 2018,” FI said.
Though firms’ solvency ratios still appeared to be satisfactory, the regulator said this was partly because the risks associated with low interest rates were not fully reflected in the calculations.
The solvency regulations insurers had to comply with were misleading during periods of very low interest rates, it said.
If the Ultimate Forward Rate (UFR), which is used to calculate the value of long-term future pension liabilities, were replaced with market rates then financial positions would deteriorate notably, according to the regulator.
“A prolonged period of low interest rates could lead to solvency problems for the undertakings, and in a worst-case scenario they could find it difficult to meet their future pension commitments,” FI said in the report.
This sector had an important function in the Swedish financial system, it said, having total investment assets of around SEK5.1tn (€485bn) at the end of June this year.