## cr17307

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### EXECUTIVE SUMMARY — Introduction and market setting
- Total insurance assets exceeded SEK 4,000 billion at the end of 2015, around 20 percent of total financial sector assets and almost 100 percent of GDP.
- Some 90 percent of insurance sector assets were held by companies in the life insurance sector.
- There are over 300 registered Swedish insurance companies (note: Table 2 excludes smallest companies in its totals).
- Industry concentration:
  - The five largest life companies account for over 50 percent of life sector assets.
  - The largest four non-life companies account for 80 percent of total non-life gross premium income.
- Business composition and product features:
  - Occupational pensions dominate life business and are now written almost entirely on a defined contribution basis.
  - Occupational pensions account for two thirds of premium income in the life sector.
  - Most life insurance products offer a savings component; products with guarantees remain popular.
  - The average guarantee across all life business with guarantees is estimated at 3 percent per annum.
  - Sales of unit-linked products have been growing, but traditional guaranteed products remain significant.
- Distribution channels for life insurance (percent) in selected years:
  - Own sales force: 2010 12; 2011 17; 2012 17; 2013 18; 2014 21.
  - Agents and brokers: 2010 22; 2011 36; 2012 33; 2013 30; 2014 31.
  - Banks: 2010 12; 2011 14; 2012 10; 2013 12; 2014 14.
  - Corporate benefit portals: 2010 49; 2011 23; 2012 28; 2013 28; 2014 28.
  - Other: 2010 5; 2011 11; 2012 12; 2013 12; 2014 7.
- Risk profile and vulnerabilities:
  - The duration gap between assets and liabilities is among the highest in the EU (according to EIOPA).
  - Swedish insurers have traditionally run high equity exposures relative to European peers.
  - The life sector remains exposed to low interest rates, particularly when combined with falls in equity or real estate markets.

### Regulatory and supervisory framework developments since FSAP 2011
- Principal authority and responsibilities:
  - Finansiinspektionen (FI) is the principal regulatory body with responsibility for prudential regulation, consumer protection (in combination with the Swedish Consumer Agency), and macroprudential regulation.
- Major reform:
  - Implementation of the EU Solvency II framework from January 1, 2016.
- Resourcing and independence:
  - Most of the 2011 FSAP recommendations on insurance have been addressed, including higher resourcing (up by 50 percent for insurance supervision) and increased independence from government.
- FI insurance staffing (total 71 staff):
  - Legal function: 19 staff.
  - Insurance risk supervision, including actuaries, capital and accounting specialists: 23 staff.
  - Insurance supervision section: 22 staff.
- Other agencies:
  - The Swedish Consumer Agency (SCA) has oversight and enforcement powers on marketing and unfair contract terms; the Consumer Ombudsman may act on behalf of policyholders.
  - Separate bodies handle consumer complaints mediation and advice.

### Implementation and effects of Solvency II
- Implementation timing and coverage:
  - Solvency II was implemented from January 1, 2016.
  - The requirements apply in full across only some 40 percent of the market (by assets in savings products).
  - Solvency II has been applied in full to non-life companies.
  - Using transitional measures available until 2019, Sweden has permitted companies to exclude occupational pensions insurance from the application of the main solvency provisions of the framework; insurers taking advantage include many of the largest.
- Valuation and models:
  - A relatively market consistent pre-2016 approach to valuation reduced the need for transitional measures associated with long-term guarantee business.
  - Applications to use internal models have been fewer than expected and none has been approved as yet.
- Improvements from Solvency II:
  - Brought higher standards of regulation.
  - Improvements in regulatory reporting and group supervision.
  - Higher overall solvency coverage.
- Implementation caveats and supervisory readiness:
  - Only some 36 percent of Swedish life and occupational pensions insurance business is subject to Solvency II; the majority remains on the Solvency I-based regime.
  - The first Solvency II reports were due in late May 2016; the first full published reports were due in May 2017.
  - FI must follow up on late or inaccurate reporting and its internal preparedness to capture and analyze reports will be tested.
  - Transitional regime complications: FI must apply two regimes in many companies and stakeholders may be unclear which companies are subject to which regime.

### MAIN FINDINGS
- Life sector:
  - A relatively large duration gap.
  - High levels of past business with guarantees, leaving exposure to low interest rates.
- Non-life sector:
  - Risks are more diverse; underwriting results have been strong in recent years.
  - Market risks on investment portfolios are similar to life insurers.
- Macroprudential context:
  - FI’s macroprudential mandate covers insurance and banking.
  - None of the Global Systemically Important Insurers (G-SIIs) is present in Sweden, but there are large domestic insurers.
  - No experience of failure of a significant insurance company in many years.

### KEY RECOMMENDATIONS (prioritized)
- High priority
  - The authorities should decide as soon as possible on the approach to be taken to the regulation of occupational pensions after transitional measures expire for occupational pensions insurance in 2019. They should ensure that whatever approach is chosen, the same level of protection is provided to occupational pensions as to life insurance. (Responsible: Swedish Government)
  - In the interim period, FI should place any further requirements on occupational pension insurance not subject to Solvency II requirements which they judge necessary to deliver effective regulation and supervision, including additional reporting. The government should give FI new powers to do this, if necessary. (Responsible: FI and Swedish government if necessary)
- Medium priority
  - FI should focus early attention on key areas of the new solvency framework where the approach has greatest implications, including investments; and use its review of ORSAs to require companies to meet additional capital requirements where risks or governance and risk management shortcomings are evident. (Responsible: FI)
  - FI should overlay its approach to risk-based allocation of resources with minimum staffing levels and an extended range of minimum supervisory work for the highest impact entities and increased resourcing of the teams addressing the highest risk companies. Increased on-site supervisory work and more systematic written communication of the actions expected of companies in response to supervisory work is also recommended. (Responsible: FI)
  - Supervisory resources for consumer protection work should be augmented, including for supervision of individual companies. A broader mandate from government would avoid the need for FI to seek new mandates in respect of consumer protection issues, with the delays this can entail. (Responsible: Swedish Government)
- Low priority
  - While microprudential supervision appears to be the priority, it is recommended that the authorities, led by the FI, develop a strategy and plan for practical measures, starting with crisis preparedness and extending to recovery planning for the major companies. (Responsible: FI, the Riksbank, and the Ministry of Finance)

### Strengthening supervision and consumer protection
- Supervisory approach and recommended measures:
  - FI is implementing a risk assessment framework with a mix of firm-specific and thematic work and a matrixed deployment of general supervisory and specialist resources.
  - Recommendations include:
    - Overlay risk-based allocation with minimum supervisory staffing levels.
    - Define an extended range of minimum supervisory activities for highest impact entities.
    - Increase resourcing of teams supervising highest risk companies.
    - Increase on-site supervisory work.
    - More systematic written communication of expected company actions following supervisory work.
- Consumer protection:
  - FI’s new, separate consumer protection function covers all sectors and improves identification and addressing of consumer risks.
  - Agenda includes issues such as the future of commissions-based remuneration.
  - Recommendation: augment resources for consumer protection, including supervision of individual companies, and provide FI a broader mandate to avoid delays when new mandates are needed.

### Macroprudential regulation, financial stability, and crisis preparedness
- Current status:
  - FI monitors potential sources of instability; thinking on practical macroprudential measures for insurance is still developing.
  - Recovery and resolution work is most advanced for G-SIIs, none of which operate in Sweden.
- Recommendation:
  - Authorities, led by FI, should develop a strategy and plan for practical macroprudential measures, beginning with crisis preparedness and extending to recovery planning for major companies.

### Institutional arrangements, cooperation, and implementation of prior FSAP recommendations
- FI’s remit and resources:
  - FI’s work covers all financial sector activities. Of its 30 staff, seven cover bank and insurance conduct consumer protection specifically 10.
  - FI is responsible to the Ministry of Finance, and its budget is approved by the Parliament.
  - FI levies fees and charges on the regulated companies broadly equal to the FI’s planned expenditure.
  - FI obtained an overall increase of 56 percent between 2011 and 2016, and increased resources available to insurance sector work by 49 percent.
- Cooperation and EU engagement:
  - The Financial Stability Council (FSC) (Government, FI, the Swedish National Debt Office and Riksbank) discusses financial stability and financial imbalances; the Minister for Financial Markets takes the chair.
  - FI is an active participant in EU insurance regulatory work and benefited from EIOPA’s two-year preparatory framework.
- Implementation of FSAP 2011 recommendations:
  - Most recommendations have been implemented; notable exceptions include FI not applying to be a signatory to the IAIS Multilateral Memorandum of Understanding and some governance and transparency measures not adopted.

### Box 1 — Occupational Pensions Insurance in Sweden’s Solvency II Implementation (key points)
- Background and government decision:
  - In late 2015 the government decided to apply large parts of Solvency II on a mandatory basis only to life insurance, using transitional arrangements that expire in 2019.
  - Rationale: ongoing work on the IORPs II directive made mandatory application to occupational pensions from 2016 inappropriate.
- Transitional arrangements and supervisory practice:
  - Insurers may continue to apply Solvency I to occupational pensions business or opt in to Solvency II (on notification to FI).
  - Assets covering technical provisions must be separated in registers for the two areas of business but full legal segregation is not required.
  - FI has continued to apply its “traffic lights system” stress-testing framework to Solvency I business.
  - FI has agreements with the two largest companies not subject to full Solvency II to share detailed information voluntarily.
  - Some companies develop ORSAs voluntarily; some Solvency I companies monitor solvency on both Solvency I and Solvency II methodologies.
- Coverage and impact:
  - Of mixed companies, 23 percent of business is on Solvency I and 13 percent on Solvency II.
  - Not shown are 11 life risk specialist companies, with total technical provisions of SEK 8.5 billion, all subject to Solvency II.
  - Solvency II is expected to reduce the coverage of solvency ratios relative to pure Solvency I and relative to the traffic lights system.
  - FI is monitoring a small number of companies that may be challenged to meet their SCR; one company has reported likely non-compliance.
- Mitigants and disclosure:
  - FI adopted at the start of 2014 a valuation approach to liabilities similar to Solvency II.
  - Transitional measures in Solvency II have modest impact in Sweden because valuation basis was already market consistent.
  - Differential application complicates comparisons across companies; FI should prepare public information to address misinterpretation.
- Internal models and ORSA:
  - FI expected 18 internal model applications but received fewer; at the time of the mission only one was expected and a second was received shortly after the mission.
  - FI reviewed ORSA drafts in the Solvency II preparatory phase and plans deeper quantitative assessment in 2016.

### Annex I — Sweden’s response to 2011 FSAP recommendations (selected responses)
- Supervisory objectives:
  - Recommendation to adopt explicit supervisory objectives for insurance: Response — No developments.
- Supervisory authority (ICP3):
  - FI’s resources for insurance sector supervision increased by 50 percent since 2011; further resources sought.
  - FI granted powers to issue regulations on small insurance companies; discussions with government on mandates for business conduct issues.
  - Government’s role in licensing and interventions has been removed; FI is sole licensing authority.
  - FI has not applied to be a signatory to the IAIS MMoU; using bilateral approaches instead.
- Fit and proper, governance, reporting and on-site work:
  - Fit and proper assessment introduced as part of Solvency II implementation (IBA, Chapter 10, Section 5).
  - Solvency II governance requirements applied to all insurers, including those with only occupational pensions business.
  - Solvency II implementation has strengthened reporting, reinsurance oversight, and on-site monitoring capacity.
- Enforcement, winding-up, and group supervision:
  - No developments on resolution issues pending EU initiatives.
  - Solvency II implementation increased FI power over unregulated entities for group supervision.
  - Insurers subject to full requirements will report all assets item by item to FI quarterly; Special Register of assets required.
- Other areas:
  - AML-CFT resources: no significant change since 2011; legal requirements updated for CDD when insurers rely on intermediaries.

*Source: IMF technical note prepared as part of the 2016 FSAP for Sweden (EXECUTIVE SUMMARY).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Introduction and market setting
- Total insurance assets exceeded SEK 4,000 billion at the end of 2015, around 20 percent of total financial sector assets and almost 100 percent of GDP.
- Some 90 percent of insurance sector assets were held by companies in the life insurance sector.
- There are over 300 registered Swedish insurance companies (note: Table 2 excludes smallest companies in its totals).
- Industry concentration:
  - The five largest life companies account for over 50 percent of life sector assets.
  - The largest four non-life companies account for 80 percent of total non-life gross premium income.
- Business composition and product features:
  - Occupational pensions dominate life business and are now written almost entirely on a defined contribution basis.
  - Occupational pensions account for two thirds of premium income in the life sector.
  - Most life insurance products offer a savings component; products with guarantees remain popular.
  - The average guarantee across all life business with guarantees is estimated at 3 percent per annum.
  - Sales of unit-linked products have been growing, but traditional guaranteed products remain significant.
- Distribution and channels:
  - Distribution channels for life insurance (percent) in selected years include:
    - Own sales force: 2010 12; 2011 17; 2012 17; 2013 18; 2014 21.
    - Agents and brokers: 2010 22; 2011 36; 2012 33; 2013 30; 2014 31.
    - Banks: 2010 12; 2011 14; 2012 10; 2013 12; 2014 14.
    - Corporate benefit portals: 2010 49; 2011 23; 2012 28; 2013 28; 2014 28.
    - Other: 2010 5; 2011 11; 2012 12; 2013 12; 2014 7.
- Risk profile and vulnerabilities:
  - The duration gap between assets and liabilities is among the highest in the EU (according to EIOPA).
  - Swedish insurers have traditionally run high equity exposures relative to European peers.
  - The life sector remains exposed to low interest rates, particularly when combined with falls in equity or real estate markets.

### Regulatory and supervisory framework developments since FSAP 2011
- Finansiinspektionen (FI) is the principal regulatory body with responsibility for:
  - Prudential regulation.
  - Consumer protection (in combination with the Swedish Consumer Agency).
  - Macroprudential regulation.
- Major reform:
  - Implementation of the EU Solvency II framework from January 1, 2016.
- Resourcing and independence:
  - Most of the 2011 FSAP recommendations on insurance have been addressed, including higher resourcing (up by 50 percent for insurance supervision) and increased independence from government.
- FI insurance staffing (total 71 staff):
  - Legal function: 19 staff.
  - Insurance risk supervision, including actuaries, capital and accounting specialists: 23 staff.
  - Insurance supervision section: 22 staff.
- Other agencies:
  - The Swedish Consumer Agency (SCA) has oversight and enforcement powers on marketing and unfair contract terms; the Consumer Ombudsman may act on behalf of policyholders.
  - Separate bodies handle consumer complaints mediation and advice.

### Implementation and effects of Solvency II
- Solvency II was implemented from January 1, 2016.
- Coverage and application:
  - The requirements apply in full across only some 40 percent of the market (by assets in savings products).
  - Solvency II has been applied in full to non-life companies.
  - Using transitional measures available until 2019, Sweden has permitted companies to exclude occupational pensions insurance from the application of the main solvency provisions of the framework; insurers taking advantage include many of the largest.
- Valuation and models:
  - A relatively market consistent pre-2016 approach to valuation reduced the need for transitional measures associated with long-term guarantee business.
  - Applications to use internal models have been fewer than expected and none has been approved as yet.
- Improvements from Solvency II:
  - Brought higher standards of regulation.
  - Improvements in regulatory reporting and group supervision.
  - Higher overall solvency coverage.

### Main findings and recommended policy actions
Findings
- The life sector is characterized by:
  - A relatively large duration gap.
  - High levels of past business with guarantees, leaving exposure to low interest rates.
- Non-life sector:
  - Risks are more diverse; underwriting results have been strong in recent years.
  - Market risks on investment portfolios are similar to life insurers.
- Macroprudential context:
  - FI’s macroprudential mandate covers insurance and banking.
  - None of the Global Systemically Important Insurers (G-SIIs) is present in Sweden, but there are large domestic insurers.
  - No experience of failure of a significant insurance company in many years.

Key recommendations (high, medium, low priorities as in Table 1)
- High priority
  - The authorities should decide as soon as possible on the approach to be taken to the regulation of occupational pensions after transitional measures expire for occupational pensions insurance in 2019. They should ensure that whatever approach is chosen, the same level of protection is provided to occupational pensions as to life insurance. (Responsible: Swedish Government)
  - In the interim period, FI should place any further requirements on occupational pension insurance not subject to Solvency II requirements which they judge necessary to deliver effective regulation and supervision, including additional reporting. The government should give FI new powers to do this, if necessary. (Responsible: FI and Swedish government if necessary)
- Medium priority
  - FI should focus early attention on key areas of the new solvency framework where the approach has greatest implications, including investments; and use its review of ORSAs to require companies to meet additional capital requirements where risks or governance and risk management shortcomings are evident. (Responsible: FI)
  - FI should overlay its approach to risk-based allocation of resources with minimum staffing levels and an extended range of minimum supervisory work for the highest impact entities and increased resourcing of the teams addressing the highest risk companies. Increased on-site supervisory work and more systematic written communication of the actions expected of companies in response to supervisory work is also recommended. (Responsible: FI)
  - Supervisory resources for consumer protection work should be augmented, including for supervision of individual companies. A broader mandate from government would avoid the need for FI to seek new mandates in respect of consumer protection issues, with the delays this can entail. (Responsible: Swedish Government)
- Low priority
  - While microprudential supervision appears to be the priority, it is recommended that the authorities, led by the FI, develop a strategy and plan for practical measures, starting with crisis preparedness and extending to recovery planning for the major companies. (Responsible: FI, the Riksbank, and the Ministry of Finance)

### Strengthening supervision and consumer protection
- Supervisory approach and recommendations:
  - FI is implementing a risk assessment framework with a mix of firm-specific and thematic work and a matrixed deployment of general supervisory and specialist resources.
  - Recommendations include:
    - Overlay risk-based allocation with minimum supervisory staffing levels.
    - Define an extended range of minimum supervisory activities for highest impact entities.
    - Increase resourcing of teams supervising highest risk companies.
    - Increase on-site supervisory work.
    - More systematic written communication of expected company actions following supervisory work.
- Consumer protection:
  - FI’s new, separate consumer protection function covers all sectors and improves identification and addressing of consumer risks.
  - Agenda includes issues such as the future of commissions-based remuneration.
  - Recommendation: augment resources for consumer protection, including supervision of individual companies, and provide FI a broader mandate to avoid delays when new mandates are needed.

### Macroprudential regulation, financial stability, and crisis preparedness
- Current status:
  - FI monitors potential sources of instability; thinking on practical macroprudential measures for insurance is still developing.
  - Recovery and resolution work is most advanced for G-SIIs, none of which operate in Sweden.
- Recommendation:
  - Authorities, led by FI, should develop a strategy and plan for practical macroprudential measures, beginning with crisis preparedness and extending to recovery planning for major companies.

*Source: IMF technical note prepared as part of the 2016 FSAP for Sweden (EXECUTIVE SUMMARY).*

### 2014. Its work covers all financial sector activities. Of its 30 staff, seven cover bank and insurance

### MAIN FINDINGS AND RECOMMENDATIONS

### Institutional arrangements and resourcing
- FI’s work covers all financial sector activities. Of its 30 staff, seven cover bank and insurance conduct consumer protection specifically 10.
- FI is responsible to the Ministry of Finance, and its budget is approved by the Parliament.
- FI levies fees and charges on the regulated companies broadly equal to the FI’s planned expenditure, as approved in the government budgetary process 11.
- In practice, FI has in recent years sought and obtained significant additional resources, including an overall increase of 56 percent between 2011 and 2016, from which it increased the resources available to insurance sector work by 49 percent.
- The ministry is responsible for the development of broad regulatory policy, including the overall approach to implementing EU legislation, and for presenting proposed new legislation to Parliament.
- FI has responsibilities for oversight of occupational pension funds (11) and some responsibilities for oversight of larger pension foundations (about 80) – which are outside the scope of this note.
- Others are responsible for the supervision of fund asset management companies, investment firms, insurance intermediaries, payment services companies and cross-sector risk assessment.
- The size of the fees and charges, as well as, for example, which types of matters should be subject to charge, is decided by the government (in cooperation with FI).

### Cooperation and EU engagement
- Arrangements to promote cooperation among the authorities:
  - The Financial Stability Council (FSC) (Government, FI, the Swedish National Debt Office and Riksbank) discusses issues of financial stability and financial imbalances; the Minister for Financial Markets takes the chair.
  - In case of an actual financial crisis, the FSC would function as a forum for the discussion of possible crisis management measures.
  - Insurance sector issues, such as the implications of low interest rates on life insurance, have been considered by the FSC.
  - There are various mechanisms for practical cooperation, including an agreement between FI and the SCA in respect of cooperation on consumer protection issues.
- FI is an active participant in European Union (EU) insurance regulatory work.
  - Much of the insurance regulatory framework derives from EU legislation, including the solvency requirements (the Solvency II framework) and the regulation of intermediaries (Insurance Mediation Directive (IMD) and soon to be implemented Insurance Distribution Directive (IDD)).
  - The EU framework for occupational pensions regulation (Institutions for Occupational Retirement Provision - IORPs) is also relevant.
  - The European Insurance and Occupational Pensions Authority (EIOPA) issues technical standards and guidelines on a wide range of issues, including on the supervisory approach and the functioning of colleges of supervisors.
  - EU legislation and EIOPA material also covers an increasing range of issues related to consumer protection.

### Implementation of the FSAP 2011 recommendations
- Most of the recommendations of the FSAP 2011 assessment of insurance sector regulation and supervision have been implemented.
- The 2011 assessment noted a high level of observance of the ICPs 12; most were assessed as observed or largely observed, and only in the powers, resources and independence of the supervisory authority and the regulation of derivatives was the approach found to be only partly observed.
- A key finding was that FI lacked the resources required to carry out effective regulation and supervision. FI’s commitment of resources to insurance supervision has increased significantly and provisions for government intervention in operational decisions have been removed.
- The authorities have decided not to take action on other recommendations. Specifically:
  - The authorities have not found it necessary to change FI’s objectives for insurance supervision.
  - The authorities have not required publication of the reasons for dismissal of board members or the Director-General of FI.
  - The authorities have not required annual regulatory returns to be audited.
  - FI has not yet applied to be a signatory to the IAIS Multilateral Memorandum of Understanding, although it maintains bilateral relations with other supervisors.
- A summary of the FSAP 2011 recommendations and Sweden’s responses is set out in the Annex to this note.

### The implementation of Solvency II
- The approach to the implementation of Solvency II has been well-considered and thorough.
  - Provisions implemented through changes to the Insurance Business Act (IBA), and rules and guidance issued by FI.
  - FI benefited from work undertaken under EIOPA’s two-year preparatory framework 13, covering business organization and risk management; forward-looking assessment of own risks (FLAOR); pre-application for internal models; and reporting.
  - Surveys of insurance company readiness found several, mainly smaller, companies had not made adequate preparations and action was taken by FI.
  - Swedish companies were included in the 2014 EIOPA stress test, carried out on a Solvency II basis.
- Implementation will be fully tested only when insurance company reporting under the new framework begins.
  - The first reports were due in late May 2016.
  - Concerns remain over the readiness of companies to begin reporting on the new basis.
  - It will be important that FI follows up on late or inaccurate reporting.
  - FI’s own internal preparedness (to capture the reports and perform analysis) will also be tested and there may be strains, despite its preparations to date.
- The implementation of Solvency II has been complicated and its impact reduced by the limited scope of its application to occupational pensions insurance.
  - Sweden used a transitional provision in the Solvency II Directive not to apply Solvency II in full on a mandatory basis to occupational pensions insurance.
  - As a result, only some 36 percent of Swedish life and occupational pensions insurance business 14 is now subject to the modern risk-based standards represented by Solvency II (Figure 1), the majority (much of it conducted by many of the largest firms) remaining on the weaker Solvency I-based regime.
  - It may be unclear to stakeholders which companies are subject to which regime 15.
  - FI’s task has been complicated by the need to apply two regimes, in many cases (where companies have significant life as well as occupational pensions insurance business) to the same company.
  - There will be full transparency to the public when the insurance companies issue their first full published reports, due in May 2017. In the interim, FI will ensure that the market is informed.

### Additional supervisory measures and mitigants
- FI has strengthened the supervisory process, increased its oversight of the reinsurance programs of primary non-life insurers and developed its consumer protection work (as recommended).
- The authorities emphasized significant mitigants to the risks created by limited application of Solvency II, including the application of governance and group requirements.

*cr17307 - 2014. Its work covers all financial sector activities. Of its 30 staff, seven cover bank and insurance*

### Box 1. Occupational Pensions Insurance in Sweden’s Solvency II Implementation

### Box 1. Occupational Pensions Insurance in Sweden’s Solvency II Implementation

### Background and government decision
- Sweden historically applied the same regulatory requirements and supervisory approach to life and occupational pensions insurance, as permitted under EU IORPs legislation.
- In late 2015 the government decided to apply large parts of the EU Solvency II framework, on a mandatory basis, only to life insurance, making use of transitional arrangements that expire in 2019.
- Government rationale: work on the new EU directive on occupational pensions regulation (IORPs II) was continuing, so it was considered inappropriate to apply full Solvency II mandatorily to occupational pensions insurance from 2016 given potential further changes.

### Transitional arrangements, scope, and segregation
- Solvency II implementing measures allow insurers with occupational pensions business to:
  - continue to apply existing solvency requirements based on Solvency I to that business (and to their life insurance business if it constitutes less than 5 percent of the total); or
  - apply Solvency II requirements if they prefer (on notification to FI).
- Companies with both occupational pensions and life insurance are not required by law to fully separate the two areas of business into distinct funds, although assets covering technical provisions must be separated in registers for the two areas of business.
- All insurers are required to comply with the new Solvency II requirements in relation to corporate governance and group supervision.
- Core financial requirements (valuation of assets and liabilities, investments and capital adequacy), the new reporting requirements, and the requirement to develop an Own Risk and Solvency Assessment (ORSA) are not applied in relation to business remaining on the existing requirements.

### Supervisory practice under transitional regime
- FI has continued to apply its “traffic lights system” stress-testing framework to business subject to Solvency I-based requirements; this system has:
  - required insurers (since 2006) to carry out and report simple stress tests based on individual risk factors with a simple correlations approach;
  - acted as a supervisory tool that does not create binding minimum requirements and is not comprehensive in risk coverage compared with Solvency II.
- Traffic light results for individual companies do not have to be disclosed.
- Some companies on Solvency I are expected to participate in EIOPA’s 2016 stress-testing exercise (based on Solvency II), although the basis for their participation is unclear.
- FI has agreed with the two largest companies not subject to full Solvency II that they will share detailed information with FI on a voluntary basis (e.g., on investment assets).
- Some companies have been developing ORSAs on a voluntary basis and presenting them to FI; some Solvency I companies monitor solvency both on Solvency I and on the new Solvency II methodology.
- FI expects companies with mixed Solvency I and Solvency II business to have a policy on allocation of surplus assets for calculating capital requirements; no requirement in transitional arrangements to comprehensively ring-fence the two blocks of business, creating a risk of regulatory arbitrage and requiring intensive supervision.

### Coverage of companies and business (selected statistics)
- Of the mixed companies, 23 percent of business is on Solvency I and 13 percent on Solvency II.
- Not shown are 11 life risk specialist companies, with total technical provisions of SEK 8.5 billion, all subject to Solvency II.

### Impact on solvency ratios and mitigation
- Solvency II is expected to reduce the coverage of solvency ratios (extent to which actual capital exceeds requirements) relative to pure Solvency I and relative to the traffic lights system.
- FI is monitoring a small number of companies that may be challenged to meet their Solvency Capital Requirement (SCR); one company has already reported likely non-compliance and FI will require a recovery plan if necessary.
- Some impacts of Solvency II have been mitigated in Sweden by prior alignment measures:
  - FI adopted at the start of 2014 a valuation approach to liabilities similar to Solvency II (prevailing risk free market interest rates, with extrapolation to an ultimate forward rate).
  - Valuation approach had been relatively market consistent for many years, with adjustments in mid-2012 and at the start of 2014 to dampen impacts and address procyclical pressures.
- Transitional measures in Solvency II (parts of the long-term guarantee package) have modest impact in Sweden:
  - Swedish insurers derive little or no benefit from transitional measures related to valuation interest rate because their valuation basis was already market consistent.
  - Companies may use the volatility adjustment and the matching adjustment (subject to FI approval), but benefits are likely limited and matching adjustment conditions are demanding.

### Public disclosure and comparability issues
- Differential application of Solvency II to occupational pensions versus life insurance complicates comparisons across companies and for mixed-business companies when full disclosure takes effect in 2017.
- FI should be prepared with public information to address potential misinterpretation by advisers and others.

### Internal models, undertaking-specific parameters, and ORSA
- FI expected 18 internal model applications but was expecting only one at the time of the mission; a second internal model application was received shortly after the FSAP mission.
- Outcome reflects uncertainties over occupational pensions regulation, delays in finalizing Solvency II, expectations that internal models would not deliver large SCR reductions, and preference by some companies to use models mainly for internal risk management and ORSA.
- FI reviewed ORSA drafts in the Solvency II preparatory phase (FLAOR), provided feedback on process and governance, and plans to assess quantitative aspects more deeply in its 2016 supervisory program.

### Assessment of Solvency II implementation and supervisory readiness
- Solvency II has greatly strengthened the regulatory framework in key areas covered by the ICPs: qualitative and quantitative requirements at solo and group level, reporting and disclosure requirements, and supervisory understanding of risks.
- Lack of full implementation for occupational pension insurance (quantitative requirements and reporting on the EIOPA basis) is a major qualification affecting Sweden’s conformance with international insurance regulation and supervision standards.
- FI must adapt to more principles-based approaches (prudent person principle, governance) and be prepared to impose capital add-ons, require internal models or undertaking-specific parameters, or impose other measures in response to identified risks.

### Key recommendations (focused on occupational pensions and Solvency II implementation)
- In relation to regulation of occupational pensions insurance:
  i. Resolve as soon as possible the uncertainties over the approach to regulation to be taken following the end of the transitional period in 2019; and ensure that whatever regime is chosen for after 2019 provides the same level of protection to occupational pension business as to life insurance, recognizing the similarities in products and risks.
  ii. In the interim, FI should not hesitate (and should be empowered as necessary) to place any further requirements on business still subject to the Solvency I framework which it judges necessary to deliver effective supervision, including requiring further additional reporting and enhancements to ORSAs (or equivalent tools of internal capital and risk management).
- In relation to Solvency II implementation, FI should:
  i. follow up inaccurate or incomplete reporting at an early stage to prevent significant misreporting becoming embedded;
  ii. focus early attention on key areas where the new principles-based approach has greatest implications for companies and supervisory approach, including investments regulation;
  iii. increase, taking a risk-based approach, its feedback to companies on their ORSAs and require additional capital where risks or governance and risk management shortcomings are evident; and
  iv. develop a communications plan to support public understanding of the new solvency measures to be disclosed by companies from next year, including the different measures for companies with occupational pensions insurance.

*International Monetary Fund – Box 1. Occupational Pensions Insurance in Sweden’s Solvency II Implementation*

### Annex I. Sweden’s Response to the Recommendations of the

### Annex I. Sweden’s Response to the Recommendations of the 2011 FSAP

### 2. Supervisory objectives
- Recommendation: Consider adopting explicit supervisory objectives for the insurance sector, including FI’s role in protecting policyholders.
- Response: No developments – this has not been considered urgent in the light of Swedish experience.

### 3. Supervisory authority (ICP3)
- Recommendations:
  - a) Review the adequacy of supervisory resources for effective implementation of a more robust risk-based supervision;
  - b) Consider a more principle-based approach in respect of the scope for FI to issue secondary regulations;
  - c) Review the role of the government in institution-specific supervisory issues;
  - d) Consider reviewing whether the legal protection available to FI and its staff members are at the level envisaged by ICP3;
  - e) Require publication of the reasons for the removal of board members and the DG of FI.
- Responses:
  - (a) FI’s resources for insurance sector supervision have been increased by 50 percent since 2011. The increase in resources which FI is seeking in the current three-year budgetary process includes further resources for insurance supervision.
  - (b) Following the 2011 revisions to the Insurance Business Act (IBA) (giving FI a mandate to issue regulations in the areas of solvency, liquidity and risk management), a further revision at 1 January 2016 enabled FI to issue regulations on small insurance companies. FI has identified some significant issues in business conduct where it lacks a mandate to issue regulations and is in discussion with the Swedish government.
  - (c) The role of the government in licensing has been removed – under the revised IBA, FI is the sole authority. The government’s role in interventions, sanctions, mergers and license revocations has also been removed.
  - (d) The regulations on legal protection for employees at FI (which is the same for all civil servants) has not been changed since 2011. FI considers it inconceivable that a personal liability could ever arise in the case of actions taken in good faith while discharging the employee’s duties and considers it unlikely even in case the employee has caused the damage intentionally or with gross negligence.
  - (e) No developments – this has not been considered urgent in the light of Swedish experience.

### 4. Supervisory process
- Recommendation: Consider reviewing the impact of judicial review on the ability of FI to make timely interventions to protect policyholders’ interests.
- Response: FI has reviewed the issues. It considers that, while a decision on “immediate application” of a sanction can be appealed, such cases have priority at the courts and have in practice been determined rapidly.

### 5. Supervisory cooperation and information sharing
- Recommendation: Expedite Sweden’s accession to the IAIS multilateral MoU.
- Response: FI has not applied to be a signatory to the MMoU pending resolution of legal issues. FI is taking a bilateral approach to developing supervisory contacts with (the relatively few relevant) non-EEA country jurisdictions on group supervision and supervisory colleges, especially with jurisdictions deemed equivalent to Solvency II under the EU process.

### 6. Licensing
- Recommendations:
  - a) Review the government’s role in the licensing process under the IBA;
  - b) Extend the fit and proper assessment to senior management of insurers;
  - c) Consider empowering FI to impose licensing conditions; and
  - d) Consider having a definition of insurance business in the IBA.
- Responses:
  - (a) See above ICP 3.
  - (b) Fit and proper assessment has been introduced as part of Solvency II implementation (IBA Chapter 10, Section 5).
  - (c) FI has not been empowered to impose conditions for licensing. FI has the power to limit licenses if this should be necessary due to special circumstances.
  - (d) The issue has been considered but no definition of insurance has been introduced into IBA.

### 7. Suitability of persons
- Recommendations:
  - a) Explicit provision for FI to assess the fitness and propriety of senior management of insurers as well as their auditors and actuaries;
  - b) Require insurers to notify FI of circumstances that may affect the fitness and propriety of its board members, MD, senior managers, auditors and actuaries.
- Responses:
  - (a) Requirements have been introduced, including for key functions, with Solvency II implementation (IBA, Chapter 10, Section 5). The onus on assessment of fit and proper compliance is placed in the insurance company.
  - (b) There is no explicit requirement. However, insurers must notify FI if a relevant person has been replaced, because he or she no longer fulfils the fit and proper requirements. (IBA, Chapter 10 Section 5).

### 9. Corporate governance
- Recommendations: Establish clear corporate governance standards for insurers on:
  - a) The minimum level of independent directors and criteria for independence;
  - b) Establishment of relevant board committees, taking into account the nature, scale and complexity of their operations;
  - c) Policies and procedures to assess the effectiveness of their boards;
  - d) The role and accountabilities of senior managers;
  - e) Providing actuaries with direct access to the board and board committee on a timely basis.
- Responses:
  - None of these issues in (a) to (d) has been included in regulatory requirements. FI relies on the supervisory process to assess effective corporate governance. There are, however, requirements on limited companies which are prohibited to pay dividends and mutual companies that more than half the board members are not employees of the company or employees or board members of another company in the same group (IBA Chapter 11, Section 7 and Chapter 12 Section 25).
  - (e) As part of Solvency II implementation, one of the requirements of the actuarial function and persons responsible for the function is to inform the board and senior managers of the reliability and adequacy of the calculation of technical provisions. Solvency II governance requirements have been applied to all insurers, even those with only occupational pensions business.

### 10. Internal controls
- Recommendation: Consider adopting explicit provisions to ensure that internal auditors have unfettered access to the board and senior management and appropriate status to ensure that senior management acts upon its recommendation.
- Response: As part of Solvency II implementation, FI has required that the internal audit function is objective and independent from the operational function. (IBA Chapter 10 Section 17). Internal audit must evaluate the system of governance and report to the board on certain matters.

### 11. Market analysis
- Recommendation: Enhance FI’s capacity and resources to analyze developments outside the Swedish market on a regular basis including Swedish insurers’ exposures to foreign risks.
- Response: FI notes that this issue is under discussion and that increased resources will be made available for the analysis of foreign markets, macroeconomic developments and the exposure to such risk that may fall on Swedish insurers and policyholders.

### 12. Reporting to supervisors
- Recommendations:
  - a) Formulate a more robust risk-based supervision approach based on both the impact and probability of failure, supported by an appropriate baseline supervision;
  - b) Review the adequacy of resources for off-site monitoring;
  - c) Establish clear regulatory requirement for insurers to report their reinsurance strategy and program, outsourcing arrangements and off-balance sheet exposures including derivatives transactions;
  - d) Require annual regulatory returns of insurers to be audited.
- Responses:
  - (a) The supervisory process including baseline supervision has developed since 2011 in line with Solvency II with a risk assessment framework that distinguishes between impact and probability of failure.
  - (b) The general increase in FI’s insurance supervision resources since 2011 has also made available more resources for off-site monitoring.
  - (c) Such reporting has increased substantially with the Solvency II requirements (although their application of limited in the case of occupational pensions).
  - (d) No developments – not considered urgent in the light of Swedish experience.

### 13. On-site inspection
- Recommendation: Improve the robustness of on-site inspection and ensure that the planned baseline onsite supervisory program is supported by adequate supervisory resources.
- Response: FI has reviewed its approach to on-site work as part of the development of its broader framework of risk-based supervision. The general increase in resources since 2011 has also made available more resources for on-site monitoring.

### 15. Enforcement or sanction
- Recommendations:
  - a) Empower FI to order a compulsory transfer of insurance portfolios of an insurer in distress;
  - b) Strengthen FI’s intervention powers against unregulated entities within an insurance group or financial conglomerate;
  - c) Consider how best to empower FI in taking necessary measures to protect the interests of the public pending the completion of police investigations;
  - d) Review the government’s continued involvement in enforcement and sanctions at institution-specific level.
- Responses:
  - (a) There have been no developments on resolution issues generally pending initiatives at the EU level (to which FI is contributing).
  - (b) Solvency II implementation has given FI increased power over unregulated entities, where required for effective group supervision, which applies to all insurers even those with only occupational pensions business.
  - (c) The issue has been considered. FI considers that its regular powers laid out in IBA Chapter 18, for example, to appoint an accountant or an actuary may be useful in this context.
  - (d) See ICP 3.

### 16. Winding-up or exit from the market
- Recommendations:
  - a) Ensure adequate controls over assets covering technical provisions including quarterly submission of the special register of assets;
  - b) Establish clear rules on how existing assets of an insolvent insurer are to be distributed amongst policyholders.
- Responses:
  - (a) Following Solvency II implementation, insurers subject to the full requirements will be reporting all their assets, item by item, to FI quarterly. The regulation of investments is now based on the prudent person principle. Regulations issued by FI require that a Special Register of assets to which policyholders hold a priority should be kept and maintained in such a way that the undertaking can show the contents of this register at any time in the last twelve months so that FI can analyze the Special Register when necessary. The methods of analysing the Special Register of assets have not yet been developed pending the start of full assets reporting in May 2016.
  - (b) FI sees no urgent need for such further rules of distribution as the existing legislation in the Rights of priority Act provides that the policyholders are preferential and Section 9 provides in which order the preferential claims shall be distributed amongst them (as other claims may also be preferential). Section 1 of the Rights of Priority Act provides that if claims are of the same preference, the creditors (in this case the policyholders) shall be paid in proportion to their claim.

### 17. Group-wide supervision
- Recommendations:
  - a) Review the adequacy of supervisory resources, particularly for the effective supervision of cross-border groups/conglomerates;
  - b) Harmonize the supervisory approach for insurance groups and conglomerates, e.g., in the area of risk concentration;
  - c) Formulate appropriate regulatory requirements applicable to non-regulated holding companies.
- Responses:
  - (a) The general increase in resources since 2011 has also made available more resources for group supervision.
  - (b) The issue has been addressed in the course of Solvency II implementation and by ensuring communication between supervisory departments within FI.
  - (c) The issue has been addressed by Solvency II implementation under which the non-regulated holding company is included in the scope of group supervision. The relevant provisions apply to all companies covered by FI’s implementation of Solvency II, including occupational pensions insurance business.

### 18. Risk assessment and management
- Recommendation: Develop policies and processes to monitor the adequacy of insurers’ risk management systems on a regular basis including requiring insurers to report on their risk management system as part of the annual returns.
- Response: This issue has been addressed through Solvency II implementation, for example the Regular Supervisory Reporting and Own Risk and Solvency Assessment requirements (although these do not apply uniformly to insurers undertaking occupational pensions insurance). Supervisory work is focusing on risk management in response to the new requirements and reporting.

### 19. Insurance activity
- Recommendations:
  - a) Review the adequacy of reinsurance programs as part of its routine off-site surveillance instead of the current limited scope review;
  - b) Establish policies and procedures to check that insurers properly account for all risk transfer instruments.
- Responses:
  - (a) Solvency II implementation has provided FI with increased information on reinsurance and off-site surveillance of reinsurance programs is expected to develop.
  - (b) Procedures and policies for a proper accounting of all risk transfer instruments has been developed, but further work may be needed.

### 20. Liabilities
- Recommendation: The implementation of Solvency II will strengthen FI’s supervision over insurers’ technical provisions.
- Response: This is expected as a result of implementing Solvency II, where applicable (i.e. excluding large parts of occupational pensions business).

### 21. Investments
- Recommendation: Enhance the robustness of supervision of insurers’ investment operations and update regulations on investment management by insurers.
- Response: As a result of Solvency II implementation, more regulation is in place and more information is available on investments.

### 22. Derivatives and similar commitments
- Recommendation: Expedite the issuance of regulations governing insurers’ derivative activities.
- Response: FI regards the Solvency II implementation on corporate governance as sufficient, in particular regarding the required risk management function. In addition, FI has issued regulations on investments in financial instruments, including derivatives, and diversification of risk. (Chapter 5 Section 2 of FFFS 2015:8).

### 23. Capital adequacy and solvency
- Recommendation: The implementation of Solvency II with effect from January 2013 will facilitate FI in implementing a more robust and risk-sensitive solvency regime.
- Response: This is expected as a result of implementing Solvency II, where applicable (i.e. excluding large parts of occupational pensions business).

### 25. Consumer protection
- Recommendations:
  - a) Review the adequacy of current regulatory requirements for conditional bonus and transfer of policies;
  - b) Consider articulating more clearly the roles and accountabilities of various agencies involved in consumer protection to improve efficiency and promote better understanding by consumers.
- Responses:
  - (a) Conditional bonus and transfer of policies have been reviewed to some extent in FI reports since 2011. FI regulation on information in relation to transfer of policies has been amended during the period.
  - (b) Reports to Parliament and the government have analyzed the rules and accountabilities of the agencies involved. The government has addressed the issues in its communications with the agencies. There remains some confusion amongst consumers as to agency responsibilities, but enquiries and complaints are directed to the appropriate agency, as required.

### 26. Information, disclosure and transparency towards markets
- Recommendation: To facilitate market discipline, FI should formulate plans to implement the IAIS supervisory standards on public disclosures.
- Response: The regulation on public disclosure under Solvency II has been implemented and FI expects it to sufficient for the present needs (but it does not apply to large parts of occupational pensions business).

### 28. Anti-money-laundering, combating the financing of terrorism (AML-CFT)
- Recommendations:
  - a) Review the adequacy of resources for AML-CFT supervision;
  - b) Update the legal requirements where insurers rely on intermediaries to perform customer due diligence (CDD).
- Responses:
  - (a) The resources for AML-CFT supervision have not been changed significantly since 2011.
  - (b) FI notes that the legal requirements have been updated (Chapter 2 Section 3 of the Act on Measures against Money Laundering and Terrorist Financing). Insurers are now required to obtain CDD information immediately if insurers rely on third parties to perform CDD.

*Annex I. Sweden’s Response to the Recommendations of the 2011 FSAP (extracted content).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17307.pdf_