The Fennia Group’s Solvency and Financial Condition Report based on solvency regulation includes information concerning Fennia Non-Life Insurance Ltd’s 2018 business operations, profitability, governance system, risk profile, valuation for solvency purposes and capital management.
Fennia Non-Life Insurance Ltd was an expert in insurance and related services, offering companies, entrepreneurs and households the insurance services they needed. Fennia Non-Life Insurance’s line of business included statutory and voluntary non-life insurance. Fennia Non-Life Insurance engaged in the direct insurance business only in Finland. During 2018, Fennia Group’s parent company 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. In accordance with the decision of the general meeting of shareholders, Fennia Non-Life Insurance Ltd merged with Fennia Group’s parent company on 1 May 2019.
Fennia Non-Life Insurance’s premiums written totalled EUR 75.6 million (EUR 76.4 million) during the reporting period. The company’s combined ratio, excluding unwinding of discount, was 117.6 per cent (96.5 %), with claims, i.e. risk ratio, accounting for 78.8 per cent (59.6 %) and operating expenses and claims handling expenses, i.e. operating expense ratio, for 38.8 per cent (36.9 %).
At the closing of the reporting period, Fennia Non-Life Insurance’s investment assets at fair value was EUR 205.7 million (EUR 211.1 million). In 2018, the net return on investments at fair value was EUR –1.7 million (EUR 1.0 million) and the return on invested capital was –0.8 per cent (0.5 %).
2018 was a challenging year in terms of investment operations. The return on risky investments was mostly negative and risk-free or low-risk investments brought in insufficient returns. Only government bonds yielded returns, largely due to a decline in the interest rate level. The weakest performing asset classes were equities, which suffered from the markets’ risk aversion, especially in the last quarter. The real estate portfolio’s return was stable and positive.
Fennia Non-Life Insurance’s governance system has been combined with the governance system of the parent company Fennia Mutual Insurance Company as a result of the merger on 1 May 2019. As a result, this report describes only Fennia Group’s joint governance system. The highest decision-making power at Fennia Non-Life Insurance was exercised by the shareholder Fennia through the annual general meeting. Fennia Non-Life Insurance’s governing bodies were the board of directors and managing director. The board of directors took care of the administration of the company and the appropriate organisation of its operations.
Fennia Non-Life Insurance had a managing director, who was elected by the company’s board of directors and whose terms and conditions of employment, salary and bonuses were determined by the board of directors. The managing director oversaw the company’s day-to-day administration in line with the board of directors’ guidelines and regulations.
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 Non-Life Insurance’s solvency capital requirement before loss-absorbing items was EUR 34.1 million (EUR 29.7 million) at the close of the reporting period. Of that amount, the market risk share was EUR 13.3 million (EUR 14.7 million), the counterparty risk was EUR 2.6 million (EUR 1.5 million), the underwriting risk was EUR 21.5 million (EUR 20.2 million) and the operational risk was EUR 3.9 million (EUR 2.3 million). After loss-absorbing items, the solvency capital requirement amounted to EUR 27.3 million (EUR 25.9 million). With eligible own funds of EUR 63.1 million (EUR 75.3 million), the company’s relative solvency position was 231.5 per cent (291.1 %).
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 Non-Life Insurance’s underwriting risks was EUR 21.5 million (EUR 20.2 million). Taking diversification benefits into account, the underwriting risk’s contribution was EUR 19.2 million (EUR 15.2 million), which is 56.4 per cent (51.2 %) of the solvency capital requirement before loss-absorbing items. Fennia Non-Life Insurance’s underwriting risk mainly consists of premium risk and reserve risk. More information about the underwriting risk is given further on in the report.
The market risks that affect Fennia Non-Life Insurance, 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 eligible own funds and in the solvency capital requirement. As market risks are realised, the eligible own funds shrink, which weakens the solvency position. Changes in assets and liabilities also often affect the solvency capital requirement.
Fennia Non-Life Insurance’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, the prudent person principle, and 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 13.3 million (EUR 14.7 million). Taking diversification benefits into account, the market risks’ contribution to the total capital requirement was 27.7 per cent (38.3 %). The amount and the contribution decreased compared to the situation a year earlier. The contribution of the spread risk to the market risks’ solvency capital requirement was the largest, at 37.5 per cent (32.8 %). The second-highest contribution, 25.6 per cent (30.8 %), was that of the equity risk. The contribution of the open interest rate risk was 25.2 (25.7 %) per cent of the solvency capital requirement for Fennia Non-Life Insurance’s market risks.
Credit risk, i.e. counterparty risk, is the risk that the counterparties are not able to meet their obligations. In Fennia Non-Life Insurance’s solvency calculations, the counterparty risk mostly resulted from reinsurance contracts, cash assets 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 Non-Life Insurance’s counterparty risk was EUR 2.6 million (EUR 1.5 million) and the contribution to the total solvency capital requirement before loss-absorbing items was EUR 1.5 million (EUR 0.8 million). The counterparty risk’s share of the solvency capital requirement before loss-absorbing items was 4.5 per cent (2.8 %).
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 Non-Life Insurance’s operational risks and the contribution to the total solvency capital requirement before loss-absorbing items was EUR 3.9 million (EUR 2.3 million). Its share of the solvency capital requirement before loss-absorbing items was 11.4 per cent (7.8 %).
Fennia Non-Life Insurance 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 Non-Life Insurance’s investments in the solvency calculation balance sheet at the close of the reporting period totalled EUR 206.3 million (EUR 211.8 million) and in the closing balance sheet EUR 189.9 million (EUR 192.1 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 Non-Life Insurance’s technical provisions defined by the solvency calculation technique at the close of the reporting period totalled EUR 141.5 million (EUR 129.8 million). Of that amount, the share of the best estimate was EUR 130.0 million (EUR 122.3 million) and the share of the risk margin was EUR 11.5 million (EUR 7.6 million). The technical provisions in accordance with the financial statements amounted to EUR 190.1 million (EUR 189.2 million).
In determining Fennia Non-Life Insurance’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 Non-Life Insurance 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 Non-Life Insurance’s available own funds amounted to EUR 63.1 million (EUR 75.3 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 minimum capital requirement. The company does not apply the transitional measures enabled by the regulation to its own funds.
Fennia Non-Life Insurance’s solvency capital requirement at the end of the reporting period was EUR 27.3 million (EUR 25.9 million) and the minimum capital requirement was EUR 12.3 million (EUR 11.6 million). The ratio of eligible own funds to the minimum capital requirement was 514.4 per cent (646.9 %). 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.