## 1dnkea2020003

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### Market structure and size
- Denmark’s insurance sector is highly developed with a particularly high penetration and density in the life sector.
- Life insurance penetration (premiums to GDP): 7.6 percent.
- Life insurance density (2018): US$4,590.
- Life insurance penetration: EU 4.4; Advanced markets 4.3 (percent of GDP).
- Non-life insurance penetration: 2.8 percent.
- Non-life insurance density (2018): US$1,699.
- Non-life penetration: EU 2.9; Advanced markets 3.5 (percent of GDP).
- Assets managed by the insurance industry: 146 percent of the GDP at end-2018 (EU average: 72 percent).
- Increase in assets managed since 2013: 17 percentage points.
- Number of licensed insurance companies: declined from 115 (end-2013) to 97 (2018); of which 31 were life insurers and 66 non-life insurers.
- Foreign branches active in Denmark: 39 at end-2017 compared to 49 at end-2013.
- Market concentration:
  - Life sector: three largest life insurance groups account for 37 percent of assets; the largest ten groups for 73 percent.
  - Non-life sector: three largest companies account for 57 percent; ten largest for 88 percent.
- Distribution channels:
  - Number of agents increased from 566 in 2014 to 1,173 in 2018.
  - Number of brokers increased from 80 to 111 over the same period.

### Product mix and business model developments
- Life insurance contracts are predominantly occupational pension schemes; individual life business accounts for only 7 percent of premiums.
- Market-return products, including unit-linked life insurance, are increasingly crowding out traditional policies.
  - Premiums in traditional life insurance (with bonus) declined since 2010 and amounted to 29 percent (DKK 51.9 billion) of total gross premiums written in 2018.
  - Unit-linked policies without guaranteed minimum return account for over 67 percent of gross premiums written in 2018.
- Regular and single premiums (DKK millions, direct business):
  - Regular premiums: 6,025 99,925 9,398
  - Single premiums: 6,599 58,085 0
  - Total (1+2): 12,624 158,010 9,398
  - Of which unit-linked contracts without guaranteed minimum return: 6,216 114,629 753
- Non-life premiums stagnated in real terms from 2014 to 2018.
  - Major non-life lines (DKK millions): Property 25,921; Motor 21,687; Sickness and accident 14,029; Workers Compensation 3,475; Liability 3,177; Marine, Aviation and Transport 1,413; Other 3,351; Total 73,053.
- Retention rates: more than 99 percent in life business retained by primary insurers; retention rates in non-life around 90 percent.

### Asset allocation and liabilities
- Technical provisions account for 84 percent of total liabilities.
- Technical provisions split (2019 Q3, in percent): Life 45,4; Unit-linked 36,3; Non-life 2,4; Other liabilities 15,8.
- Unit-linked provisions increased by 58 percent within four years while insurance liabilities in total rose by only 4 percent.
- Non-life technical provisions account for less than 3 percent of total liabilities.
- Unit-linked assets cover 35 percent of the total investment assets.
- Covered bonds account for 19 percent of life insurers’ investments and 44 percent in the non-life sector; of these covered bonds, 93 percent are issued by Danish banks.
- Equity (incl. participations): life 13 percent, non-life 25 percent.
- Country allocation (bonds and equity, in percent): DKK/Denmark 62,1; US 10,1; DE 5,5; SE 4,2; FR 2,1; UK 1,7; ES/Other 1,2.
- Home bias: almost two thirds of all bond and equity exposures are domestic.

### Profitability and solvency
- Return on equity (median, after tax): 2018 medians: Life 2.0 percent, Non-life 1.4 percent.
- Profitability has been maintained with positive returns on equity in both life and non-life throughout 2009-2018, but declining since 2011.
- Non-life: favorable underwriting results and relatively low expense ratios.
- Life: profitability impeded by high guaranteed interest rates in legacy contracts; legacy portfolio large though declining.
  - Legacy contracts with guarantees of more than 3 percent still account for 23 percent of all life technical provisions (down from 33 percent in 2013).
- Solvency coverage:
  - Coverage of the SCR hovers around 280 percent in both life and non-life.
  - 90 percent of the life and non-life companies had an SCR coverage of at least 184 and 149 percent, respectively, in September 2019.
  - Median SCR coverage levels are well above the regulatory threshold of 100 percent.
- Investment performance:
  - Until 2017, positive investment income contributed to positive returns.
  - Market value losses in the equity portfolio and stagnating bond prices temporarily reduced profitability in 2018.

### Solvency II implementation, Long-Term Guarantee measures and valuation issues
- Solvency II implemented in full in Denmark in 2016; out of 97 Danish insurers, 82 fall within scope of Solvency II.
- Danish insurers had introduced a fairly market-consistent valuation of assets and liabilities already in the early 2000s and have established advanced asset-liability management compared to peers.
- No life insurer has to use any of the transitional measures.
- Use of LTG measures and transitionals: only the volatility adjustment (VA) is used.
  - Effect on valuation of technical provisions: reduces those by 0.4 percent as of end-2018.
  - Eligible own funds would be 3.7 percent lower without the VA.
  - The SCR would be higher by 22.3 percent without the VA.
  - As a result, the average SCR coverage ratio without the VA would be 244 percent instead of 310.
  - VA at end-2018 was 45 basis points.
- EIOPA introduced a new VA methodology in January 2019; VA in January 2019 was 13 basis points lower than in December 2018.
  - The change increased technical provisions and reduced available capital; for some life insurers SCR ratios dropped by more than 30 percentage points.
  - Market participants pointed to technical flaws in the covered bond index used for VA calculation (small number of index components, quarterly rebalancing, timing of rebalancing).
  - VA spike in March 2020 driven by market turbulences from the Covid-19 pandemic.
- DFSA found deterministic cash flow modelling for guaranteed benefits inappropriate and published guidelines recommending cash flow modelling for all future payments; DFSA expects life insurers to be compliant by end-2022 and issued orders to 25 life insurers to ensure compliance by end-2022.

### Supervision framework, resources, inspections and governance
- The Danish Financial Supervisory Authority (DFSA) is an integrated financial regulator; mandate includes prudential and market conduct supervision with policyholder protection as a primary objective (FBA section 344 (2)).
- Reporting and supervisory tools:
  - DFSA uses off-site monitoring and on-site inspections; collects QRTs, ORSA, and Regular Supervisory Reporting.
  - Life insurers must submit every quarter documentation that they have sufficient assets to cover technical provisions (registered assets).
  - External auditor must sign annual financial statements; QRTs and SFCRs are not currently required to be audited.
- Resources and staffing:
  - Insurance supervision divided into three divisions with 50 employees, an increase of about a quarter since the last FSAP.
  - For each licensed insurance undertaking and each EUR billion in total assets of the insurance sector there are only 0.52 and 0.08 staff, respectively.
  - More than 50 percent of DFSA’s insurance supervisors have less than three years of supervisory experience.
  - Per inspection only 17.8 person days were spent on-site.
- On-site inspections:
  - Frequency depends on size and riskiness; DFSA strives for on-site inspections at least every five years.
  - Actual inspection shares for non-life companies: 13, 7, and 11 percent for 2016/17, 2017/18 and 2018/19, respectively.
  - Actual inspection shares for life and pension fund sector: 30, 23, and 20 percent for 2016/17, 2017/18 and 2018/19, respectively.
  - Inspection plan thinned during 2016/17 due to Solvency II implementation, high staff turnover, and two bankruptcies.
- Governance and internal controls:
  - Solvency II requires at least four key functions (compliance, audit, risk and actuarial) per DFSA’s Executive Order on Governance; suitability requirements for key function holders in FBA section 64 (5).
  - Assessment of governance/internal controls typically during on-site inspections; no regular formal dialogue with key function holders and no systematic process to feed findings into individual risk scores.
- Crisis management and resolution:
  - DFSA has written procedures for early intervention and crisis management; can demand recovery plans and order corrective actions.
  - Resolution for solvent non-life undertakings: liquidation with DFSA supervision; for insolvent non-life undertakings: winding up by trustee appointed by bankruptcy court.
  - For life undertakings DFSA can place the undertaking under administration and create a bridge institution to which insurance contracts and related assets are transferred.
- Compensation schemes:
  - Guarantee Fund for Non-Life Insurance Companies covers eligible policyholders; entrance fee DKK 100,000; minimum capital DKK 300 million; Fund’s equity capital was negative DKK 742 million as of end-2018.
  - There is currently no guarantee scheme for life insurance.

### Conduct, AML/CFT, intermediaries and consumer protection
- Distribution and sales:
  - Executive Order on Good Business Practices for Insurance Distributors transposes Insurance Distribution Directive consumer protection requirements and national requirements.
  - Executive Order on Professional Requirements requires documented skills and knowledge for sales agents with a basic test and follow-up test every third year.
- Intermediaries:
  - Independent insurance intermediaries are not currently obliged to set up written policies and procedures or internal controls; Insurance Distribution Act lacks specific requirements on internal controls or compliance.
  - An intermediary claiming to be independent cannot receive remuneration from an insurance undertaking and staff cannot be shared between independent and tied intermediaries.
- Consumer protection mechanisms:
  - Insurance Complaints Board adjudicates private customer complaints; Consumer Ombudsman supervises compliance with the Marketing Practices Act.
- Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT):
  - Act on Measures to Prevent Money Laundering and Financing of Terrorism applies to life insurance companies, multi-employer occupational pension funds, and insurance intermediaries acting in respect of life insurance or other investment-related insurance activities.
  - Insurers and intermediaries subject to suspicious transaction reporting, CDD, and requirements on policies, procedures, and training; Act No. 651 (2017) strengthened CDD requirements.
  - Remaining legislative gap: obligation for authorities to require insurers to identify and verify beneficial owners of life insurance beneficiaries when conducting enhanced due diligence.
  - DFSA plans 40-45 AML/CFT inspections in 2020; two-to-three could be conducted in the insurance sector.
- Recommendation: initiate risk-based AML/CFT on-site inspections of insurance undertakings and intermediaries, with relatively high scrutiny for insurers active in individual life insurance and intermediaries distributing such policies.

### Macroprudential surveillance and stress testing
- DFSA produces an internal risk assessment of the insurance market twice a year; includes a bottom-up analysis and a risk dashboard, written report, and risk matrix.
- DFSA participates in biannual EIOPA stress tests:
  - 2018 EIOPA insurance stress test: two Danish insurance groups included in EU-wide sample of 42 groups.
  - 2016 EIOPA stress test: included 12 Danish insurers at solo level.
- DFSA collects quarterly sensitivity data but does not conduct domestic sector-wide stress tests based on macrofinancial scenarios beyond EIOPA tests.
- Predefined sensitivity tests include interest rate, equity, property risk, foreign exchange risk and credit spread risk, and other risks such as counterparty risk, lapse risk, and longevity risk.
- DFSA has not designated any insurance company as a domestic systemically important insurer (D-SII) and currently employs no macroprudential measures.
- Recommendation: develop a stress testing framework which ideally combines both a top-down (in cooperation with DN) and a bottom-up perspective; run additional national stress tests in years when no EIOPA stress test is conducted or amend the EIOPA sample for domestic purposes.

### Main policy recommendations (selected, with priority and timing)
- Expand the risk assessment framework to include more non-financial risks, in particular those related to governance and internal controls (¶59, 70) — DFSA — ST — H.
- Expand supervisory resources of the DFSA’s Insurance Supervision Department (¶65) — DFSA, MIBFA — ST — H.
- Increase the frequency of on-site inspections (¶66) — DFSA — ST — H.
- Establish a regular dialogue with companies’ key function holders to facilitate an assessment of their effectiveness (¶70) — DFSA — ST — H.
- Continue efforts in analyzing the implications of the switch towards more market-return products (¶31) — DFSA — C — H.
- Initiate on-site inspections on AML/CFT matters in insurance undertakings and intermediaries (¶76) — DFSA — I — M.
- Complete the process of signing the IAIS MMoU (¶86) — DFSA — I — M.
- Require at least the annual QRTs to be audited, and to require audit assurance process for the systems and procedures used to complete the QRTs and SFCRs (¶64) — DFSA — MT — M.
- Continue facilitating the insurance sector’s move toward stochastic modelling of technical provisions and challenge companies’ models (¶24) — DFSA — C — M.
- Review the current methodology of the volatility adjustment and consider technical refinements of the covered bond index (¶25) — DFSA — ST — L.

### Key quantitative indicators (selected)
- Assets / liabilities: 109.0 ... 110.4 110.4 109.9 108.6.
- SCR coverage ratio (Solvency II): ... ... 304 290 296 279.
- MCR coverage ratio (Solvency II): ... ... 780 744 772 730.
- Unrestricted Tier 1 capital / eligible own funds: ... ... ... ... 94.9 94.8.
- Growth in gross written premiums - life: ... 6.2 15.6 10.4 5.9 2.9.
- Growth in gross written premiums - non-life: ... 0.6 -0.9 1.4 1.3 4.2.
- Loss ratio (net paid claims / net premiums) - non-life: 60.6 61.9 64.0 63.0 66.5 ...
- Combined ratio - non-life, median: 92.6 95.9 96.0 94.9 92.6 ...
- Return on equity - life: 9.1 3.6 7.6 5.9 -5.0 ...
- Return on equity - non-life: 14.0 10.1 14.9 14.8 9.3 ...
- Bonds / total investments excl. unit-linked: ... ... 36.3 37.7 38.7 34.3.
- Liquid assets / total investments excl. unit-linked: ... ... 67.6 70.4 71.3 67.1.
- Risk retention ratio (net premium / gross premium) - life: ... ... 99.7 99.7 99.8 99.9.
- Risk retention ratio (net premium / gross premium) - non-life: 92.1 91.2 90.2 90.4 90.0 91.7.

_Source: 1dnkea2020003 - EXECUTIVE SUMMARY and chapter material._

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Key findings: market structure and size
- Denmark’s insurance sector is highly developed with a particularly high penetration and density in the life sector.
- Life insurance penetration (premiums to GDP) in Denmark: 7.6 percent.
- Life insurance density (premiums per capita) in Denmark (2018): US$4,590.
- Life insurance penetration: EU 4.4; Advanced markets 4.3 (percent of GDP).
- Non-life insurance penetration in Denmark: 2.8 percent.
- Non-life insurance density (2018): US$1,699.
- Non-life penetration: EU 2.9; Advanced markets 3.5 (percent of GDP).
- Assets managed by the insurance industry: 146 percent of the GDP at end-2018 (EU average: 72 percent).
- Increase in assets managed since 2013: 17 percentage points.
- Number of licensed insurance companies: declined from 115 (end-2013) to 97 (2018); of which 31 were life insurers and 66 non-life insurers.
- Foreign branches active in Denmark: 39 at end-2017 compared to 49 at end-2013.
- Market concentration:
  - Life sector: three largest life insurance groups account for 37 percent of assets; the largest ten groups for 73 percent.
  - Non-life sector: three largest companies account for 57 percent; ten largest for 88 percent.
- Distribution channels:
  - Number of agents increased from 566 in 2014 to 1,173 in 2018.
  - Number of brokers increased from 80 to 111 over the same period.

### Product mix and business model developments
- Life insurance contracts are predominantly occupational pension schemes; individual life business accounts for only 7 percent of premiums.
- Market-return products, including unit-linked life insurance, are increasingly crowding out traditional policies.
  - Premiums in traditional life insurance (with bonus) declined since 2010 and amounted to 29 percent (DKK 51.9 billion) of total gross premiums written in 2018.
  - Unit-linked policies without guaranteed minimum return account for over 67 percent of gross premiums written in 2018.
- Non-life premiums stagnated in real terms from 2014 to 2018.
  - Major non-life lines: property (35 percent of premiums) and motor (30 percent of premiums).
- Retention rates: more than 99 percent in life business retained by primary insurers; retention rates in non-life around 90 percent.

### Profitability and solvency
- Profitability in the life sector is challenged by low interest rates; solvency rates are stable.
- Positive returns on equity maintained in both life and non-life insurance throughout 2009-2018.
- Non-life insurance: favorable underwriting results and relatively low expense ratios.
- Life insurance: profitability impeded by high guaranteed interest rates in legacy contracts; legacy portfolio is large though constantly declining.
- Investment performance:
  - Until 2017, positive investment income contributed to positive returns.
  - Market value losses in the equity portfolio and stagnating bond prices temporarily reduced profitability in 2018.
- Solvency ratios have been broadly stable since Solvency II implementation, hovering around 280 percent in both life and non-life—well above the regulatory threshold of 100 percent.

### Solvency II implementation and valuation, model issues
- Solvency II implementation in 2016 has raised the overall level of observance with the Insurance Core Principles and improved risk culture.
- Danish insurers had introduced a fairly market-consistent valuation of assets and liabilities already in the early 2000s and have established advanced asset-liability management compared to peers.
- No life insurer has to use any of the transitional measures.
- Technical work is still needed to introduce stochastic modelling of technical provisions in the life sector; DFSA assessed currently used deterministic modeling as inconsistent with the Solvency II Directive.
- Recommendation flagged: continue facilitating the insurance sector’s move toward stochastic modelling of technical provisions and challenge companies’ models.

### Supervisory framework, resources, and practices
- The Danish Financial Supervisory Authority (DFSA) is an integrated financial regulator.
- Resources in DFSA’s Insurance Supervision Department have increased since the last FSAP but still rank below EU peers on a number of comparative statistics.
- Staff profile: rather junior staff and relatively high turnover rates.
- Supervisory priorities and gaps:
  - Increase overall staff levels and establish policies to retain qualified staff.
  - Increase number of on-site inspections; DFSA has increased on-site inspections in the life sector slightly, but falls short in the non-life sector relative to desired inspection cycles.
  - Need to complete a solid risk assessment framework and include non-financial risks, in particular governance risks.
  - Establish a regular institutionalized supervisory dialogue with major insurers’ key control functions.
  - Supervision of cross-border business should be strengthened—two smaller non-life insurers heavily engaged in cross-border business failed since 2017 related to insufficient reserves and incorrect asset assessment.
  - A new supervisory standard is being developed to address previous gaps in licensing and supervisory reporting.
- Reporting and audit recommendations:
  - Recommend requiring at least the annual QRTs to be audited, and to require audit assurance process for the systems and procedures used to complete the QRTs and SFCRs.

### Conduct, AML/CFT, and integrity
- Conduct of business and consumer protection matters flagged for attention, including closing regulatory loopholes for insurance intermediaries and stepping up supervision of intermediaries.
- Recommendation: initiate on-site inspections on AML/CFT matters in insurance undertakings and intermediaries.

### Macroprudential surveillance and stress testing
- Recommendation: develop a stress testing framework which ideally combines both a top-down and a bottom-up perspective.
- Recommendation: review the current methodology of the volatility adjustment and consider technical refinements of the covered bond index.

### Main policy recommendations (Table 1: Denmark: Main Recommendations on Insurance Regulation and Supervision)
- 1 Expand the risk assessment framework to include more non-financial risks, in particular those related to governance and internal controls (¶59, 70) — DFSA — ST — H
- 2 Expand supervisory resources of the DFSA’s Insurance Supervision Department (¶65) — DFSA, MIBFA — ST — H
- 3 Increase the frequency of on-site inspections (¶66) — DFSA — ST — H
- 4 Establish a regular dialogue with companies’ key function holders to facilitate an assessment of their effectiveness (¶70) — DFSA — ST — H
- 5 Continue efforts in analyzing the implications of the switch towards more market-return products (¶31) — DFSA — C — H
- 6 Submit detailed findings and orders resulting from on-site inspections to companies without any undue delay (¶67) — DFSA — I — M
- 7 Initiate on-site inspections on AML/CFT matters in insurance undertakings and intermediaries (¶76) — DFSA — I — M
- 8 Complete the process of signing the IAIS MMoU (¶86) — DFSA — I — M
- 9 When deciding on an industry-wide roll-out of IFRS 17, carefully consider the resource implications for smaller undertakings and potential operational risks (¶26) — DFSA — I — M
- 10 Close regulatory loopholes for insurance intermediaries (¶41) — MIBFA — ST — M
- 11 Step up supervision of insurance intermediaries and allocate sufficient resources to this task (¶42) — DFSA — ST — M
- 12 Implement the intensified framework for supervision of cross-border business and allocate sufficient resources to it (¶85) — DFSA — ST — M
- 13 Develop a stress testing framework which ideally combine both a top-down and a bottom-up perspective (¶92) — DFSA — ST — M
- 14 Require at least the annual QRTs to be audited, and to require audit assurance process for the systems and procedures used to complete the QRTs and SFCRs (¶64) — DFSA — MT — M
- 15 Continue facilitating the insurance sector’s move toward stochastic modelling of technical provisions and challenge companies’ models (¶24) — DFSA — C — M
- 16 Review the current methodology of the volatility adjustment and consider technical refinements of the covered bond index (¶25) — DFSA — ST — L

*Prepared by the IMF FSAP mission team as summarized in the Executive Summary and Table 1 of the technical note.*

*Source: 1dnkea2020003 - EXECUTIVE SUMMARY*

### 1. Regular premiums

### 1. Regular premiums

### Premium and contract-level figures
- Regular premiums: 6,025 99,925 9,398
- Single premiums: 6,599 58,085 0
- Total (1+2): 12,624 158,010 9,398
- of which:
  - Life insurance contracts with bonus: 4,632 40,626 6,595
  - Life insurance contracts without bonus: 1,516 1,030 2,051
  - Unit-linked contracts with guaranteed minimum return: 209 1,725 0
  - Unit-linked contracts without guaranteed minimum return: 6,216 114,629 753
- DKK millions, direct business (Non-life insurance):
  - Property25,921
  - Motor21,687
  - Sickness and accident14,029
  - Workers Compensation3,475
  - Liability3,177
  - Marine, Aviation and Transport1,413
  - Other3,351
  - Total73,053

### Insurance liabilities: structure and recent trends
- Technical provisions account for 84 percent of total liabilities.
- Technical provisions split into:
  - Technical provisions - Life: 45,4 (2019 Q3, in percent)
  - Technical provisions - Unit-linked: 36,3 (2019 Q3, in percent)
  - Technical provisions - Non-life: 2,4 (2019 Q3, in percent)
  - Other liabilities: 15,8 (2019 Q3, in percent)
- Unit-linked provisions increased by 58 percent within four years while insurance liabilities in total rose by only 4 percent.
- Non-life technical provisions account for less than 3 percent of total liabilities.
- Compared with European peers, Denmark’s share of unit-linked business is relatively high; among larger markets only topped by Ireland, Finland, the UK and Sweden.

### Asset allocation of insurers (2019 Q3)
- Investment composition (only investment assets, in percent) — life vs non-life (bars implied in source):
  - Sovereign bonds
  - Covered bonds
  - Other corporate bonds
  - Equity and participations
  - Mutual funds
  - Property
  - Other investments
- Key allocation figures:
  - Mutual funds reflect the proportion of unit-linked business and represent a large asset class (unit-linked assets cover 35 percent of the total).
  - Covered bonds account for 19 percent of life insurers’ investments and 44 percent in the non-life sector.
    - Of these covered bonds, 93 percent are issued by Danish banks.
  - Equity (incl. participations): life 13 percent, non-life 25 percent.
- Country allocation (only bonds and equity, in percent):
  - DKK/Denmark: 62,1
  - US: 10,1
  - DE: 5,5
  - SE: 4,2
  - FR: 2,1
  - UK: 1,7
  - ES/Other: 1,2
- Home bias: almost two thirds of all bond and equity exposures are domestic; another 10 and 5 percent are U.S. and German securities; rest of world 22 percent.

### Profitability and solvency
- Return on equity (median, after tax):
  - Median return on equity declined; 2018 medians: Life 2.0 percent, Non-life 1.4 percent.
  - Profitability has been maintained with positive returns on equity in both life and non-life throughout 2009 to 2018, but declining since 2011.
- Underwriting and expense characteristics:
  - Non-life: favorable underwriting results and relatively low expense ratios.
  - Life: high guaranteed interest rates continue to impede profitability because legacy contracts with guarantees of more than 3 percent still account for 23 percent of all life technical provisions (down from 33 percent in 2013).
- Solvency coverage:
  - Coverage of the solvency capital requirement (SCR) hovers around 280 percent in both life and non-life.
  - 90 percent of the life and non-life companies had an SCR coverage of at least 184 and 149 percent, respectively, in September 2019.
  - Median SCR coverage levels are well above the regulatory threshold of 100 percent.

### Long-Term Guarantee (LTG) measures and Volatility Adjustment (VA)
- Use of LTG measures and transitionals:
  - Danish insurers make less use of LTG measures and transitionals than companies in other European markets.
  - Among LTG measures, only the volatility adjustment (VA) is used.
- Quantified VA and impact:
  - Effect on valuation of technical provisions: reduces those by 0.4 percent as of end-2018.
  - Eligible own funds would be 3.7 percent lower without the VA.
  - The SCR would be higher by 22.3 percent without the VA.
  - As a result, the average SCR coverage ratio without the VA would be 244 percent instead of 310.
  - VA at end-2018 was 45 basis points.
- VA dynamics and methodological change:
  - EIOPA introduced a new methodology in January 2019; VA in January 2019 was 13 basis points lower than in December 2018.
  - The change increased technical provisions and reduced available capital; for some life insurers SCR ratios dropped by more than 30 percentage points.
  - Market participants pointed to technical flaws in the covered bond index used for VA calculation (small number of index components, quarterly rebalancing, timing of rebalancing), which the report recommends fixing.
  - VA spike in March 2020 driven by market turbulences from the Covid-19 pandemic.

### Valuation, accounting and regulatory implementation
- Solvency II implementation:
  - Solvency II implemented in full in Denmark; several bills amended the Financial Business Act to transpose Directive and Technical Standards.
  - Out of 97 Danish insurers, 82 fall within scope of Solvency II.
  - Some small insurers remain outside scope and thus excluded from certain regulatory requirements.
- Valuation regime:
  - Valuation of assets and liabilities uses economic valuation reflecting risk-adjusted present values of cash flows.
  - Until 2017, Danish accounting allowed deterministic cash flow modelling for guaranteed benefits; DFSA review found this inappropriate and published guidelines recommending cash flow modelling for all future payments.
  - DFSA expects life insurers to be compliant by end-2022; gap analyses required; orders issued to 25 life insurers to ensure compliance by end-2022.
- IFRS 17:
  - In 2019, only five Danish insurers prepared accounts based on IFRS.
  - Implementation of IFRS 17 scheduled for 2023 (at time of text) will be mandatory for those companies; preparatory work has started.
  - DFSA is considering whether GAAP should change in line with IFRS 17; substantial work needed for granularity of IFRS 17 calculations.

### Investments, prudent-person principle, and market-return products
- Legal and supervisory requirements:
  - Life insurance companies must fully cover their technical provisions with investment assets at all times (FBA section 167 (1)); assets shall exclusively serve policyholder liabilities and be unencumbered.
  - DFSA checks registered assets on a quarterly basis; auditors must perform at least once-yearly non-notified review.
  - For non-life companies, insurance claims take precedence over other claims, but winding-up claims are served prior to insurance claims (FBA section 234a).
  - Prudent-person principle implemented via FBA sections 70, 71, 158 and 167; Executive Order on Management and Control sets out detailed investment policy requirements.
- DFSA supervisory activities:
  - DFSA released guidance on alternative investments and sound investment processes; set up a unit of four full-time equivalents to analyze alternative investments.
  - Thematic on-site inspections on infrastructure investments; current focus on credit investments.
- Market shift and risks:
  - In response to persistently low interest rates, several life insurers have moved from traditional guaranteed products to asset management-type market-return products, shifting market and some biometric risks to policyholders.
  - Such shifts may lead insurers to invest in riskier assets to achieve competitive returns, exposing them to liquidity risks for which a robust regulatory framework is not yet fully in place.
- DFSA initiatives on market-return products:
  - DFSA published "Pensions when the guarantees disappear" discussion paper in February 2017 and requested comments on need for new regulation to protect policyholders with unguaranteed products.
  - In 2019 DFSA initiated a market investigation where life insurers and multi-employer occupational pension funds had to report extensive information on unguaranteed market-return products (product design, pay-out phase features, underlying investment strategy, risk management).
  - DFSA will hand over findings to the Ministry of Industry, Business and Financial Affairs (MIBFA) for further debate on regulatory needs.

### Analysis and Recommendations
- Valuation and actuarial modelling:
  - The DFSA should continue facilitating the move toward stochastic modelling of technical provisions and enhance its actuarial resources to challenge companies’ models to mitigate provisioning risks and risks to policyholders and financial stability.
- Covered bond index and VA:
  - The DFSA should consider technical refinements of the covered bond index used as input in the VA calculation to address identified technical flaws and aim for a robust calculation method that reflects market practitioners’ views.
- IFRS 17 roll-out considerations:
  - When deciding on an industry-wide roll-out of IFRS 17, DFSA should carefully consider resource implications for smaller undertakings and potential operational risks.
  - A roll-out to other major insurers or the whole market should foresee sufficiently long implementation deadlines, especially for smaller undertakings where necessary skills are scarce and need to be built up.

_Source: IMF staff calculations based on DFSA and EIOPA data._

### 31.      The DFSA should continue its efforts in analyzing the implications of the switch

### 31.      The DFSA should continue its efforts in analyzing the implications of the switch towards more market-return products

### Capital Adequacy
- An insurance undertaking's own funds must cover the solvency capital requirement calculated by the company at all times according to FBA section 126c.
- The solvency capital requirement is calculated using either the standard formula or an internal model authorized by the DFSA.
- The DFSA may require an authorized internal model if an undertaking's risk profile deviates substantially from the prerequisites on which the standard formula is based.
- Composition and characteristics of Danish insurers' solvency capital requirement:
  - Market risks amount to 91 percent of the Basic Solvency Capital Requirement (BSCR) before diversification.
  - Life underwriting risks contribute 18 percent of the BSCR.
  - Diversification effect across modules is limited: -14 percent.
  - Loss-absorbing capacity of technical provisions reduces the BSCR by 76 percent.
- Capital add-ons:
  - In 2019, the DFSA prescribed capital add-ons for the first time, motivated by governance shortcomings detected during on-site inspections.
  - In one case, the capital add-on amounted to more than 20 percent of the previously required capital.
  - One company appealed against the DFSA’s decision—the final outcome is still pending.
- Internal models usage as of end-2018:
  - Eight insurers used a partial internal model.
  - Two companies had developed a full internal model.
  - The two full internal model users are part of a large non-life group, with combined premium volume of around 20 percent of the Danish non-life insurance sector.
  - Partial internal model users account for 43 percent of the sector’s total assets.
  - Among partial internal model users:
    - Five life insurers use the model to derive capital requirement for longevity risk.
    - Three non-life insurers use an internal model to calculate capital charge for underwriting risks in either all lines of business or a majority thereof.

### Conduct of Business and Consumer Protection
- DFSA mandate and objectives:
  - DFSA’s mandate includes prudential and market conduct supervision with policyholder protection as a primary objective.
  - FBA section 344 (2) was amended effective January 2016 to explicitly include policyholder protection as a primary objective.
- Distribution and sales conduct:
  - Undertakings distributing insurance products are obliged not to use unfair contract terms or misleading business practices.
  - The Executive Order on Good Business Practices for Insurance Distributors transposes Insurance Distribution Directive consumer protection requirements and additional national requirements before and during the life of contract.
  - Executive Order on Professional Requirements for Insurance Companies and Insurance Intermediaries:
    - Requires documented skills and knowledge for sales agents.
    - Skills must be documented by a basic test before the person can act on its own and reconfirmed by a follow-up test every third year.
- Internal procedures and intermediaries:
  - Insurance undertakings must have written procedures for all substantial areas of their business according to FBA section 71, including fair treatment of customers and compliance with the Executive Order on Good Business Practices for Insurance Distributors.
  - Independent insurance intermediaries:
    - No equivalent regulation obliging them to set up written policies and procedures to ensure compliance.
    - Insurance Distribution Act does not include specific requirements regarding internal controls or compliance.
    - An intermediary who claims to be independent can only represent the customer to avoid conflicts of interest according to art. 16 of the Insurance Distribution Act.
    - An intermediary may not receive remuneration or other forms of financial compensation from an insurance undertaking, and staff cannot be shared between independent and tied intermediaries.
- Consumer protection mechanisms:
  - Insurance Complaints Board: private complaints board authorized by the MIBFA to adjudicate complaints from private customers relating to law of property and resulting obligations; considers all complaints concerning motor insurance.
  - Consumer Ombudsman: independent authority supervising compliance with the Marketing Practices Act; may investigate complaints, issues of public importance relating to marketing, and may bring civil or criminal actions on behalf of complainants.
- Analysis and Recommendations:
  - Recommendation: regulatory loopholes for insurance intermediaries should be closed; specifically, the need for written policies and procedures as well as internal control functions should be established, at least for larger intermediaries.
  - Recommendation: DFSA should step up its supervision of insurance intermediaries and allocate sufficient resources to this task.
    - Note: supervision of intermediaries suffers from low resources; DFSA was allocated resources for one-off registration of intermediaries under the Insurance Distribution Directive, but ongoing risk-based supervision requires more staff.

### Crisis Management and Insurance Resolution
- DFSA procedures:
  - DFSA has a written procedure regarding early intervention and crisis management, supplemented by a crisis manual describing scenarios and policy actions (e.g., inadequate capital).
  - In cases of inadequate capital, DFSA will demand a recovery plan and typically request reporting on a monthly or, depending on crisis type, daily basis.
  - FBA prescribes specific procedures and timelines for breach of the SCR or the minimum capital requirement (MCR).
- DFSA corrective powers:
  - DFSA can order corrective actions when:
    - an insurance undertaking is not complying with the provisions of the FBA; or
    - the insurer’s funds allocated for coverage of technical provisions are inadequate; or
    - the insurer’s financial position has deteriorated to such a degree that the interests of the insured parties are at risk.
  - DFSA shall order the company to take necessary steps within a time limit in such cases.
- Resolution approaches:
  - Solvent non-life insurance undertakings: resolution affected through liquidation with liquidators appointed to carry out liquidation; undertakings in liquidation remain subject to DFSA supervision.
  - Insolvent non-life undertakings: wound up by a trustee appointed by the bankruptcy court; DFSA receives information trustee sends to the bankruptcy court.
  - In liquidation initiated by DFSA, DFSA will consult with liquidators on handling the portfolio of existing insurance contracts:
    - Options include attempting to transfer portfolio fully or partly to other undertakings, or terminating the portfolio by other means.
    - If no undertaking is willing to take over the portfolio, the undertaking under liquidation must continue until all insurance obligations have run off; DFSA supervises until transfer or dissolution is complete.
  - Life insurance undertakings:
    - DFSA can place the undertaking under administration in certain situations (e.g., failure to implement DFSA-ordered measures that risk insured parties).
    - When placed under administration, a bridge institution is created and the undertaking’s portfolio of insurance contracts and related assets are transferred to the bridge institution.
    - Remaining assets and liabilities not related to transferred insurance contracts are subject to traditional insolvency proceedings.
  - Cross-border activities:
    - DFSA may activate the EIOPA Decision on the Collaboration of the Insurance Supervisory Authorities and set up an EIOPA platform for information exchange when assessing portfolio transfer possibilities for contracts written outside Denmark.
- Compensation and guarantee schemes:
  - Compensation for loss in case of a failed insurer is available to non-life policyholders via the Guarantee Fund for Non-Life Insurance Companies:
    - Established and administered as a private, self-governing body by the Danish Insurance Association, under DFSA supervision.
    - Covers eligible policyholders for claims outstanding and premiums paid prior to a bankruptcy order.
    - Premium cover subject to an excess of DKK 1,000 per policy; no maximum on compensation payable for either claims or premiums.
    - Non-life insurance companies are required to make regular contributions to the Fund; entrance fee is DKK 100,000.
    - Amount payable to the Fund is set by the DFSA annually—annual fee was suspended from 2009 to 2018.
    - In 2019, Fund members are paying DKK 40 per policy written or renewed in 2019.
    - Minimum capital of the Fund is set at DKK 300 million and the Fund may borrow, subject to a state guarantee.
    - As of end-2018, the Fund’s equity capital was negative with DKK 742 million, mainly due to bankruptcies of Alpha Insurance A/S and Qudos Insurance A/S in 2018.
  - There is currently no guarantee scheme for life insurance; authorities consider insolvency law and the register of assets covering technical provisions to provide adequate protection to policyholders.
- Box 2: Recent Insurance Failures (Alpha and Qudos)
  - Alpha Insurance A/S:
    - Operated under EU Freedom to Provide Services (FPS) in France, Germany, Greece, Ireland, Italy, Norway, Spain and the United Kingdom.
    - Sold non-life products mostly to approximately 1.4 million policyholders.
  - Qudos Insurance A/S:
    - Operated mainly in Denmark, France, Germany, Greece, Ireland, Italy, Norway and the United Kingdom.
    - Provided mostly motor, property, general liability, income protection policies to around 400,000 policyholders.
  - Root causes identified by DFSA for both failures:
    - Lack of understanding in the companies of risks in host countries, especially long-tailed business, leading to insufficient technical provisions.
    - Heavy reliance on outsourcing of underwriting and claims handling, and on agents’ own view on the risk profile of the products.
    - Insufficient staff resources, resulting in insufficient control mechanisms and lack of control with the agents.
    - Too optimistic management assumptions on technical provisions, solvency capital requirement calculation, valuation of assets, which overstated the financial position.
  - DFSA actions following failures:
    - Intensified supervision of the FPS business model.
    - Inspected another non-life insurer with an FPS business model in spring 2019 and issued a capital add-on order due to insufficient governance framework.
    - Initiated an inspection in a smaller company planning geographic expansion by FPS; company dropped plan after on-site inspection.
  - DFSA was preparing a report on the reasons for the failures including recommendations on supervision of the FPS business model.

### Insurance Supervision
- Legal mandate and risk-based approach:
  - FBA section 344 (1) mandates the Danish FSA to supervise compliance with the Financial Business Act and rules issued pursuant to this Act.
  - DFSA supervises compliance with multiple EU regulations, including Solvency II; FBA section 344 (2) amended effective January 2016 to include explicit policyholder protection.
  - DFSA takes a risk-based approach and examines viability of business model per FBA section 344 (2).
- Supervision tools and reporting:
  - DFSA uses off-site monitoring and on-site inspections; receives regular data and qualitative reports including Solvency II Quarterly Reporting Templates (QRTs), ORSA, and Regular Supervisory Reporting.
  - FBA sections 346 and 347 give DFSA authority for off-site monitoring, on-site inspections, and to require additional information; FBA section 347 (5) permits inspections at outsourcing companies.
- Reporting requirements (introduced with Solvency II in 2016):
  - Examples of submitted data include:
    - Income statement and balance sheet;
    - Detailed list of assets; life insurers must submit every quarter documentation that they have sufficient assets to cover technical provisions (registered assets);
    - Calculation of the solvency capital requirement and information on available own funds;
    - Technical provisions and projection of future cash flows;
    - Annual longevity analysis from life insurers.
- Data quality and audits:
  - Ongoing work to improve QRT data quality; DFSA performs quality checks and sometimes requires corrections.
  - External auditor must sign annual financial statements according to the FBA, but does not audit the QRTs or the Solvency and Financial Condition Report.
- Ad-hoc reporting and notifications:
  - FBA section 75: any financial undertaking shall immediately inform DFSA of matters of material significance.
  - Executive Order on Outsourcing of Activities of Significant Importance requires insurers to report new critical outsourcing contracts in due time before agreement.
  - Changes in fit and proper status for board members, executive management and key function holders must be reported to DFSA according to FBA section 64.
- Supervisory review and analytics:
  - DFSA maintains an internal risk assessment for each insurance company, updated at least every year, covering business model, governance, investments, solvency, risk management, actuarial matters; results in an internal rating supplemented by a technical rating based on quantitative measurements.
  - Proportionality and risk-based approach: more resources allocated to larger undertakings with more probable or impactful risks; procedures for off-site supervision described in Guidelines for Off-site Supervision.
  - Business intelligence:
    - DFSA uses business intelligence to analyze trends in assets, capital position, and key performance indicators based on QRTs.
    - Every quarter DFSA analyzes solvency and financial position of an insurer.
    - For non-life insurers, quarterly review is based on twelve (purely quantitative) criteria as documented in Procedure for the Quarterly Solvency Surveillance.
    - Outliers must be explained through analysis or dialogue with relevant companies.
    - DFSA supplements key figures with sensitivity and scenario calculations.
    - Executive Order on Sensitivity Analysis for Group 1 Insurers: DFSA collects and analyzes quarterly each undertaking’s sensitivities across a wide range of risk metrics covering both market and insurance related risks; if solvency becomes critical in any scenario the insurer is monitored closer.
    - Business intelligence tool under development and expected to cover more of the QRTs in the future, especially liabilities and technical provisions.

*Source: IMF staff summary of DFSA and FBA material contained in the provided content unit.*

### 58.      Besides the established procedures on risk assessments, planning of supervisory

### 1dnkea2020003 - 58.      Besides the established procedures on risk assessments, planning of supervisory

### Ongoing supervisory dialogue and information gathering
- DFSA uses established procedures on risk assessments, planning of supervisory activities, and analyses of reporting data, supplemented by different channels for ongoing dialogue with insurers.
- DFSA may request further information from companies triggered by policyholder complaints, media reports, or reporting through the DFSA’s whistleblower system.
- DFSA meets with the largest insurers once a year to discuss market trends and other relevant matters.
- Commonly used indicators (listed in the source) include: SCR ratio, MCR ratio, absolute MCR ratio, SCR divided by gross written premiums, gross combined ratio, net combined ratio, growth in gross written premiums, growth in gross earned premiums, change in reinsurance result, receivables, change in premium provisions, change in claims provisions.

### Risk assessment framework — findings and recommendation
- Finding: The risk assessment framework should be expanded to include more non-financial risks, particularly governance and internal controls.
- Recommendation: Provide clear guidance to DFSA staff to determine under which circumstances a risk should be considered high, medium or low. The two recent capital add-on decisions are cited as good case studies for such guidance.

### On-site inspections — procedures, recent practice, and recommendations
- Procedures:
  - Frequency of on-site inspections depends on size and riskiness of an insurer and is documented in the DFSA’s Guidelines for Preparing Inspections.
  - Planning of supervisory activities, including on-site inspections, is done on a yearly basis.
  - On-site inspections review business model, underwriting policy, governance structure, financial strength, outsourcing and treatment of policyholders. Procedures set out in Guidelines for Executing Inspections.
  - DFSA publishes main findings and orders; meetings held first with senior management, then with the board. Detailed report provided to insurer but often finalized some months after inspection. Insurer must publish a DFSA-prepared statement on supervisory findings and submit documentation on remedial actions within given deadlines.
- Recent practice:
  - Since Solvency II, DFSA has conducted more thematic inspections, especially in life and pension fund sector, reducing full comprehensive inspections.
  - Examples: 2017 thematic inspection on alternative investments in infrastructure covering eight life insurers; 2019 fact-finding examination on market-return products; a thematic inspection on illiquid credit investments near finalization.
  - Target: DFSA strives for on-site inspections at least every five years.
  - Actual inspection shares for non-life companies: 13, 7, and 11 percent for 2016/17, 2017/18 and 2018/19, respectively.
  - Actual inspection shares for life and pension fund sector: 30, 23, and 20 percent for 2016/17, 2017/18 and 2018/19, respectively.
- Resource and timing issues:
  - Inspection plan thinned during 2016/17 due to implementation of Solvency II, high staff turnover, and two bankruptcies, leading to significantly lower frequency in the last three years.
  - Detailed findings and orders are sometimes provided to insurers only after several months.
- Recommendations:
  - Require at least the annual QRTs to be audited and require audit assurance processes for systems and procedures used to complete the QRTs and SFCRs.
  - Increase frequency of on-site inspections, re-establishing the inspection cycle aimed for after the last FSAP and allowing sufficient number of full and comprehensive inspections besides thematic inspections.
  - Avoid undue delays in submitting detailed findings and orders to companies after on-site inspections.

### Resources in insurance supervision — findings and recommendations (Box 3)
- Structure:
  - Insurance supervision divided into three divisions: General Insurance and Reinsurance Division, Life Assurance Division, and Pension Funds Division.
  - The three insurance divisions comprise 50 employees, an increase of about a quarter since the last FSAP.
  - DFSA supplements with dedicated experts from other divisions (e.g., Operational Risk Division, AML Division, Consumer Protection Division, Financial Reporting Division).
- Comparative resource metrics (DFSA relative to EU peers):
  - For each licensed insurance undertaking and each EUR billion in total assets of the insurance sector there are only 0.52 and 0.08 staff, respectively.
  - More than 50 percent of DFSA’s insurance supervisors have less than three years of supervisory experience.
  - Per inspection only 17.8 person days were spent on-site.
- Recommendations:
  - Expand supervisory resources of the DFSA’s Insurance Supervision Department.
  - Increase number of insurance supervisors, specifically target mid-career staff with actuarial, audit and accounting skills, and staff for supervision of intermediaries according to the Insurance Distribution Directive.
  - Aim for higher retention of qualified staff; expand knowledge management, training program, documentation and succession planning.

### Corporate governance and internal controls — findings and recommendations
- Findings:
  - Solvency II led to improvement: requirement to have at least four key functions (compliance, audit, risk and actuarial) as laid out in the DFSA’s Executive Order on Governance; suitability requirements for key function holders described in the FBA, section 64 (5).
  - Requirement to set up key functions is not applicable to insurance undertakings not subject to Solvency II.
  - DFSA applies higher scrutiny when an insurer applies for an internal model or requests model changes; two companies with severe governance shortcomings were ordered to hold a capital add-on in 2019.
  - Assessment of governance and internal control functions typically performed during on-site inspections, but no regular formal dialogue with key function holders and no systematic process to feed governance/internal control deficiencies into individual risk scores.
- Recommendation:
  - Establish a regular dialogue with companies’ key function holders to assess effectiveness; intensity should be based on size and risk scores and findings should feed into the risk assessment of individual undertakings.

### Countering fraud in insurance — findings and recommendation
- Findings:
  - DFSA takes no measures at present to assess fraud risk or to require insurers and intermediaries to take effective measures to address those risks, except a requirement to monitor transactions or relationships not in line with policies on good practices.
  - Last FSAP advised legislative changes to empower DFSA to issue enforceable rules requiring insurers and intermediaries to report insurance frauds and to establish supervisory review processes; DFSA has not introduced such regulatory or supervisory requirements and considers fraud prevention the responsibility of insurers and intermediaries. Market participants have not flagged shortcomings.
- Recommendation:
  - DFSA should maintain a dialogue with the insurance industry on insurance fraud, monitor trends and operational risk management practices across insurers, and establish a regular exchange with judicial authorities.

### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
- Scope and legal framework:
  - Act on Measures to Prevent Money Laundering and Financing of Terrorism applies to life insurance companies, multi-employer occupational pension funds, and insurance intermediaries when acting in respect of life insurance or other investment-related insurance activities (cf. sections 1(1) no. 4 and 7).
  - Insurers and intermediaries subject to suspicious transaction reporting, customer due diligence (CDD), and requirements on policies, procedures, and training. Act No. 651 (2017) strengthened CDD requirements.
  - DFSA’s AML Division supervises these institutions.
  - A remaining legislative gap: obligation for authorities to require insurers to identify and verify beneficial owners of life insurance beneficiaries when conducting enhanced due diligence.
- Risk assessment and supervisory activity:
  - SPSEIC national risk assessment 2018 finds it very unlikely that money laundering is a significant risk in life insurance and pension funds due to predominance of employer-based contracts.
  - DFSA considers life insurance and pension funds relatively low ML/TF risk and has given limited priority to on-site inspections in this sector.
  - DFSA plans to start AML/CFT inspections of all types of life insurance companies; of the 40-45 AML/CFT inspections planned for 2020, two-to-three could be conducted in the insurance sector.
  - Insurer selection for inspection will follow a risk-based, data-driven risk assessment model still in development; main risk factors include overall company size, share of individual savings business, and deficiencies in corporate governance.
- Recommendation:
  - Initiate risk-based AML/CFT on-site inspections of insurance undertakings and intermediaries, with relatively high scrutiny for insurers active in individual life insurance and intermediaries distributing such policies.

### Consolidated supervision and cross-border supervision
- Legal and supervisory framework:
  - Insurance supervision conducted at solo and consolidated group level in line with Solvency II; group requirements in FBA sections 70, 71, 170, 175 b-e, 176 and 177.
  - DFSA conducts on-site inspections including at holding companies covering group governance, risk concentration and intra-group transactions (IGTs).
  - IGT framework harmonized across sectors via Executive Order no. 904 of 2004 (amended 2017 by Executive Order no. 1736): IGTs require written agreements and market-based terms; cost-coverage basis allowed only for common group tasks/administrative functions; boards must adopt written general guidelines; insurers must report significant group risk concentration and significant IGTs at least annually via QRTs.
- International cooperation:
  - DFSA is active in EU supervisory colleges and has implemented guidelines on role as group and host supervisor and crisis preparedness.
  - DFSA is lead supervisor for one insurance group (Danica) with a supervisory college including Norway and EIOPA; physical meetings annually.
  - DFSA participates as host in colleges led by UK PRA (RSA) and Finnish authority (Sampo), and participates in colleges for Gjensidige and Munich Re despite minor Danish operations.
  - DFSA has a cooperation agreement with Norway and Sweden regarding Tryg Forsikring supervision; no formal college established for Tryg as it lacks host-country subsidiaries.

*Source: 1dnkea2020003 - 58.*

### 81.      The DFSA also uses other less institutionalized frameworks for supervisory

### 1dnkea2020003 - 81.      The DFSA also uses other less institutionalized frameworks for supervisory

### Supervisory cooperation frameworks for cross-border operations
- For cross-border operations within the EEA conducted under the Freedom to Provide Services (FPS), the DFSA:
  - participates in and has initiated collaboration platforms, according to the annex of the EIOPA Decision on the Collaboration of the Insurance Supervisory Authorities.
- For cross-border operations outside the EEA (e.g., Switzerland or the Faroe Islands), the DFSA may, based on FBA sections 37 and 38, lay down more detailed regulations regarding services rendered from countries outside the EEA, with which the EU has not entered into any specific agreements for the financial sector.
- For EEA insurance groups the college arrangement includes procedures for crisis management:
  - An emergency plan for a group is prepared in line with the EIOPA Guidelines on Preparation for and Management of a Financial Crisis.
  - For cooperation in case of a crisis the DFSA liaises with EIOPA to establish contact with all relevant supervisory authorities.

### Sharing confidential information
- Legal framework:
  - FBA Section 354 (6): the DFSA may share confidential information with financial supervisory authorities in other EEA Member States provided that the supervisory authorities need the information to perform their duties.
  - FBA Section 354 (12): outside the EEA, confidential information may only be divulged to financial supervisory authorities:
    - on the basis of an international co-operation agreement, and
    - provided that the recipients of the information are, at a minimum, subject to a statutory duty of confidentiality corresponding to the duty of confidentiality of the DFSA, and that the supervisory authorities require the information to perform their duties.

### Memoranda of Understanding and international cooperation
- The DFSA signs bilateral Memoranda of Understanding (MoUs) when needed for sharing confidential information outside the EEA.
  - Example: bilateral MoUs with Gibraltar and New Zealand during the crisis management of Alpha Insurance to ensure proper and timely information exchange.
- The DFSA has not yet signed the IAIS Multilateral MoU; an application to join is being prepared.

### Analysis and recommendations on supervisory frameworks
- It is recommended that the DFSA quickly implements its intensified framework for the supervision of cross-border business and allocates sufficient resources to it.
  - Rationale: The failure of two insurance companies whose business model was predominantly targeted to cross-border services has unveiled considerable shortcomings in the supervisory framework.
  - Licensing scrutiny for FPS-oriented business models should focus in particular on governance, (cross-border) outsourcing arrangements and contingency planning.
- Recommendation: The process of signing the IAIS Multilateral MoU should be completed in due time.

### Macroprudential surveillance practices
- Frequency and content:
  - The DFSA produces an internal risk assessment of the insurance market twice a year, considering macroeconomic and macrofinancial factors.
  - The assessment includes a bottom-up analysis of risks identified in internal risk assessments of individual insurers.
  - The risk assessment consists of a risk dashboard, a written report, and a risk matrix summarizing main risks with each risk’s level and trend. The written report concludes with actions the DFSA has taken or intends to deploy to mitigate identified risks.
- Inputs and coordination:
  - Insights from other national authorities such as the Systemic Risk Council and the DN are incorporated.
  - The DFSA has its own Systemic Risk Forum, meeting quarterly to discuss cross-sector risks.
  - International information sources used include EIOPA and the European Systemic Risk Board (ESRB).
- Stress testing:
  - The DFSA participates in the biannual EIOPA stress tests for insurance and pension fund sectors.
    - 2018 EIOPA insurance stress test: two Danish insurance groups included in EU-wide sample of 42 groups.
    - 2016 EIOPA stress test: conducted for 236 solo entities, included 12 Danish insurers.
  - The DFSA collects quarterly data on sensitivities towards market risks and insurance-related risks but does not conduct sector-wide stress tests based on macrofinancial scenarios beyond those organized by EIOPA.
  - Predefined sensitivity tests include market risks such as interest rate, equity, and property risk, foreign exchange risk and credit spread risk on i) domestic sovereign and covered bonds, ii) foreign sovereign bonds, and iii) other bonds. Other risks such as counterparty risk, lapse risk, and longevity risk are also included.
- Publications and systemic designation:
  - The DFSA publishes detailed aggregated market data on its website, including key performance indicators of individual undertakings.
  - The DN has extended coverage of the insurance sector; topical analysis in November 2019 focused on liquidity risks arising from insurers’ derivative transactions.
  - The DFSA has not designated any insurance company as a domestic systemically important insurer (D-SII).
  - No macroprudential measures are currently being employed.

### Analysis and recommendations on macroprudential surveillance and stress testing
- The DFSA should develop a stress testing framework that ideally combines both a top-down (in cooperation with DN) and a bottom-up perspective.
  - Rationale: EIOPA stress tests cover only a limited sample of Danish insurers and sometimes switch between the group and solo perspective, limiting their usefulness for domestic macroprudential surveillance.
  - Suggested actions:
    - Run additional national stress tests in years when no EIOPA stress test is conducted, or amend the EIOPA sample for domestic purposes.
    - Construct the adverse scenario for domestic stress tests based on a current risk outlook and include all macrofinancially relevant risk factors.

### Appendix I — Financial Soundness Indicators of the Insurance Sector (In percent) — key figures
- Capital adequacy:
  - Assets / liabilities: 109.0 ... 110.4 110.4 109.9 108.6
  - SCR coverage ratio (Solvency II): ... ... 304 290 296 279
  - MCR coverage ratio (Solvency II): ... ... 780 744 772 730
  - Solvency coverage ratio (Solvency I): 165 179 ... ... ... ...
  - Unrestricted Tier 1 capital / eligible own funds: ... ... ... ... 94.9 94.8
  - Tier 3 capital / eligible own funds: ... ... ... ... 0.3 0.3
- Profitability:
  - Growth in gross written premiums - life: ... 6.2 15.6 10.4 5.9 2.9
  - Growth in gross written premiums - non-life: ... 0.6 -0.9 1.4 1.3 4.2
  - Loss ratio (net paid claims / net premiums) - non-life: 60.6 61.9 64.0 63.0 66.5 ...
  - Combined ratio (loss ratio plus expense ratio) - non-life, median: 92.6 95.9 96.0 94.9 92.6 ...
  - Return on equity - life: 9.1 3.6 7.6 5.9 -5.0 ...
  - Return on equity - non-life: 14.0 10.1 14.9 14.8 9.3 ...
- Asset quality:
  - Bonds / total investments excl. unit-linked: ... ... 36.3 37.7 38.7 34.3
  - Stocks / total investments excl. unit-linked: ... ... 5.0 5.5 4.9 4.6
  - Return on average interest rate product - life, median: ... ... 7.5 5.8 -0.6 ...
- Liquidity:
  - Liquid assets / total investments excl. unit-linked /1: ... ... 67.6 70.4 71.3 67.1
- Reinsurance:
  - Risk retention ratio (net premium / gross premium) - life: ... ... 99.7 99.7 99.8 99.9
  - Risk retention ratio (net premium / gross premium) - non-life: 92.1 91.2 90.2 90.4 90.0 91.7
- Note: /1 Liquid assets include bonds, equity, cash and deposits, and investment funds.

*Source: IMF staff calculations based on DFSA, EIOPA, Danish Insurance Association.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1dnkea2020003.pdf_