Solvency capital refunds extended
In a mutual company, ownership is based on a customer relationship.
No owner-policyholder has invested equity-related assets in the company. This kind of ownership is not realised in the form of dividends or any other return on equity.
In normal operational circumstances, ownership in a mutual company means primarily a right to participate in the company's administration. At Suomi Mutual, this means the right to vote in the Policyholders' Representative Assembly, which acts as the General Meeting, every three years. Ownership ceases, without any compensation based on it, as the insurance contract expires.Excess capital refunded to policyholders
Although policyholders in a mutual company have not invested any equity-related assets in the company, the company's net assets belong to them.
Suomi Mutual ceased to underwrite new insurances at the beginning of 2005. The company is in a so-called run-off state. Its task is to manage its insurance and investment portfolios for the benefit of its customers. As insurances expire, the company's need for solvency capital decreases. The consequently released solvency capital is refunded to the company's policyholders. The refunds are not based on the policyholders' status as owners, but on their status as insurance customers.
During the year 2005, Suomi Mutual announced the principles on which solvency capital would be refunded to customers. At first, the refunds were directed fully into so-called special additional benefits. Current policyholders whose insurances at Suomi Mutual were already effective on July 1, 1997, were eligible. This portion of the insurance portfolio had previously been given a conditional promise of new special additional benefits. In accordance with previously announced principles, the amount of excess refunds was confirmed at EUR 840 million - the amount previously conditionally declared - plus interest, to be credited as of January 1, 2005 on the portion yet to be refunded.
Of the sum conditionally promised to policyholders, over EUR 250 million has been, on the basis of decisions taken in 2005, be declared for policies entitled to special benefits.
The company's solvency capital is clearly higher than the amount yet to be refunded to policyholders in accordance with the aforementioned conditional promise. The Suomi Mutual Board of Directors had already previously decided that any solvency capital exceeding that amount would be refunded to the entire insurance portfolio. During the financial year, the Board decided to start these refunds by significantly increasing additional customer bonuses granted to insurance policies.
From now on, customer bonuses on insurance savings will include a portion determined on the basis of the anticipated return at any given time, as well as a solvency capital refund. Refunds will be made to the extent allowed for by the company's solvency position and the aforementioned special additional benefits. In 2007, insurance savings will attract a customer bonus of at least 2%. Last year, Suomi Mutual refunded a total of EUR 315 million to its policyholders as additional benefits. The amount includes both the 2007 special additional benefits and customer bonuses.
As a special additional benefit, old policies, i.e. those current polices that were already effective at Suomi Mutual on July 1, 1997, will receive a 9% bonus. It will be granted as an increase in insurance savings and the related security. In general the customer bonus granted to all insurance savings was increased by 2 percentage points. In the best case, old insurance policies will receive an annual return on their savings of over 18% (technical interest of 4.5%, a previously declared special benefit of 2.7%, a special additional benefit of 9% and a customer bonus of 2%). The annual return on other insurance savings is 6.0% - 6.5%, depending on the level of technical interest. A decision to increase the reductions in risk insurance premiums was made in 2005 as follows: from 2007, the additional benefit granted as a reduction in the premiums of those risk insurance policies that are within the scope of the special additional benefits would be increased from 20% to 30%.
After the granting of the special additional benefits for the past financial year, EUR 464 million remain of the conditionally declared EUR 840 million for current policies that were already effective on July 1, 1997.
The solvency capital refunds were extended to the entire insurance portfolio this early so that as many policies as possible would have time to benefit from them. As a significant proportion of the currently very high additional benefits is based on the reduced need for solvency, it is clear that these benefits may change significantly from year to year. Decisions on special additional benefits or customer bonuses will never be allowed to jeopardise the company's risk position. The aim of the chosen operating approach is that the company retains adequate capacity to take investment risks. In this way, the expected return of long-term insurances will also remain good.
Company liabilities are long-term
Life and pension insurance contracts are often very long-term. Hence Suomi Mutual's liabilities are also long-term. The company has acquired both expertise and technical skills to enable it to assess the development of the insurance portfolio and technical provisions. The first results from such assessments became available during the financial year. They demonstrate, among other things, that technical provisions are decreasing slowly. The number of the insured is diminishing faster in comparison, but in 20 years, will still be almost 100,000 (currently over 350,000).
Forecasts of the development of technical provisions and balance sheet are used in planning the company's investment operations. A run-off company must be able to integrate the duration of the investment periods with the expiry of company liabilities.
Based on forecasts, it is easy to assess that the company's run-off state will not generate a need to redirect investments in the near future. The company can retain, for example, its investment allocation the way it sees fit at any given time based on its risk position and the market outlook.
Figure 1 shows the development of the company's balance sheet in 2006-2026. The forecast has been based on expected return assuming the current interest rate level and investment allocation are maintained. It also presumes that customer behaviour will remain more or less similar to today (insurance premiums, surrenders, expiry of insurance periods, pension security). Stochastic versions of such forecasts are needed for both planning investments and determining various additional benefits. They will also assist in preparing for future regulatory changes, such as the new EU-level solvency requirements (the so called Solvency II project). Such changes will also affect run-off companies such as Suomi Mutual in the future.
Duration of technical provisions varies by insurance type
Figure 2 shows the comparative development of the company's technical provisions by type in 2006-2026. It demonstrates that the company's longest-term liabilities are those related to individual life insurances and group pension insurances. With regard to group pension insurances, this is due to the fact that the majority of insured pensions are life-long. Life insurances, for their part, used to mature at a very high age. It is possible that life insurance surrenders will increase in the future leaving liabilities shorter than predicted.
The largest insurance type in terms of technical provisions is the individual pension insurance. However, its share of the total technical provisions will gradually start to decline due to the fact that most pension insurances of this type are fixed term.
The forecasts are based on the assumption that pension savers will start to draw their pension in accordance with their current pension plan. Many will, however, postpone the start beyond the time set in the plan. If this continues to happen, the technical provisions for this insurance type will start to decline more slowly than predicted in figure 2.
The technical provisions for capital redemption are much shorter than for other insurance types. They will decrease significantly in 2008 and, in practice, cease completely by 2012.
Fast decline in premiums written
Figure 3 shows the forecast development of premiums written. The forecast clearly demonstrates that the company's premiums written will decline very quickly. This, as well as the predicted claims expenditure, has been taken into consideration in forecasts of the balance sheet and technical provisions. Therefore, forecasts of premiums written do not bring any particularly new information into investment planning.
Number of policyholders to remain significant for quite some time
Figure 4 presents an assessment of the development of the number of the insured. The forecast has been made by insurance type, and consequently, policyholders with several insurances of different types are included more than once. During the financial year, there were over 350,000 policyholders. The number of people eligible to vote in the 2006 election for the Policyholders' Representative Assembly was just under 300,000, which indicates the real number of policyholders during the financial year. Part of the difference can be explained by the fact that in group pension insurances, the number of the insured is higher than that of the policyholders: policyholders are eligible to vote, while the forecast presents the number of people that are insured.
This forecast enables the company to assess any development needs for its governance model. The number of the insured will remain high for quite some time, and it is therefore reasonable for the company to maintain a representative model of governance.
Solvency capital refunds to customers present even good results as negative
As explained above, Suomi Mutual refunds its entire solvency capital to its customers in the form of various additional benefits, to the extent that this capital is no longer needed in the company's operations. The aim is an equitable distribution among insurance policies of different durations. A significant amount of the company's solvency capital is equity capital, which has been acquired through profits from previous years.
Providing an additional benefit will weaken the result recorded in the profit and loss account, as additional benefits will increase technical provisions beyond what they would have been, had the benefits not been granted. For the portion of the additional benefit financed through equity capital, there will be no positive counter item in the profit and loss account. In practice this means that the profit and loss account will generally show a loss even when the overall result is actually good. A more correct picture of the profit and loss account can be obtained by looking at the sum of the amount of new additional benefits and the change in solvency capital.