The Fennia Group’s Solvency and Financial Condition Report based on solvency regulation includes information concerning Fennia Mutual Insurance Company’s 2018 business operations, profitability, governance system, risk profile, valuation for solvency purposes and capital management.
Fennia is an expert in insurance and related services, offering companies, entrepreneurs and households the insurance services they need. Fennia’s line of business includes statutory and voluntary non-life insurance and re-insurance. Fennia engages in the direct insurance business primarily in Finland.
During 2018, changes occurred within the Fennia Group when Fennia acquired Fennia Asset Management from Fennia Life through an intra-Group transaction and acquired the entire share capital of Folksam Non-Life Insurance. Folksam Non-Life Insurance’s name was changed to Fennia Non-Life Insurance Company Ltd on 27 February 2019 and Fennia Non-Life Insurance merged with Fennia on 1 May 2019 in accordance with the general meeting of shareholders’ decision. In addition, Fennia established Fennia-service Ltd, which produces ancillary services closely linked to non-life insurance and risk management for customers.
Fennia’s premiums written totalled EUR 382.8 million (EUR 393.7 million) during the reporting period. The company’s combined ratio, excluding unwinding of discount, was 99.7 per cent (96.6 %), with claims, i.e. risk ratio, accounting for 63.6 per cent (61.1 %) and operating expenses and claims handling expenses, i.e. operating expense ratio, for 36.0 per cent (35.5 %).
At the close of the reporting period, Fennia’s investment assets at fair value amounted to EUR 1,721.4 million (EUR 1,706.0 million).In 2018, the net return on investments at fair value was EUR 27.5 million (EUR 78.9 million) and the return on invested capital was 1.6 per cent (4.7 %). Although the return on investments was clearly below that of the previous year’s, the return can still be considered good, considering the market conditions. The final quarter of the year was weak in terms of the development of the return on risky asset classes and the dramatic plunge in equities and credit risk investments ate into a large portion of the entire year’s returns. This was partly offset by risk-free fixed income investments and the stable return on real estate investments and the good return on unlisted equities. The return on fixed income investments rose considerably from the previous year. Both equity and real estate investments yielded less than in the previous year, but the return was still clearly positive.
In accordance with Fennia’s legal form of a mutual company, the highest decision-making power at Fennia is exercised in the general meeting of shareholders by the policyholders, i.e. Fennia’s clients. The company’s governing bodies are the supervisory board, the board of directors and the managing director.
The supervisory board supervises the administration of the company, which is the responsibility of the board of directors and the managing director. Fennia’s Board of Directors takes care of the administration of the company and the appropriate organisation of its operations. The board of directors is assisted by the nomination and remuneration committee. The audit committee is a joint committee of the boards of Fennia and Fennia Life.
Fennia has a managing director, who is elected by the company’s board of directors and whose terms and conditions of employment, salary and bonuses are determined by the board of directors. The managing director oversees the company’s day-to-day administration in line with the board of directors’ guidelines and regulations. The managing director is the chairman of the Group’s executive group, whose task is to implement the decisions made by the boards of directors concerning group-level matters.
Fennia Group complies with a common salary and remuneration policy. The starting point for remuneration is to provide encouraging, fair and reasonable remuneration to management and personnel that is in line with the short- and long-term interests of the Group and Group companies. In the Group, suitability and reliability (i.e. ‘fit & proper’) assessments are used to ensure that the persons responsible for the Group’s and companies’ management and key functions are suited to their tasks and that they are reliable.
In the Fennia Group, risk management means co-ordinated strategies, processes, principles and measures to identify, measure and report, as well as to monitor and manage, risks faced by the Group and the Group companies. Solvency management is used to determine and steer the Group’s and the Group companies’ risk-bearing capacity, risk appetite, risk tolerance and restrictions of their essential risks.
A Group-level ALCO committee has been established for managing the insurance companies’ balance sheets. The committee’s tasks are to create a proposal on the investment strategy for the insurance companies’ boards, to change the strategy if necessary without breaking the restrictions set by the boards of directors and to report on the balance sheet risks to the boards. A risk management executive group operates within the Group to prepare, steer and co-ordinate tasks related to risk and solvency management and to communicate related information.
The steering model for the Fennia Group’s risk management system is based on three lines of defence, each with its own tasks. In the three-defence-line model, responsibility for risk and solvency management is allocated between various roles. More information about the three-defence-line model is given further on in the report.
The Group’s risk management function comprises two units: the Risk Management unit and the Compliance & Operational Risks unit. Both units operate under the supervision of the Group’s Chief Financial Officer as independent units and bring the risk management function’s services to all Group companies that have a licence to engage in insurance and investment service operations. A central aim of the risk management system is to generate perspectives, analyses and assessments of the possible financial impacts of individual risks and combinations thereof in the short and long term as part of business planning and strategy implementation.
Own Risk and Solvency Assessment (ORSA) is a tool for the board of directors, managing director and other executive management to support capital management, business planning and product development. In own risk and solvency assessments, risks are identified, an understanding of the risks’ capital needs is formed, and forecasts and scenarios are created on the company’s financial future and the possible financial consequences if the risks are realised. Own risk and solvency assessment is part of the continuous risk management process, and as the outcome of which, a broad summary of the central future estimates and risks is produced at least once a year. This ORSA process includes an overall picture of the current situation and future outlook, in terms of business operations, strategic decisions and policies, risks and solvency.
The aim of internal control at the Fennia Group is to ensure the appropriateness, efficiency and productivity of the operations, and the reliability of the financial data and reporting, as well as compliance with the regulations. The boards of directors of the companies belonging to the Group bear overall responsibility for the functioning of internal control. Executive management oversees the arrangement of internal control in practice.
The compliance function, which monitors compliance with the rules, comprises the Group’s chief compliance officer and the responsible compliance officers of Fennia Group companies. The Group’s compliance function is organised into the Compliance & Operational Risks unit. The Group’s chief compliance officer, who also co-ordinates the Group’s compliance monitoring, functions as the parent company’s responsible compliance officer
The internal audit is a function that is independent of the businesses and which supports the Fennia Group and its senior management in achieving its strategy and targets by offering a systematic approach to the organisation’s control, leadership and administrative processes and to the assessment and development of the functionality and efficiency of risk management.
The insurance company’s responsible actuary is in charge of the company’s actuarial function and sees to it that the actuarial methods applied in pricing and in calculating technical provisions are appropriate, and sets the level of the technical provisions. The actuarial function tasks are calculating the technical provisions, ensuring the appropriateness of tariffs, assessing the solvency level, reporting that serves business operations, participating in improving the quality of information and product development and supporting the insurance sales process.
Outsourcing means concluding a contract with an outside service provider on the performance of a process, service or task that is part of the companies’ business sector. At the Fennia Group, outsourcing is arranged in such a way that the risks related to outsourcing are controlled, the operations continue uninterrupted and the regulatory requirements related to outsourcing are met.
In a market-consistent valuation environment, risk-taking capacity is illustrated by the difference between balance sheet assets and liabilities, i.e. the eligible market-consistent amount of own funds. The more eligible own funds the company has, the greater its risk-bearing capacity and the more freedom it has to decide which risks it will bear in its operations. From a quantitative perspective, risk-taking is illustrated by the solvency capital requirement required by the operations. The greater the risk, the higher the solvency capital requirement. A closer look at the solvency capital requirement can reveal the source of the balance sheet’s risks. An understanding of the company’s risk profile is gained by analysing the amount of eligible own funds, the solvency capital requirement and the relationship between the two.
Fennia’s solvency capital requirement before loss-absorbing items was EUR 391.6 million (EUR 465.9 million) at the close of the reporting period. Of that amount, the market risk share was EUR 308.8 million (EUR 384.2 million), the counterparty risk was EUR 31.4 million (EUR 28.1 million), the underwriting risk was EUR 97.9 million (EUR 103.7 million) and the operational risk was EUR 23.9 million (EUR 24.6 million). After loss-absorbing items, the solvency capital requirement amounted to EUR 313.3 million (EUR 372.8 million). With eligible own funds of EUR 876.7 million (EUR 953.7 million), the company’s relative solvency position was 279.8 per cent (255.8 %).
Underwriting risk is linked to the basic business, i.e. insurance, and is divided into three main classes, which are premium risk, reserve risk and catastrophe risk. The premium risk is a loss risk of future insurance compensation costs (including operating expenses) exceeding the insurance premiums gained from insurance. Reserve risk is caused by unfavourable value changes in technical provisions. The actuarial risk factors included in the reserve risk are, among other things, biometric risks (mortality, longevity, disability and similar risks), different lapse risks, the expense risk and the revision risk. Underwriting risk also includes catastrophe risk, i.e. large loss risk.
Insurance operations are based on taking underwriting risks, diversifying the risks within the insurance portfolio and managing underwriting risks. The most important instruments for managing underwriting risks are appropriate risk selection, pricing, insurance terms and conditions, and the acquisition of reinsurance cover. Underwriting risk pricing aims to achieve risk matching. The solvency capital requirement for Fennia’s underwriting risks was EUR 97.9 million (EUR 103.7 million). Taking diversification benefits into account, the underwriting risk’s contribution was EUR 58.3 million (EUR 57.4 million), which is 14.9 per cent (12.3 %) of the solvency capital requirement before loss-absorbing items. Fennia’s underwriting risk consists mainly of premium risk and reserve risk. The amount of underwriting risks has declined compared to the situation a year earlier. Fennia’s insurance portfolio does not include any significant unreinsured risk concentrations. More information about the underwriting risk is given further on in the report.
The market risks that affect Fennia, i.e. those that cause impacts on the company’s financial position due to impacts resulting from changes in the market values of assets and liabilities, are interest rate, spread, equity, real estate, currency risks and the concentration risk. It is essential to examine market risks from the perspective of the entire balance sheet. Both sides of the balance sheet are valued in the solvency calculation on market terms, which means changes in risk factors simultaneously affect both assets and liabilities.
Changes in market risk factors affect solvency in two ways: as a change in both own funds and in the solvency capital requirement. As market risks are realised, the own funds shrink, which weakens the company’s solvency position. Changes in assets and liabilities also often affect the solvency capital requirement.
Fennia’s general risk appetite, risk tolerance and business targets guide investment operations and create the preconditions for investment operations. In investment operations and market risk management, the objective is to attain the set business targets without endangering the solvency targets. The cornerstones of market risk management are sufficient diversification of investments and the prudent person principle, as well as risk-mitigating techniques. Exposure to and the impacts of market risks are measured using asset class allocation, sensitivity analyses, and the solvency capital requirement arising from the market risk in question.
The solvency capital requirement for market risks was EUR 308.8 million (EUR 384.2 million). Taking diversification benefits into account, the market risks’ contribution to the total capital requirement was 75.5 per cent (80.0 %). The amount and the contribution decreased compared to the situation a year earlier. The contribution of the equity risk to the market risks’ solvency capital requirement was clearly the greatest, at 56.0 per cent (60.8 %). The second-highest contribution, 14.7 per cent (15.4 %), was that of the spread risk. The contribution of the open interest rate risk was 1.1 (2.8 %) per cent of the solvency capital requirement for Fennia’s market risks.
Credit risk, i.e. counterparty risk, is the risk that the counterparties are not able to meet their obligations. In Fennia’s solvency calculations, the counterparty risk mostly resulted from reinsurance contracts, cash assets and derivative contract counterparties and receivables from insurance customers. The starting point for managing counterparty risks is to ensure that the counterparties and related risks can be identified, measured, monitored, managed and reported on.
The solvency capital requirement for Fennia’s counterparty risk was EUR 31.4 million (EUR 28.1 million) and the contribution to the total solvency capital requirement before loss-absorbing items was EUR 13.8 million (EUR 11.3 million). The counterparty risk’s share of the solvency capital requirement before loss-absorbing items was 3.5 per cent (2.4 %).
A liquidity risk arises from the possibility of the company not being able to meet its payment obligations on time. The management of liquidity risk is divided into long- and short-term liquidity risk. Liquidity risk is not included in the standard formula solvency calculation nor does it result in a capital requirement, but it can have great significance, particularly in unfavourable market situations. This is why the management of liquidity risk requires close scrutiny to ensure that the risks do not materialise.
The management of operational risks is part of the Fennia Group’s overall risk management. Operational risks are defined at the Fennia Group as risks resulting from internal processes, personnel, systems and external factors. Operational risks and the management thereof thus impact all Fennia Group employees. The objective of operational risk management at the Fennia Group is to, in a cost-effective manner, reduce the likelihood that risks will be realised and the impacts of the realised risks, support business and support functions to achieve the targets set for them using risk management, and help ensure that the Group’s operations meet the requirements set by authorities and legislation.
The solvency capital requirement for Fennia’s operational risks and the contribution to the total solvency capital requirement before loss-absorbing items was EUR 23.9 million (EUR 24.6 million). Its share of the solvency capital requirement before loss-absorbing items was 6.1 per cent (5.3 %).
Fennia is also subject to other risks that are not taken into account in solvency capital requirement calculations, and usually are very difficult to measure. These risks include risks linked to the strategy and business environment, risk linked to acquiring additional capital, reputation risk and entirely new types of risk that are difficult to identify or assess ahead of time.
The solvency calculation balance sheet is based on financial statements drawn up in accordance with Finnish Financial Accounting Standards (FAS) and adjusted in line with the solvency regulations. The valuation principles for solvency calculation are based on the IFRS standard. The objective is to define fair value in accordance with the arm’s length principle. The most significant differences between capital and reserves in the financial statement and own funds in the solvency calculation stem from the difference in the valuation of investment assets, the valuation of technical provisions and the treatment of the equalisation provision.
Fennia’s investments in the solvency calculation balance sheet at the close of the reporting period were EUR 1,831.6 million (EUR 1,913.7 million) and in the closing balance sheet EUR 1,536.0 million (EUR 1,546.1 million).
The technical provisions for insurance contracts used in solvency calculations are the present value of the cash flows linked to the current insurance portfolio. Cash flows are discounted using the swap zero-coupon rate curve confirmed by the European Insurance and Occupational Pensions Authority (EIOPA). The technical provisions are the sum of the best estimate (actuarial expectation) and risk margin (safety loading).
Fennia’s technical provisions defined by the solvency calculation technique at the close of the reporting period totalled EUR 849.0 million (EUR 873.0 million). Of that amount, the share of the best estimate was EUR 795.2 million (EUR 819.0 million) and the share of the risk margin was EUR 53.8 million (EUR 53.9 million). The technical provisions in accordance with the financial statements amounted to EUR 1,451.2 million (EUR 1,461.7 million).
In determining Fennia’s technical provisions, matching adjustment, volatility adjustment and transitional measures were not used.
The goal of managing own funds is to ensure the sufficiency of own funds to cover the regulatory solvency capital requirement and a sufficiently large surplus at all times, and to allocate capital to key risk areas efficiently in terms of risk-return ratio. The required minimum level of own funds determines the minimum level of own funds with which the company can, with great probability, meet its obligations concerning the benefits of the insured. This amount of own funds is determined to be larger than the solvency capital requirement required by the solvency regulations and the solvency capital requirement defined according to the company’s own understanding of risk.
For unexpected stress factors, Fennia defines the amount of capital buffer on top of the required minimum amount of own funds. The capital buffer allows time to adjust the risk position when sudden and unforeseen situations are realised, i.e. to modify the risk/return position and solvency position with careful consideration to a level that corresponds to the new operating situation. The risk and solvency assessment, carried out at least annually, defines the risk appetite and risk tolerance and allocates risky capital overall and across individual risks. The management of own funds and solvency is part of the risk management system.
Fennia’s available own funds amounted to EUR 876.7 million (EUR 953.7 million) at the end of the reporting period and belonged in their entirety to class 1, which can be used without limitation and can be used as they stand to cover the solvency capital requirement and the minimum capital requirement. The company does not apply the transitional measures enabled by the regulation to its own funds.
Fennia’s solvency capital requirement at the end of the reporting period was EUR 313.3 million (EUR 372.8 million) and the minimum capital requirement was EUR 78.3 million (EUR 93.2 million). The ratio of eligible own funds to the minimum capital requirement was 1,119.4 per cent (1,023.4 %). The company does not use an internal model, company-specific parameters, simplified calculations or a duration-based equity risk sub-module to calculate the solvency capital requirement. The company did not fall below its required regulatory level of the solvency capital requirement or minimum capital requirement during the reporting period.