Swedish authorities put brakes on traffic light mo
The Swedish Financial Supervisory Authority, or Finansinspektionen, has amended the so-called traffic light model following consultation.
“The model has been circulated widely for comment and responses have resulted in certain adjustments to the original proposal,” FI says.
The changes include the possibility of using another risk-free interest rate for valuation of liabilities than the government bond rate, and a reduction in the floor in the credit risk scenario from 50 basis points to 25bps.
And companies will have to apply all interest rates changes in the same direction when measuring interest-rate risk. Another change is that an explicit correlation assumption - of 0.5 - between the euro interest rate and the Swedish real interest rate is established.
“The model is being applied so that FI can identify companies at an early stage that could face problems in the event that equities and property prices or interest rates change sharply,” it said.
“The traffic light, which currently can only show red, will measure the life insurance companies and occupational pension funds’ risks and is a complement of other forms of supervision.”
There have been some amendments to the original proposal, which FI said could have “significant” effects if occupational pension funds and life insurers change their portfolio composition in the future.
“The model measures how both assets and liabilities are affected by asset price changes, that it is the companies’ net risks that are being studied,” the FI said.
The new supervisory tool - applicable to all occupational funds and life insurance firms - would identify with “great accuracy” companies with excessive financial risk.
Companies with a red light would not automatically be sanctioned – instead they will be subject to in-depth review.