## _cr07119 ## Source details **Canonical URL:** [_cr07119](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07119.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07119.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07119.pdf.json) --- ### Overview of pension and insurance market structure - Pension system layers: - First pillar: entitlement to old-age pension from age 65, and ATP. - Next layer: mandatory labor market pension schemes LD and SP. - Last pillar: private and individual pension savings. - Main scheme establishments: (i) by law (ATP, SP, LD); (ii) by labor market agreements; (iii) individual contracts. - Distribution channels: direct insurer sales, banks, intermediaries; labor market parties largely decide supplier, premiums, coverage. - Cross-border activity: limited due to tax legislation (premiums to foreign undertakings not tax deductible). ### Aggregate pension assets and market concentration (end-2004 / end-2005) - Total pension assets: - 2004 Total: 1,844 Billion DKr; 100.0 percent of Total Value - 2005 Total: 2,154 Billion DKr; 100.0 percent of Total Value - By entity, 2004: - Life insurance companies: 810 Billion DKr; 43.9 percent of Total Value - General pension funds: 339 Billion DKr; 18.4 percent of Total Value - Company pension funds: 39 Billion DKr; 2.1 percent of Total Value - Credit institutions: 244 Billion DKr; 13.2 percent of Total Value - ATP: 307 Billion DKr; 16.7 percent of Total Value - SP: 46 Billion DKr; 2.5 percent of Total Value - LD: 58 Billion DKr; 3.2 percent of Total Value - By entity, 2005: - Life insurance companies: 953 Billion DKr; 44.2 percent of Total Value - General pension funds: 381 Billion DKr; 17.7 percent of Total Value - Company pension funds: 42 Billion DKr; 1.9 percent of Total Value - Credit institutions: 298 Billion DKr; 13.8 percent of Total Value - ATP: 365 Billion DKr; 16.9 percent of Total Value - SP: 51 Billion DKr; 2.5 percent of Total Value - LD: 64 Billion DKr; 3.0 percent of Total Value - Growth and shares: - Total pension assets growth in 2005: almost 17 percent. - Schemes based on law account for 22 percent of total pension assets. - Life insurance companies and general pension funds account for 62 percent of total pension assets. - Company pension funds account for approximately 2 percent of total pension assets. - Number of legal entities (2000–05): - Life insurance companies: 63 (2000) → 36 (2005) - General pension funds: 31 (2000) → 29 (2005) - Company pension funds: 54 (2000) → 44 (2005) - Market concentration (gross premium shares, top providers, 2003–05): - Danica Pension: 19.0 (2003), 17.4 (2004), 17.6 (2005) - PFA Pension: 17.4 (2003), 17.2 (2004), 17.4 (2005) - PensionDanmark: - (2003), - (2004), 9.0 (2005) - Top 5 total: 57.4 (2003), 55.3 (2004), 59.9 (2005) - Top 10 total: 74.4 (2003), 73.4 (2004), 79.0 (2005) - Commercial market (≈55 percent of life insurance + general pension funds): - Danica Pension commercial share: 32.5 (2003), 32.1 (2004), 32.3 (2005) - PFA Pension commercial share: 29.7 (2003), 26.3 (2004), 26.3 (2005) - Top 5 total commercial: 89.3 (2003), 87.9 (2004), 89.2 (2005) ### Product mix, guarantees, and premiums (2000–05) - With-profit contracts — nonlinked market share: 88.1 percent (2000); 83.4 percent (2003); 82.3 percent (2004); 75.7 percent (2005) - Unit linked insurance: 5.1 percent (2003); 6.6 percent (2004); 8.8 percent (2005) - Term risk: 1.4 percent (2003); 1.7 percent (2004); 4.6 percent (2005) - Unit linked with zero percent return option: 2.6 percent (2000); 1.7 percent (2003); 0.9 percent (2004); 1.6 percent (2005) - Group pension insurance: 9.2 percent (2000); 8.4 percent (2003); 8.5 percent (2004); 9.3 percent (2005) - Maximum technical interest rate history: - Until mid-1994: 4.5 percent - Mid-1994: lowered to 2.5 percent - 1999: reduced to 1.5 percent - Contracts up to mid-1994 may still yield guaranteed rate of 4.5 percent ### Sector vulnerabilities, investment mixes and returns - Main vulnerabilities: - Susceptible to low interest rates, equity prices, and property prices. - Investment–liability mismatches pose risk to buffer capital. - Liquidity risk in equity market if sudden portfolio adjustments needed. - Investment mix and totals (selected years): - Total investments: 118,490 (2000), 120,579 (2002), 144,643 (2004), 167,289 (2005) - Bonds: 61,002 (2000) / 84,769 (2002) / 89,227 (2004) / 94,026 (2005) - Participating interests: 36,630 (2000) / 14,700 (2002) / 19,974 (2004) / 25,113 (2005) - Investments in subsidiary and associated companies: 10,785 (2000) / 6,179 (2002) / 8,440 (2004) / 19,644 (2005) - Interests in investment associations: 5,692 (2000) / 7,962 (2002) / 18,981 (2004) / 14,773 (2005) - Land and buildings: 3,514 (2000) / 4,620 (2002) / 3,825 (2004) / 4,224 (2005) - Other investments: 86 (2000) / 2,349 (2002) / 4,195 (2004) / 9,509 (2005) - Return on investments (before tax): 5.65 (2000), -1.63 (2001), 1.77 (2002), 6.86 (2003), 10.40 (2004), 14.25 (2005) - Return on investments (after tax): 4.95 (2000), -1.20 (2001), 1.71 (2002), 6.05 (2003), 9.11 (2004), 12.46 (2005) - Company results (2005): result before tax of over DKr 16 million, result on investments DKr 165 million - Administration costs: 6.49 percent (2001) → 5.33 percent (2005) ### Solvency, buffers and failures - Solvency ratio (weighted average): 4.2 (2000), 2.4 (2001), 2.2 (2002), 2.6 (2003), 2.7 (2004), 2.6 (2005) - At end-2005: - Weighted average solvency ratio: 2.6 - Companies with solvency ratio < 2.8 represent approximately 73 percent of the market - Bottom 10 percent had solvency ratio below 1.5 (none less than 1.2) - Top 10 percent had solvency ratio exceeding 6.4 - Failures and causes: - Four life insurers failed to meet solvency requirements during the last five years; for all four, capital was restored by DFSA-accepted restoration plans - Causes: losses on investments (equity declines and low interest rates) and mismatches between interest rate sensitivity of assets and liabilities - No direct losses were observed; all four continued business ### DFSA regulatory tools and stress testing (traffic light system) - Regulatory changes and stress-tests: - 2000: equity investment limit raised to 70 percent of technical provisions conditional on improved asset–liability matching - June 2001: DFSA introduced red and yellow “traffic light” stress test scenarios for life insurers and pension funds; extended to nonlife end-2003 - Companies report stress-test results biannually; the system supplements required capital margin - End-2005 traffic light status: - No life insurance companies or general pension funds in red light; 6 companies in yellow light - Red light scenario: - Decrease of 12 percent in price of stocks; decrease of 8 percent in price of real estate; change of interest rate level of 0.7 percentage points; credit risk and FX risk stressed - Consequence: monthly reporting required; no increase in overall risk allowed if company cannot meet red scenario - Yellow light scenario: - Decrease of 30 percent in price of stocks; decrease of 12 percent in price of real estate; change of interest rate level of 1.0 percentage point - Consequence: quarterly reporting required if company cannot meet yellow scenario ### Company pension funds, ATP, LD/SP (structure, selected 2004 figures) - Company pension funds: - Total assets (CPF aggregate): 5,270 (€ million equivalent) (selected 2004 figure) - Company pension funds cover 2 percent of the total pension assets in the Danish market - Number of company pension funds (legal entities): 54 (2000), 50 (2001), 47 (2002), 47 (2003), 44 (2004), 44 (2005) - Schemes mostly defined benefit; three schemes defined contribution - Total assets (selected 2004 aggregates): - ATP total assets 41,354 (€ million) - LD total assets 7,812 (€ million) - SP total assets 6,252 (€ million) - CPF total assets 5,270 (€ million) - Investment result (2004): ATP 5,693; LD 838; SP 458; CPF 325 - Net profit for the year (2004): ATP 766; LD 143; SP 98; CPF -105 - Gross premiums (2004): ATP 8980; LD -26; SP 111 - Solvency and stress-test status (2004): - Company pension funds solvency ratio (end-2004): 6 - End-2004 DFSA traffic light: five company pension funds in red light; eight in yellow light ### Nonlife insurance market metrics and performance - Number of nonlife insurance companies: 136 (2000), 131 (2001), 128 (2002), 124 (2003), 125 (2004), 124 (2005) - Market concentration: - Dominated by Tryg, Topdanmark, Codan, Alm. Brand - Top 5 total market shares: 70.3 (2003), 70.1 (2004), 66.7 (2005) - Top 10 total market shares: 87.1 (2003), 86.6 (2004), 82.9 (2005) - Business mix: - Total nonlife market represents 0.46 percent of the world nonlife insurance market - Personal lines (motor and household) represent approximately 70 percent of the nonlife market - Premiums by class (selected gross/net 2004–05): - Motor insurance gross/net: 26.6 / 29.6 (2004), 27.0 / 30.0 (2005) - Property and casualty gross/net: 18.7 / 20.3 (2004), 18.9 / 20.3 (2005) - Commercial insurance gross/net: 32.1 / 28.1 (2004), 32.4 / 28.9 (2005) - Total direct business gross/net: 94.3 / 94.3 (2004), 96.0 / 96.1 (2005) - Financial results and ratios: - Net profit increased by 11.1 percent in 2004; technical result doubled compared to 2003 - Return on equity after tax: 15.5 (2000), 5.6 (2001), 0.9 (2002), 14.1 (2003), 14.5 (2004), 17.0 (2005) - Net claims ratio: 83.1 (2000), 78.8 (2001), 80.3 (2002), 71.2 (2003), 74.5 (2004), 80.1 (2005) - Net expenses: 25.3 (2000), 23.5 (2001), 22.8 (2002), 21.7 (2003), 17.5 (2004), 17.3 (2005) - Net operational ratio: 108.4 (2000), 100.9 (2001), 106.1 (2002), 97.2 (2003), 94.1 (2004), 91.6 (2005) - Combined ratio below 100 as of 2005 - Investments of nonlife insurers (total investments): 10,099 (2002) / 13,338 (2004) / 15,226 (2005) - End-2005 traffic light status for nonlife: one company in red light (company in run off); no companies in yellow light ### Supervisory framework, legal basis and DFSA powers - Legal framework: - Financial Business Act (FBA) and Executive Orders (EO); guidelines (not legally binding) - Section 71 FBA: good administrative and accounting practices; written guidelines on significant activities - Section 344 FBA: DFSA identified as principal supervisory authority; section 350: DFSA powers to order remedial measures - Executive Order No. 1399, Executive Order No. 1406, Executive Order No. 1183 (audit rules) - DFSA governance and independence: - DFSA is an independent authority under Ministry for Economic and Business Affairs (MoEB); senior decision-making bodies include the Financial Business Council (FBC) and Danish Securities Council (DSC) - DFSA budget determined annually by government; DFSA must agree budget with MoEB though costs covered by supervised entities' fees - Assessment: many governance and procedural items judged "Observed" or "Largely observed" - Supervisory powers and corrective measures: - DFSA may order remedial measures within time limits and withdraw licenses (FBA section 350) - DFSA may require restoration plans (FBA sections 248–252) - DFSA cannot impose fines directly in most cases; fines require court decision - DFSA cannot unilaterally dismiss controlling owners or managers but may remove management or restrict activities in specific circumstances - Licensing and cross-border operation: - Foreign insurers may operate via branch, subsidiary, or services basis; DFSA requires home supervisor information and assesses capital adequacy - Decision on license refusal addressed within six months; ongoing quarterly reporting condition for licensees - Life and nonlife activities must be in separate entities (FBA) - On-site and off-site supervision: - On-site inspection cycles: larger nonlife insurers every four years; smaller nonlife and all life insurers every seven years; vulnerable insurers more frequently - DFSA uses risk assessment including seven-indicator rating, stress-tests, qualitative supervisor assessment - Long form audit book comments submitted to DFSA (Executive Order No. 1183 section 4.1) - DFSA may not have direct inspection powers over most service providers - Reporting requirements: - Statutory reporting: annual accounts, actuarial reports (life insurers), insurance provisions, registered assets; bi-annual electronic reporting of accounting figures and stress-test results - Immediate notification obligations for material matters and suspected capital shortfalls - Group supervision: - Consolidated supervision principles in FBA chapters 10 and 12 - Notification and approval required for holdings > 10 percent - MoUs and EEA protocols in place for cross-border cooperation ### IAIS Insurance Core Principles observance summary and key recommended actions - Observance counts: - Observed: 18 principles (1, 2, 4, 5, 8, 9, 11, 12, 13, 14, 16, 17, 20, 23, 24, 25, 26, 27) - Largely observed: 10 principles (3, 6, 7, 10, 15, 18, 19, 21, 22, 28) - Key recommended actions (selected): - CP 1: Apply some more specific rule-based requirements to all companies; Guideline 9680 should guide companies while defining minimum standards applicable to all companies. - CP 3: Limit or restrict potential interference of executive branches in DFSA budget allocation. - CP 6: Consider requiring that the suitability of auditors and actuaries be assessed; apply tighter rule-based supervision in early years of new businesses. - CP 7: Consider applying fit and proper requirements to a broader range of senior management. - CP 10: Make internal audit function compulsory for smaller companies; convert Guideline 9680 into an executive order to clarify DFSA requirements. - CP 11: Enlarge DFSA market analysis activities, including macroeconomic information, to enable forecasting market trends. - CP 13: Include company size in risk-assessment and subject larger life companies to a full inspection on a 4-year cycle. - CP 14/15: Consider a broader range of graduated sanctions; enable DFSA to address management problems directly, including issuing an executive order. - CP 18/19/21/22: Require an obligatory risk assessment framework for all companies (expressed in an executive order); consider suitability requirements for investment and derivatives functions and more detailed suitability requirements overall. - CP 28: Finalize and implement new money laundering law to fully implement the EU 3rd Money Laundering Directive. ### Authorities’ response — main points - General agreement with IMF assessment; authorities will consider: - Establishing DFSA as an independent institution via statutory basis and separating regulatory and supervisory budget for greater transparency. - Adjusting regulation to allow DFSA to take measures if auditors, actuaries, investment officers, derivatives functions are not fit and proper, balanced against cost-efficiency concerns. - No immediate perceived need to make internal audit compulsory in small companies; will consider converting some guidelines to executive orders while weighing administrative burden. - Existing DFSA powers over owners and managers (including abolition of voting rights in specific cases) are considered adequate by authorities. *Source: Danish Financial Supervisory Authority; assessment carried out as part of the FSAP mission to Denmark (extracted in IMF staff report content unit _cr07119).* ### 1. Total Pension Assets Split on Types of Entities, End-2004 ..................................................6 ### 1. Total Pension Assets Split on Types of Entities, End-2004 ### Overview of pension system and supervisory assessment - The assessment of observance of IAIS Insurance Core Principles (October 2003) was carried out as part of the first FSAP mission to Denmark, November 7–18, 2005. - The assessment reviews Danish insurance legislation and the effectiveness of Finanstilsynet (DFSA). Both essential and advanced criteria were considered, but only essential criteria were used for the overall level of observance. - A National Audit Office (NAO) audit (published September 2005) found supervisory improvements were needed, particularly: - Frequency of comprehensive on-site inspections needed shortening. - Supervision of IT systems needed upgrading. - Follow-up of inspections needed to be made more effective. - Key recommendations arising from the assessment highlighted: - DFSA’s system to assess appropriateness of key functions assumes senior management responsibility for staffing; while not yet causing severe problems, this may be risky given market growth. - Internal audit functions should be made compulsory for smaller companies; Guideline 9680 does not sufficiently define Finanstilsynet’s requirements on internal control and an executive order is important. ### Market structure and pension layers - The Danish pension system consists of several layers: - First pillar: entitlement to old-age pension from age 65, and ATP (Danish Labor Market Supplementary Pension Fund). - Next layer: mandatory labor market pension schemes LD (Lønmodtagernes Dyrtidsfond) and SP (Special Pension Savings Scheme). - Last pillar: private and individual pension savings. - Old-age pension is pay-as-you-go and funded by taxation; other schemes are funded by employers and employees. - Three main scheme establishments: (i) by law (ATP, SP, LD); (ii) by labor market agreements; (iii) individual contracts. - The labor market schemes consist of savings in life insurance companies, general pension funds, company pension funds, and credit institutions. Individual schemes are in life insurance companies and credit institutions. ### Aggregate pension asset distribution (end-2004 and end-2005) - Table 1 (Total Pension Assets Split on Types of Entities, End-2004 and End-2005) - 2004: - Life insurance companies: 810 Billion DKr; 43.9 percent of Total Value - General pension funds: 339 Billion DKr; 18.4 percent of Total Value - Company pension funds: 39 Billion DKr; 2.1 percent of Total Value - Credit institutions: 244 Billion DKr; 13.2 percent of Total Value - ATP: 307 Billion DKr; 16.7 percent of Total Value - SP: 46 Billion DKr; 2.5 percent of Total Value - LD: 58 Billion DKr; 3.2 percent of Total Value - Total: 1,844 Billion DKr; 100.0 percent of Total Value - 2005: - Life insurance companies: 953 Billion DKr; 44.2 percent of Total Value - General pension funds: 381 Billion DKr; 17.7 percent of Total Value - Company pension funds: 42 Billion DKr; 1.9 percent of Total Value - Credit institutions: 298 Billion DKr; 13.8 percent of Total Value - ATP: 365 Billion DKr; 16.9 percent of Total Value - SP: 51 Billion DKr; 2.5 percent of Total Value - LD: 64 Billion DKr; 3.0 percent of Total Value - Total: 2,154 Billion DKr; 100.0 percent of Total Value - In 2005, total pension assets grew by almost 17 percent—the largest growth in the last 5 year period. Credit institutions and ATP experienced the largest increase, followed by life insurance companies. - Schemes based on law account for 22 percent of total pension assets. Life insurance companies and general pension funds account for 62 percent of total pension assets. Company pension funds account for approximately 2 percent of these assets. ### Market participants and concentration - Number of legal entities (Table 2: 2000–05) - Life insurance companies: 2000: 63; 2001: 58; 2002: 43; 2003: 41; 2004: 37; 2005: 36 - General pension funds: 2000: 31; 2001: 31; 2002: 31; 2003: 30; 2004: 30; 2005: 29 - Company pension funds: 2000: 54; 2001: 50; 2002: 47; 2003: 47; 2004: 44; 2005: 44 - At end-2005, there were 36 life insurance companies and 29 general pension funds; effectively 18 life insurance companies/pension funds (groups). There were 44 company pension funds. - Market concentration (Table 3: Market Concentration Measured by Gross Premium of Life Insurance Companies (Groups) and General Pension Funds, 2003–05) - 2003 top individual shares (percent): Danica Pension 19.0; PFA Pension 17.4; PensionDanmark - ; Nordea Pension 8.3; Kommunernes Pensionsforsikring 7.6; Industriens Pensionsforsikring 5.1 - 2004 top individual shares (percent): Danica Pension 17.4; PFA Pension 17.2; PensionDanmark - ; Nordea Pension 7.9; Kommunernes Pensionsforsikring 7.6; Industriens Pensionsforsikring 5.2 - 2005 top individual shares (percent): Danica Pension 17.6; PFA Pension 17.4; PensionDanmark 9.0; Nordea Pension 8.8; Kommunernes Pensionsforsikring 7.3; Industriens Pensionsforsikring 5.2 - Top 5 total: 2003: 57.4; 2004: 55.3; 2005: 59.9 - Top 10 total: 2003: 74.4; 2004: 73.4; 2005: 79.0 - Market concentration in the commercial part of the market (Table 4: Commercial part of life insurance and general pension funds, 2003–05) - Note: The commercial part of the market amounts to approximately 55 percent of the total market of life insurance companies and general pension funds. - 2003 commercial top shares (percent): Danica Pension 32.5; PFA Pension 29.7; Nordea Pension 14.1; Codan Pension (SEB) 8.2; Topdanmark Liv 4.8; Top 5 total 89.3; Top 10 total 99.7 - 2004 commercial top shares (percent): Danica Pension 32.1; PFA Pension 26.3; Nordea Pension 14.7; Codan Pension (SEB) 9.2; Topdanmark Liv 5.7; Top 5 total 87.9; Top 10 total 99.5 - 2005 commercial top shares (percent): Danica Pension 32.3; PFA Pension 26.3; Nordea Pension 16.1; Codan Pension (SEB) 8.7; Topdanmark Liv 5.8; Top 5 total 89.2; Top 10 total 99.9 ### Product mix and distribution of gross premiums - The life sector is dominated by with-profit pension schemes, many with minimum guaranteed rates of return. - Vulnerabilities stem from guaranteed returns on long-duration in-force policies combined with an environment where higher returns are difficult to achieve. - Maximum technical interest rate history: - Until mid-1994: maximum technical interest rate 4.5 percent. - Mid-1994: lowered by DFSA to 2.5 percent. - 1999: reduced further to 1.5 percent. - Contracts established up to mid-1994 still yield a guaranteed rate of interest of 4.5 percent (maximum guaranteed rates; companies may create schemes with lower or no guarantees). - Distribution of Gross Premiums (Table 5: 2000–05) - With profit contracts – nonlinked: - 2000: 88.1 percent - 2003: 83.4 percent - 2004: 82.3 percent - 2005: 75.7 percent - Term risk: - 2000: -- - 2003: 1.4 percent - 2004: 1.7 percent - 2005: 4.6 percent - Unit linked insurance: - 2000: ... - 2003: 5.1 percent - 2004: 6.6 percent - 2005: 8.8 percent - Unit linked life insurance—with zero percent return option: - 2000: 2.6 percent - 2003: 1.7 percent - 2004: 0.9 percent - 2005: 1.6 percent - Group pension insurance: - 2000: 9.2 percent - 2003: 8.4 percent - 2004: 8.5 percent - 2005: 9.3 percent - The market for individual life insurance contracts and unit link products is limited, though unit linked products’ market share has begun to increase since introduction in the late 1980s; some life insurers introduced unit linked products with an embedded zero interest rate option. ### Cross-border activity and distribution channels - Cross-border activities are limited for life insurance, general pension funds, foreign insurers operating in Denmark, and Danish insurers operating abroad; key reason is tax legislation (premiums paid to foreign undertakings are not tax deductible for the insured). - Major distribution channels: direct sales from the insurer, through banks, and through intermediaries. - For labor market pension schemes, parties in the Danish labor market largely decide the supplier, premiums, and coverage. *Source: Danish Financial Supervisory Authority; assessment carried out as part of the FSAP mission to Denmark.* ### 20. The sector remains susceptible to low interest rates, and also to other market risks, ### _cr07119 - 20. The sector remains susceptible to low interest rates, and also to other market risks, ### Sector vulnerabilities and risk management - The sector remains susceptible to low interest rates, and also to other market risks, including equity prices and property prices. - These factors place an important premium on sound risk management by life insurance institutions, and effective oversight by supervisors. - Albeit several measures have been implemented to increase provisions and buffer capital, as well as hedging risk in the form of derivatives, this is an area that still needs to be closely monitored. - The investment risk matched with the interest rate risk on liabilities still is a concern as mismatches poses a risk to the level of buffer capital. - As the life insurance companies and pension funds are large institutional investors, situations could arise were the market would not be sufficiently liquid, if there was a sudden need for changes in the investment mix. This is most dominant for the equity market, since the bond market in Denmark is large and liquid. This would mainly be a problem in the event of solvency problems of one of the larger companies. ### Investment strategy and historical returns - Investment mix evolution: - In 2004, the mix between bonds and shares accounts for 61.7 percent and 13.8 percent, respectively. - Total investments: 118,490 (2000), 120,579 (2002), 144,643 (2004), 167,289 (2005). - Bonds: 61,002 (2000) / 84,769 (2002) / 89,227 (2004) / 94,026 (2005). - Participating interests: 36,630 (2000) / 14,700 (2002) / 19,974 (2004) / 25,113 (2005). - Investments in subsidiary and associated companies: 10,785 (2000) / 6,179 (2002) / 8,440 (2004) / 19,644 (2005). - Interests in investment associations: 5,692 (2000) / 7,962 (2002) / 18,981 (2004) / 14,773 (2005). - Land and buildings: 3,514 (2000) / 4,620 (2002) / 3,825 (2004) / 4,224 (2005). - Other investments: 86 (2000) / 2,349 (2002) / 4,195 (2004) / 9,509 (2005). - Return volatility and recent results: - Return on investments before tax: 5.65 (2000), -1.63 (2001), 1.77 (2002), 6.86 (2003), 10.40 (2004), 14.25 (2005). - Return on investments after tax: 4.95 (2000), -1.20 (2001), 1.71 (2002), 6.05 (2003), 9.11 (2004), 12.46 (2005). - In 2005, the insurance companies and pension funds achieved a result before tax of over DKr 16 million, with the result on investments amounting to DKr 165 million. - The administration costs have been reduced from 6.49 percent in 2001 to 5.33 percent in 2005. - Observations: - The return on investments fell substantially in the years 2001 and 2002, then increased in 2003, 2004, and 2005 driven by rising equity prices. - In 2003, the profit on investments was above the high guaranteed rate of 4.5 percent. - 2004 showed the best investment profits during the last 5 year period (relative to the data provided). ### Profit distribution, equity returns, and buffers - Diverging interests: - Owners may prefer carrying profit to equity capital; policyholders may prefer distribution to policyholders. - Life insurance companies and pension funds must set up rules for the return on equity comprising a return in line with yield paid to policyholders and a risk premium reasonable in relation to providing equity capital. - The actual profit to policyholders has been equal for all policyholders independent of the level of guaranteed returns. - Return on equity (life insurance companies and general pension funds): - Return on equity before tax: 4.11 (2000), -15.96 (2001), -12.68 (2002), 19.66 (2003), 17.59 (2004), 17.82 (2005). - Return on equity after tax: 3.94 (2000), -14.31 (2001), -10.59 (2002), 18.15 (2003), 15.91 (2004), 15.65 (2005). - Buffers against losses: - Collective bonus potential, bonus potential related to benefits on premium-free policies, and the capital base (equity). - The bonus potential related to benefits on premium-free policies is related to individual policies and cannot be regarded as an aggregate buffer for the entire company. - Solvency: - The weighted average solvency ratio was 2.6 at the end of 2005. - In 2004, half of the companies had a solvency ratio under this average. - Companies with a solvency ratio less than 2.8 represent approximately 73 percent of the market. - In 2005, the 10 percent of the companies with least capital had a solvency ratio below 1.5—none less than 1.2—and the 10 percent best capitalized companies had a solvency ratio exceeding 6.4. - Solvency ratio in percent: 4.2 (2000), 2.4 (2001), 2.2 (2002), 2.6 (2003), 2.7 (2004), 2.6 (2005). ### Failures and causes - Four life insurers have not been able to meet the solvency requirements during the last five years. - For all four life insurers the capital was successfully restored by restoration plans accepted by the DFSA. - All four failures were due to losses on investments (decrease of equity prices and low interest rates) and were related to mismatch between interest rate sensitivity of assets and liabilities. - All companies have continued their business and no direct losses were observed. ### Regulatory sensitivity testing (DFSA traffic light system) - Regulatory changes: - In 2000, the regulatory limit for investments in equities was raised to 70 percent of the technical provisions on the condition that the match between the assets and the liabilities of the industry should be improved. - In June 2001, the DFSA introduced the red and yellow “traffic light” stress test scenarios for life insurers and pension funds. From end-2003, similar test scenarios were introduced in nonlife insurers. - Companies and funds report the result of the stress tests biannually. The traffic light system supplements the required capital margin. - End-2005 status: - There were no life insurance companies or general pension funds in red light, but 6 companies in yellow light. - Red light scenario: - A decrease of 12 percent in the price of stocks, a decrease of 8 percent in the price of real estate, and a change of the interest rate level of 0.7 percentage points. - Credit risk and foreign exchange risks are stressed as well. - If a company cannot meet the red scenario, the DFSA requires monthly reporting and the company in question is not allowed to increase its overall risk. - Yellow light scenario: - A decrease of 30 percent in the price of stocks, a decrease of 12 percent in the price of real estate, and a change of the interest rate level of 1.0 percentage point. - In case a company cannot meet the yellow scenario, the DFSA requires quarterly reporting. ### Company pension funds, ATP, LD/SP (structure and performance) - Legal and regulatory features: - Additional funded pension plans established by law; largest funded pension plan is the Labor Markets Supplementary Pension Scheme (ATP). - Company pension funds must be autonomous legal entities segregated from the company where the beneficiaries are employed. - Pension liabilities must be fully funded. - The regulatory framework, financial prudential supervision and supervision practices for LD, ATP/SP and company pension funds are largely the same as those that apply to the insurance companies. - LD and ATP/SP are also partly supervised by the Danish Ministry of Employment. - Market concentration and assets: - Three company pension funds for the telephone operator, TDC, account for more than half of the total assets of the company pension funds. - The total assets of these company pension funds amounts to approximately € 5 billion (pension fund assets). - The company pension funds cover 2 percent of the total pension assets in the Danish market. - Number and scheme types: - Number of Company pension funds (legal entities): 54 (2000), 50 (2001), 47 (2002), 47 (2003), 44 (2004), 44 (2005). - The schemes of the company pension funds are mostly defined benefit; three schemes are defined contribution. - A large part of the funds are closed for new members. - Financial performance and solvency: - In 2004, the company pension funds showed a negative result after taxes caused by a marked increase in the technical reserves, and paid contributions amounting to the double of the premiums paid. - By end-2004, the total company pension funds had a solvency ratio of 6. - At end-2004, five company pension funds were in red light and eight companies were in yellow light in the DFSA’s traffic light stress test. - Selected 2004 aggregate figures (€ million): - ATP total assets 41,354; LD total assets 7,812; SP total assets 6,252; CPF total assets 5,270. - Investment result: ATP 5,693; LD 838; SP 458; CPF 325. - Net profit for the year: ATP 766; LD 143; SP 98; CPF -105. - Gross premiums: ATP 8980; LD -26; SP 111. ### Nonlife insurance market structure and performance - Market structure: - Number of nonlife insurance companies: 136 (2000), 131 (2001), 128 (2002), 124 (2003), 125 (2004), 124 (2005). - Market dominated by four insurers: Tryg, Topdanmark, Codan, and Alm. Brand. - Top 5 total market shares: 70.3 (2003), 70.1 (2004), 66.7 (2005). - Top 10 total market shares: 87.1 (2003), 86.6 (2004), 82.9 (2005). - Market size and business mix: - The total nonlife market represents 0.46 percent of the world nonlife insurance market. - Personal line business (motor and household insurance) represents approximately 70 percent of the nonlife market. - Premiums by class of business (percent of total, selected): - Motor insurance gross/net: 26.6 / 29.6 (2004 gross/net), 27.0 / 30.0 (2005 gross/net). - Property and casualty: 18.7 / 20.3 (2004 gross/net), 18.9 / 20.3 (2005 gross/net). - Commercial insurance: 32.1 / 28.1 (2004 gross/net), 32.4 / 28.9 (2005 gross/net). - Total direct business: 94.3 / 94.3 (2004 gross/net), 96.0 / 96.1 (2005 gross/net). - Financial results and ratios: - Net profit of the nonlife insurance companies increased by 11.1 percent in 2004; the technical result doubled compared to 2003. - Return on equity for nonlife insurance companies after tax: 15.5 (2000), 5.6 (2001), 0.9 (2002), 14.1 (2003), 14.5 (2004), 17.0 (2005). - Loss and expense ratios: Net claims ratio 83.1 (2000), 78.8 (2001), 80.3 (2002), 71.2 (2003), 74.5 (2004), 80.1 (2005). Net expenses 25.3 (2000), 23.5 (2001), 22.8 (2002), 21.7 (2003), 17.5 (2004), 17.3 (2005). Net operational ratio 108.4 (2000), 100.9 (2001), 106.1 (2002), 97.2 (2003), 94.1 (2004), 91.6 (2005). - The combined ratio is now below 100, making profit on investments a direct return on capital. - Investment mix and stress testing status: - At end-2005, only one nonlife insurance company was in red light and no companies in yellow light. The company in red light is in run off. - Investments of nonlife insurance companies (total investments): 10,099 (2002) / 13,338 (2004) / 15,226 (2005). - Bonds and equities allocation shifts contributed to higher yields the last two years. _Italic: Source — Danish Financial Supervisory Authority (as presented in the provided IMF document)._ ### 43. The solvency ratio has been stable for the last five years. In 2004, half of the nonlife ### The solvency ratio has been stable for the last five years. ### Solvency ratios and capital requirements - In 2004, half of the nonlife insurance companies had a solvency ratio of more than 5 according to the current minimum capital requirements. - In 2005, the solvency ratio increased marginally. - The 10 percent of the companies with least capital had a solvency ratio below 1.9. - The 10 percent of the companies being best capitalized had a solvency ratio exceeding 13.7. - Effective January 1, 2007, the minimum capital requirement will increase to the equivalent of the requirements in EU Solvency I Directive. - The capital requirement may be reduced for mutual insurance companies which fulfill certain conditions; after application, the DFSA may extend the time limit to January 1, 2009. - So far no companies have been granted an exemption. - There are 6 limited companies and 22 mutual companies which at the moment do not fulfill these new minimum capital requirements; however a number of these will qualify for the exemptions according to the Directive. - During 2005, the DFSA will ask the companies to report on how they plan to fulfill the stricter requirements. - Market participants are anticipating changes to capital levels in future years as the EU continues to make progress on insurance capital adequacy (Solvency II). - Minimum levels of regulatory capital are also likely to increase under Solvency II. ### Reinsurance - Reinsurance cover is mainly provided from the international reinsurance market. - There are five pure Danish reinsurance companies, which primarily reinsure risks originating from the group (captives). - Direct insurers in Denmark typically buy reinsurance cover from foreign reinsurers in the international reinsurance market. - In 2004, gross reinsurance premiums of companies on the Danish market amounted to DKr 2.5 billion. - Gross reinsurance premiums of the largest reinsurer—GE Frankona—amounted to DKr 1.2 billion. - Of the total insurance business of GE Frankona, direct insurance accounts for more than half. - A number of large companies in Denmark formed captive insurance companies in 2004; this tendency continued in 2005. ### Conditions for Effective Insurance Supervision (Principle 1) - The government's economic strategy for sustainable economic growth addresses financial sector stability. - Well-functioning money and securities markets exist to support availability of long-term and short-term investment opportunities. - An annual contract between Finanstilsynet (DFSA) and the Ministry for Economic and Business Affairs (MoEB) addresses overall objectives of effective supervision; this contract is published as an annex to the DFSA annual business statement. - The legal framework is defined, updated when necessary, and publicly disclosed. - Regulation is based on the Financial Business Act (FBA), executive orders (EO), and guidelines (guidelines are not legally binding). - The judicial system in Denmark is fully separated from lawmaking and administrative authorities and is public with at least one possibility for appeal. - Auditing and actuarial standards align with international practice and are publicly available. - Accounting standards align with IAS/IFRS; Danish insurance companies have adopted market-value measurement for assets and liabilities. - Certified auditors must pass relevant exams and are subject to ethical standards; appointed actuaries (life insurers and pension funds only) must prove appropriate qualifications. - Section 71(1) FBA requires regulated entities to have good administrative and accounting practices; section 108 (2) and (7) of FBA addresses the position of an actuary. - Basic economic, financial, and social statistics are published by Danmarks Statistik, Danmarks Nationalbank, and other bodies and are accessible to the public. - Assessment: Observed. - Comments: Conditions for effective supervision exist; professional resources are available and high-standard. Regulation is principle-based and allows risk-based supervision; some more specific rule-based requirements should be applicable to all companies. ### Supervisory objectives (Principle 2) - Objectives of insurance supervision are clearly defined in ensuring supervised undertakings comply with the FBA. - DFSA articulates mission, vision, and values and publishes a self-understanding statement. - Objectives of DFSA form part of a performance contract with the MoEB (not legally binding). - The Mission of Finanstilsynet contributes to MoEB goals and preserving confidence in the Danish financial sector. - The DFSA applies cost-benefit considerations of regulations and aims to contribute to market confidence at the lowest possible cost of supervision. - DFSA reflects in its annual report on compliance with mission, vision, performance contract, and rulings. - Prudential regulation is constantly updated and provides no significant contradicting objectives for effective supervision. - Assessment: Observed. - Comments: None. ### Supervisory authority (Principle 3) - Legal framework identifies DFSA as the principal authority to supervise insurance companies in section 344 (1) of FBA. - Finanstilsynet can issue EOs and guidelines; effective discharge of supervision is in section 350 of FBA. - DFSA can order measures within a specified time limit and may withdraw a license if measures are not taken. - Legislation and prudential regulation do not automatically cover Greenland; changes enter into force separately in Greenland approximately one year after Denmark. Faroe Islands have separate legislation, regulation, and supervision. - DFSA is an independent authority; the most senior decision-making body is the Financial Business Council (FBC) or the Danish Securities Council (DSC). EO 1363 defines matters to be brought to respective councils; section 4 requires FBC to decide on matters of principle nature and significant financial consequences. - In case of ties, the chairman has the casting vote. Minister of Economic and Business Affairs cannot give instructions on matters under council responsibility; however, Minister is ultimate superior as DFSA is an institution under the MoEB. - The FBA allows MoEB to issue further regulation on procedures; Minister may give instructions regarding other matters such as examining specific areas or entities. - In practice, the Minister asks questions regarding specific cases and approves annual performance contract; contract states DFSA acts independently within limits of contract and legislation. - DFSA budget determined annually by the government in the fiscal budget law; regulation on financing in sections 360–370 of FBA. - No special processes for appointment/dismissal of head beyond those for senior civil servants; no regulation demanding public disclosure. No indication of interference by executive or judicial branches. - DFSA decisions are published once accepted by FBC; guidelines support expectations for undertakings. DFSA consults market participants prior to material legislative changes. Warnings, decisions, and relevant matters are disclosed on its web page and in annual reports, subject to confidentiality (section 354 of FBA). - DFSA has adequate powers to impose immediate sanctions; section 373ff provides options. - FBA stipulates costs of supervision allocated to institutions under supervision at end of fiscal year; legislature grants appropriation; DFSA distributes costs among institution groups and is reviewed by executive branches according to regular budget procedures. - DFSA endeavors to recruit sufficient qualified staff; civil servant remuneration system allows some flexibility to attract expertise. - Staff are largely university graduates; no evidence of shortfall of qualifications. - Decisions made by staff are on behalf of DFSA; legal action would address DFSA unless civil servant acted with gross negligence or purpose. - DFSA has ethical rules and guidelines for employees to avoid conflicts of interest. - Section 344 (4) FBA allows Finanstilsynet to contract external resources. - DFSA maintains high measures for protection of confidential information; section 354 requires confidentiality and allows information sharing with domestic agencies and relevant supervisors. - Assessment: Largely observed. - Comments: DFSA must agree budget with MoEB although expenses are covered by supervised entities' fees. DFSA is subject to annual public sector budget reduction program; possible resource allocation to regulation could disadvantage supervisory activity. Possible interference by executive branches should be limited or restricted. ### Supervisory process (Principle 4) - Supervisory process is based on defined processes known to and followed by staff; summary of activities published in DFSA annual reports. - Regulation is updated regularly and publicly available. - DFSA applies a risk-based approach and supervisory activity responds to individual company risk assessment. - Equal treatment provided in accordance with Danish Administrative Law. - Supervisory processes are defined in manuals; dedicated teams ensure consistent application; levels of authority are clearly defined and understood. - Administrative decisions of DFSA can be subject to substantive judicial review without impeding timely interventions. - Section 372 (1) FBA: decisions by Finanstilsynet may be brought before the Company Appeals Board; the Business Appeal Board may decide that filing has delaying effect, which DFSA states does not compromise effective supervision. - A decision leading to transfer of portfolio or liquidation remains registered with the company until appeal is finished. - DFSA publishes an annual report on policies, activities, objectives, and performance; releases key figures in press releases on a bi-annual basis. MoEB receives reports under section 353 (1) of FBA. - Assessment: Observed. - Comments: None. ### Supervisory cooperation and information sharing (Principle 5) - DFSA can share information with other relevant supervisory authorities subject to confidentiality requirements. - Information sharing does not require agreements, though some are in place to set frameworks and procedures. - EU/EEA agreements signed by DFSA include: the Sienna Protocol (dated October 30, 1997), the Helsinki Protocol (dated May 11, 2000), and guidelines for Co-ordination Committees (February 2005) issued by CEIOPS. - Other agreements include MoUs with Estonian Financial Supervision Authority (dated August 2002) and Latvian Financial and Capital Markets Commission (dated August 2002). - Memorandum of Understanding between Nordic supervisory authorities (dated 2000) includes Kredittilsynet in Norge, Finansinspektionen in Sverige, Finansinspektionen in Finland, Finanstilsynet in Island, and Finanstilsynet in Danmark. - DFSA has internal procedures for handling cross-border activities and foreign branches in conformity with the mentioned protocols. - Agreements on cooperation and exchange of information cover procedures for all aspects of supervision of insurance undertakings and groups. - Statistical information on Danish insurance undertakings' activities in other EU Member States (amount of premiums) shall be provided to host authority in accordance with Article 43 of Directive 92/49/EEC and 49 of Directive 2002/83/EC; regular annual reporting takes place in accordance with 5.4 in the Siena Protocol. - There is no reciprocity requirement in legal provisions. - DFSA may require information it provides to other supervisors be used only for supervisory purposes; receiver must treat information as confidential. - Information received from foreign supervisors may only be passed on with consent of the authority concerned and only for consented purposes. - Under EU Directives on direct insurance business, DFSA may order an insurance company to cease providing business in Denmark if guilty of gross or persistent violation of obligations. - Assessment: Observed. - Comments: None. ### Licensing (Principle 6) - Licensing procedures and requirements are set out in the FBA; applicants are provided with relevant information. - Definition of insurance company in section 11 (1). - Undertakings carrying out insurance activities must be licensed; legal entity should be, per section 12 FBA, either a limited company, a mutual company, or a lateral pension fund. - DFSA is responsible for granting a license. - Regulations regarding board members and senior management are defined in the FBA; auditors and appointed actuaries must meet professional standards. - Finanstilsynet has issued "Guidelines on requirements in financial legislation for fitness and propriety of members of boards of management and boards of directors and requirements for approval of owners of qualifying interests." - Applicants must provide DFSA with detailed information about business plan, risk management, and control systems. - Executive Order no. 1399 section 15: operating plan shall cover the first three accounting years and be divided into quarters; if first financial statements are for less than one year, plan shall cover that period and the three subsequent accounting years. - Operating plan shall include opening balance, expected accounting results, report on intended reinsurance programs, and report on investment policy. - DFSA requires under section 71 (1) FBA that a financial undertaking have good administrative and accounting practices, written procedures for significant areas, full internal control procedures, adequate IT control and security, and necessary resources. - Application for a license for insurance class 10 (third-party motor liability) must be accompanied by information on claims representative appointments in each EU country. - Finanstilsynet supervises domestic insurance companies and subsidiaries in Denmark of foreign insurance companies per section 346 FBA; branches of Danish insurers established abroad are supervised by DFSA as home supervisor (one branch currently to be supervised). - DFSA has implemented EU provisions regarding sharing of supervisory tasks and cooperation between home and host supervisors; a general MoU between Nordic authorities and specific MoUs for individual groups/conglomerates have been established. - Assessment references: Cf. also ICP. - Comments: None. *Source: _cr07119 - 43. The solvency ratio has been stable for the last five years.* ### 17. A foreign insurer can carry on business in Denmark by way of a local branch or subsidiary, or ### 17. A foreign insurer can carry on business in Denmark by way of a local branch or subsidiary, or on a services basis only ### Licensing framework and requirements - Legal basis: FBA section 30–37; Executive Order no. 1399. - DFSA requires: - Information from the supervisory authorities of the home country. - A declaration that the planned activities are covered by the company's license in the home country. - Capital assessment: - DFSA shall assess whether an insurance company has adequate capital to obtain a license (Executive Order no. 1399). - If submitted plans allow for reasonable doubts regarding financial soundness or business projections, Finanstilsynet can require additional capital or decide not to grant a license. - Decision timing and transparency: - A refusal to grant a license will be addressed to the applicant within a six month period. - Danish law entitles the applicant to an explanation of what led to the decision. - Ongoing reporting condition for licensees: - DFSA grants a license on the condition that the insurance company shall submit quarterly financial statements to the DFSA in such a form as to make it immediately possible to compare the actual results and compare them to the submitted operating plan. - Structural requirement: - FBA requires that life and nonlife activities be conducted in separate entities. - Life assurance companies may carry out activities within insurance classes 1 and 2 (cf. annex 7), and may carry out reinsurance of life assurance and other insurance. - Assessment: Largely Observed. - Comment: DFSA pays specific attention to the licensing process; a tighter, rule-based supervision is applied within the first, say three, years of newly established businesses. Finanstilsynet should also require suitability assessments for auditors and actuaries. ### Principle 7 — Suitability of persons (fit and proper) - Scope: significant owners, board members, senior management, auditors and actuaries. - Legal constraints and roles: - Position as actuary shall not be compatible with position as member of senior management or board of directors (FBA section 108 (2)). - FBA section 64 (1): members of board of directors and senior management shall have adequate experience. - DFSA practices: - DFSA does not assess fitness and propriety of auditors and actuaries, but actuaries and auditors must fulfill education and practical experience requirements. - Professional bodies issue standards of professional conduct; Finanstilsynet does not rely on those standards because it does not assess fitness and propriety of auditors and actuaries. - DFSA holds senior management (executives registered for the company) responsible for fulfillment of responsibilities. - DFSA may order withdrawal of owners' voting rights if a qualified holding acts contrary to appropriate operation (section 62 (1) FBA). - DFSA may require removal of a member of senior management not fulfilling fit and proper requirements (FBA section 351(1) referencing section 64(2)). - DFSA may dismiss an auditor deemed clearly unfit and appoint another until a new auditor can be elected (section 199(4) FBA). - DFSA exchanges information with other authorities and has an internal procedure describing the exchange. - Assessment: Largely observed. - Comment: DFSA's system assumes core responsibility of senior management to ensure adequate personnel; consistent application of fit and proper attitude so far, possibly aided by limited market size. ### Principle 8 — Changes in control and portfolio transfers - Definition of qualifying interest: - FBA section 5(3)–(6) defines “qualifying interest” as direct or indirect ownership of 10 percent or more of the capital or voting rights or ownership providing opportunity for significant influence. - Section 61 FBA describes regulation of qualifying interests. - Notification and approval thresholds: - Any person planning to acquire a qualifying interest of 10 percent or more must notify DFSA in advance and obtain DFSA approval (section 61). - Same applies to increases resulting in interest equaling or exceeding limits of 20 percent, 33 percent, or 50 percent of share capital or voting rights, or resulting in the undertaking becoming a subsidiary undertaking. - DFSA shall only approve an acquisition or increase when such approval is not contrary to ensuring appropriate operation (FBA section 61 (2)). - Finanstilsynet can approve or refuse projected acquisitions and may order specific guidelines or withdraw voting rights where owners act contrary to appropriate operation. - Information obligations: - Section 347 FBA describes general obligation to provide DFSA with all necessary information. - Portfolio transfer and mergers: - Section 204 (1): a financial undertaking may not, without permission of the Minister of Economic and Business Affairs, be amalgamated with another financial undertaking or a specific business function; authority delegated to Finanstilsynet through an executive order. Same applies when the continuing undertaking is foreign. - Assessment: Observed. - Comments: None. ### Principle 9 — Corporate governance - Legal framework: Danish Public Companies Act, FBA, and guidance note; sections 70 and 71 FBA apply also to nonlisted companies and mutual insurance companies. - Board responsibilities: - Board of directors responsible for undertaking’s activities, satisfactory organization, and ensuring accounts and asset management are subject to satisfactory controls (Danish Public Companies Act chapter 9; FBA section 108). - FBA sections 70 and 71 require good administrative and accounting practices, written procedures, full internal control procedures, adequate IT control and security measures, and appropriate resources. - Supervision and guidance: - DFSA issued guidelines No 9680 to interpret FBA section 70 and 71; guidelines are important for inspections. - Inspection manual describes DFSA practices for on-site inspections and verifying sections 70 and 71. - DFSA reviews audit records (long form audit minutes) and auditor’s report to verify implementation of auditor’s issues. - Functional requirements: - Board must establish audit and actuarial functions and maintain strong internal controls. - Remuneration policy is not regulated; senior management not required to appoint a compliance function. - Appointed actuary is part of supervisory process and can demand access to the board. - Assessment: Observed. - Comments: None. ### Principle 10 — Internal control - Board obligations and guidance: - Board must ensure administration is adequate; Guideline No. 9680 interprets section 71 FBA and elaborates on internal controls and procedures; application assessed during on-site inspections. - Audit functions: - Internal audit handles part of financial audit where established; division of labor between internal and external auditors specified in board-approved agreement. - Executive order requires external auditors to state in their report whether administrative and accounting practices, including business procedures and internal control procedures, are adequately planned and executed. - Internal audit function required for larger undertakings and shall report to the board (section 4 of Executive Order No. 1324). - Actuary role and access: - Appointed actuary must have access to all necessary information, including board minutes. - Actuary must prepare a written report to the board when financial statements are adopted, containing essential conclusions relevant to presentation of accounts and compliance with technical assumptions (section 108 FBA). - DFSA holds separate meetings with the appointed actuary during on-site inspections. - Outsourcing: - If board decides to outsource activities, board must lay down guidelines ensuring activities are handled adequately, policies and strategies observed, procedures for monitoring, and adequate reporting procedures; board must regularly monitor compliance. - Internal audit thresholds: - Insurance companies with more than 50 employees and gross premium income in excess of DKr 2 billion, and in addition for life-insurance if they have total gross premiums in excess of DKr 30 billion, are required to have an internal audit function. - Board of smaller entities should consider establishing this function voluntarily. - External auditor reporting where internal audit exists: - External auditors’ report shall state whether (i) tasks agreed in audit agreement have been carried out and whether internal auditors perform duties satisfactorily, and (ii) external auditors concur with internal auditors’ audit book comments or explain disagreements. - Assessment: Largely observed. - Comments: - Requirements to establish internal audit functions should be made compulsory for smaller companies. - Guideline 9680 does not clearly define Finanstilsynet’s requirements in internal control; guideline does not expand on section 71 FBA requirements sufficiently. - Importance of internal audit function requires an executive order. ### Ongoing supervision — Principle 11 Market analysis - DFSA analyses: - Regular analyses focus on individual insurers and sub-sectors—ratings, general developments in life and nonlife sectors, and stress testing. - Macroeconomic surveillance largely limited to financial markets data. - Finanstilsynet contributes to preparation of a Financial Stability Report on a European level for the insurance and occupational pension fund sector on a semi-annual basis. - Data sources and methods: - DFSA identifies vulnerability of individual companies and aggregates to market scale; analysis mostly quantitative based on company reports and includes reporting on two stress test scenarios. - Meetings with companies and professional associations provide additional input. - DFSA and Danish Insurance Association publish aggregated industry data and some financial markets data. - Reporting and ad hoc requirements: - DFSA requires systematic reporting: biannual electronic reporting of accounting figures and reports on two stress test scenarios from all supervised companies. - On an ad hoc basis, DFSA can require extraordinary reports on matters of immediate importance (e.g., use of derivatives in life insurance). - Identified gaps: - Current aggregation of company-related data does not address some issues that could affect future stability. - Need for structured collection of information on legislative trends, macro-economic information (e.g., inflation, capital markets), and domestic economy trends affecting insurance portfolios. - Assessment: Observed. - Comment: Finanstilsynet should enlarge market analysis activities to enable forecasting of market trends and projection of potential impacts for the sector. ### Principle 12 — Reporting to supervisors and off-site monitoring - Statutory reporting: - FBA requires submission of annual accounts and reports, actuarial reports (mandatory only for life insurers), insurance provisions, registered assets, and other information. - DFSA can request all information necessary for performance of duties. - Financial performance information is submitted on a bi-annual basis. - FBA sections 193–198 set general requirements regarding annual reports and auditing. - Detailed regulations: - Executive Order no. 1406 sets detailed regulations; all insurers are subject to the same reporting requirements. - Reporting requirements define solo vs. group-wide reporting. - EO1406 includes regulations on consolidated financial statements and when annual report must include consolidated statements. - Outsourcing reporting: - No specific requirements that the insurer reports on outsourced functions unless the company experiences problems in that area. - Reporting format and use: - Nearly all reports submitted electronically and designed for ongoing monitoring. - DFSA uses information for monitoring via rating, stress-testing, and benchmarking; reporting requirements reviewed and revised regularly. - Immediate notification obligations: - Insurance companies required to inform DFSA immediately of matters of material significance to continued operation; applies correspondingly to individual board members, board management, and responsible actuaries. - If a board member, board management member, external auditor, or responsible actuary believes undertaking does not comply with capital requirement sections 124–126 or solvency need under section 124(3) and section 125(5), such person shall immediately notify Finanstilsynet. - Assessment: Observed. - Comments: None. ### Principle 13 — On-site inspection - Legal authority: - FBA section 346.1: DFSA shall examine circumstances of financial undertakings and financial holding companies, including reviews of regular reports and inspections. - Finanstilsynet authorized to gain access to undertaking and branches for information including during inspections. - Manuals and procedures: - Detailed procedures defined in on-site inspection manuals for nonlife insurers and reinsurers and for life insurers; manuals apply same methodology, reviewed regularly. - Manuals include procedures for announcing inspections, on-site performance, reporting conclusions; list elements for full-scale inspection and provide standard letters, agendas, annotated agendas, reasoning and explanations. - Inspection teams and objectives: - Finanstilsynet performs regular on-site inspections using teams of inspectors; same inspectors perform on-site and off-site supervision. - Purposes include verification of regulatory returns, evaluation of risk profile and capital strength, and compliance with legislation. - Auditor role: - Company law requires auditors to verify annual reports prepared in accordance with FBA. - Assessment: [text ends in source] *IMF Financial Sector Assessment — extracted text from the provided chapter content* ### section 183.1, cf. FBA section 193 and 199, as well as the Executive Order No. 1183 of ### _cr07119 - section 183.1, cf. FBA section 193 and 199, as well as the Executive Order No. 1183 of ### Audit reporting and statutory requirements - Executive Order No. 1183 of December 15, 2003 on Auditing Financial Undertakings and Financial Groups: - Section 4.1 requires auditors to prepare and maintain audit book comments (a long form audit report). - A copy of the audit book comments is submitted to the DFSA. - The audit book comments include a number of statements and information on the regulated entity. - Other regulatory returns such as the returns on registered assets are certified separately by the auditor. ### On-site inspections, risk assessment and planning - DFSA plans and prioritizes on-site inspections based on: - an overall risk assessment system including the results of a rating system (seven indicators), - stress-tests, - a qualitative assessment by a supervisor. - The most important stress-test is labeled the traffic-light-system; it has improved risk awareness and directs Finanstilsynet in identifying companies where tighter inspection seems necessary. - Inspection cycles: - Larger nonlife insurers: full scale inspection every four years. - Smaller nonlife and all life insurers: full scale inspection every seven years. - Vulnerable insurers: subject to more frequent full scale or focused inspections. - Insurers may be subject to more frequent full scale or focused inspections based on regular evaluations of risk. - Assessment comment: - The risk-assessment does not consider the size of the company and thus tends not fully to balance risk sensitivity and potential financial impact for the market. - Larger life companies should also be subject to a full inspection on a 4-year cycle. ### Reporting findings and follow-up procedures - Procedure after on-site inspection (described in FBA sections 346.2–3): - Material findings and conclusions are presented and discussed in a meeting with the board of directors, management, auditors, and the responsible actuary. - Material findings and conclusions are subsequently submitted in the form of a written report. - A follow up procedure is included in the report to the board of directors, management, and auditors (cf. answer to ICP 13, d). - If necessary, DFSA will perform a focused inspection to follow up on actions required as a result of an on-site inspection. - Information on service providers: - Normally obtained via the supervised entity and includes the outsourcing contract, reporting, and internal control. - Currently, the DFSA has no specific powers to inspect most service providers directly. ### Principle 14 — Preventive and corrective measures - DFSA supervises compliance with the FBA and regulations laid down in section 344.1. - FBA section 350 entitles Finanstilsynet to order that a financial undertaking take the measures necessary within a time limit specified by the DFSA if: - the financial position has deteriorated to such a degree that the interests of the depositors, the insured parties, the bond owners are at risk, or - there is a significant risk that the financial position will develop so that the undertaking loses its license. - If ordered measures are not taken within the specified time limit, the DFSA is entitled to withdraw the undertaking’s license. - FBA sections 248–252 include provisions on restoration and other measures applied where the insurer does not comply with the capital requirement. - Where appropriate: - DFSA will require the undertaking to forward a report on an identified problem, including a plan for rectification. - In case of noncompliance with capital requirement, a restoration plan will be required (FBA sections 248–252). - Assessment comment: - DFSA possesses all means to ensure that shortfalls or misuse of regulation will be supported. - The range of sanctions is rather biased to drastic measures and could be of more variety to respond to less severe shortfalls. - It can be assumed that the withdrawal of license is not an adequate response to all types of noncompliance. - Finanstilsynet is not able to impose fines, except, for instance, daily or weekly fines until required reports have been submitted. ### Principle 15 — Enforcement or sanctions - DFSA powers and measures: - Can order management to report on financial circumstances and future prospects. - Can require necessary measures within a specified time limit. - May order removal of a member of senior management. - Can stop issuing of new policies. - FBA section 252: Finanstilsynet shall, in consultation with liquidators, implement an investigation on whether to attempt transfer of portfolio of insurance contracts fully or partly to one or more insurance companies. - FBA sections 249, 250, and 350: DFSA can place an undertaking under administration or withdraw the license. - Finanstilsynet may determine a time-limit for disposal of other activities if immediate disposal would result in financial loss (sections 24–26 FBA). - Limitations: - DFSA has limited means to address management problems directly; cannot force replacement of controlling owners and managers or restrict their powers. - FBA only allows for restrictions to act as an executive; management and board are not covered by this provision. - Finanstilsynet cannot ensure that individuals will be barred from acting in responsible capacities in the future. - Criminal and other sanctions: - Violations of FBA sections may incur criminal liability according to chapter 5 of the Criminal Code. - Breaches may be sanctioned by fines, statutory debt collection, or withholding wages against individuals and legal persons. - DFSA is authorized to sanction by way of statutory debt. - Fines can only be issued subsequent to a respective court’s decision. - Individuals submitting incorrect or misleading information or guilty of gross or repeated negligence may be liable to a fine or imprisonment for up to four months unless more severe penalty applies under other legislation. - Practice and transparency: - Sanctions will be imposed in a consistent manner. - Should DFSA suspect unauthorized activity, Finanstilsynet will publish warnings and require the person to provide information about the activity. - According to section 373 (1) of the FBA, unlicensed insurance activity is liable to fines or imprisonment. - Assessment comment: - Assessment: Largely observed. - DFSA should have means to address management problems directly; issuing of an executive order should be considered. ### Principle 16 — Winding-up and exit from the market - Legal framework: - FBA chapter 15 provides framework for withdrawal of licenses and winding up of financial undertakings including insurance undertakings. - DFSA may withdraw the license on request or if it repeatedly violates the FBA. - DFSA can withdraw the license and require winding up if an insurance company has not, within time limits set by DFSA, carried out measures listed in restoration plans. - Protection of policyholders and portfolio transfers: - DFSA entitled to reduce disruption to provision of benefits to policyholders to a minimum. - A portfolio of insurance contracts shall be placed under administration if it appears not possible to obtain funds necessary to cover insurance provisions within the time limit. - Prior to transfer, DFSA must prepare a report regarding the transfer and draft an agreement with the relevant company; the report and draft shall be published in the Danish Official Gazette and in daily newspapers and forwarded to policyholders whose addresses are known. - The MoEB shall, under consideration of objections made, decide whether the portfolio may be transferred in accordance with the proposal. - DFSA can review whether long-term insurance contracts are to be terminable by both parties according to provisions that would have been in force if the duration had expired; such access to termination shall be indicated in the DFSA report. - Administration estate: - If a portfolio will be administered under DFSA direction, registered assets will be transferred immediately to the administration estate. - The administration estate represented by the administrator shall be entitled to have full charge of said assets. - Investment securities shall be registered at a central securities depository; real property in the Land Register. - Experience: - Two companies have been winded up during the period from 2002–05. - No shortfalls on provisions have been reported. - Assessment: Observed. ### Principle 17 — Group-wide supervision - Definitions and notification: - FBA section 5 includes definitions of parent company, subsidiary undertaking, associated undertaking. - All holdings of more than 10 percent in a financial institution are subject to notification and approval (cf. section 61). - Coordination and cross-border cooperation: - DFSA has entered into multilateral protocols with other supervisory authorities of the European Economic Area (EEA). - An MoU amongst the Nordic supervisory authorities has been signed to agree terms to supervise groups such as Nordea and others. - As an integrated supervisor for the financial sector in Denmark, a comprehensive outline is available for Danish groups. - Consolidated supervision and intra-group exposures: - FBA chapters 10 and 12 lay down principles for applying solvency and capital adequacy rules on a consolidated basis. - All intra-group exposures need prior approval from Finanstilsynet before they are allowed to be conducted; approval is rules based and is often given for one year (maximum). - Executive Order No. 793 of July 10, 2004 on Reporting of Large Exposures for Groups where the parent Company is a Financial Holding Company or a Financial Undertaking and where full Consolidated Statements are not prepared implements the EU Conglomerates Directive. - FBA section 179: DFSA may under certain conditions order a parent undertaking that owns holdings in financial undertakings to separate such financial undertakings and finance institutions in a subgroup under a financial holding company. - FBA section 180: DFSA may under certain conditions order a financial holding company to dispose of holdings in a financial undertaking. - Assessment comment: - DFSA supervises three financial conglomerates with activities in the Danish market. - Risk-assessment of the Danish business takes place in joint meetings of all involved parties within Finanstilsynet. - The MoU with Nordic countries ensures a consistent approach. - The simultaneous assessment of major risks in all countries of the respective groups impedes unsupervised risk transfer. ### Principle 18 — Risk assessment and management (Prudential requirements) - Requirements and guidance: - Insurance companies are not explicitly required to have risk assessment and risk management systems in place. - Guideline 9680 requires management of insurance companies to define procedures under which they delegate responsibility that: - insurance risks will be assessed and underwritten, - financial and operational risks will be considered, - payment systems will be under control. - DFSA activities: - DFSA runs a traffic-light system, which addresses the financial resilience of the undertakings. *Source: _cr07119 - section 183.1, cf. FBA section 193 and 199, as well as the Executive Order No. 1183 of* ### Section 71 of the FBA requires the board of directors of a financial undertaking to prepare ### _cr07119 - Section 71 of the FBA requires the board of directors of a financial undertaking to prepare ### Section 71 requirement and Guideline scope - Section 71 FBA requires the board of directors of a financial undertaking to prepare written guidelines on the most significant areas of activity, specifying the distribution of responsibilities between the board of directors and the board of management. - The guideline on section 71 lays out more detailed requirements on limits of the material risk areas including the insurance activity (underwriting), the reinsurance cover, and investments. - The guideline stipulates that the board of directors receive reporting explaining the compliance with lines and limits set by the board as well as the current exposure. - The motivations accompanying the bill explain the guidelines must define the risk profile of the undertaking and that contents should reflect the actual business activity; the required degree of detail will vary according to complexity, size, and nature of business. ### Risk assessment, risk management systems, and reporting - Regulation and guidelines specify a framework, provide minimum requirements, and point out issues insurers should consider in respect of risk assessment, risk management systems, and required reporting. - The FBA requires that funds be invested in an appropriate manner, and a manner advantageous for the insured parties, such that there is adequate security that the company can meet its obligations at all times. - Insurers should have risk management policies and systems capable of identifying, measuring, assessing, reporting and controlling their risks at all times; the DFSA checks this during on-site inspections. - Assessment: Largely observed. - Comment: The DFSA receives reporting on results of stress tests on assets (traffic light) on a regular basis. Finanstilsynet expects companies to examine financial robustness in all material risk areas, e.g. market risks and realistic disaster scenarios including reinsurance cover. In practice, a company must have a risk assessment framework in place relative to its nature of business to produce internal reporting and stress test results. The requirement to establish a risk assessment framework should be obligatory for all companies and should be expressed in an executive order. ### Principle 19 — Insurance activity - Description: - Section 71 FBA requires written guidelines and distribution of responsibilities between board and management. - The board must set risk limits including limits on underwriting, tariffs, and reinsurance cover (mitigating and diversifying risks and defining limits on the amount to be retained). - The DFSA requires insurers to evaluate risks they underwrite and have a clear strategy to mitigate and diversify risks by defining limits on the amount of risk retained. - Reporting to Finanstilsynet includes annual reporting by all newly licensed nonlife insurance companies and nonlife insurance companies with a gross premium exceeding DKr 25 million of their reinsurance contracts to the Reinsurance Monitoring System (REMOS). This enables the DFSA to evaluate reinsurance cover and security of reinsurers. - Underwriting risk is an important element of a full-scale inspection; Finanstilsynet can review methodology used to set premiums but the ability to determine whether premiums are established on reasonable assumptions enabling the insurer to meet commitments is restricted to life business. - Assessment: Largely observed. - Comment: Finanstilsynet should consider issuing an executive order with minimum requirements regarding insurance activity. ### Principle 20 — Liabilities - Description: - Executive Order No. 1406 requires technical and other provisions to be valued based on sound accounting and actuarial principles. - If DFSA assumes reserve levels are not adequate, it must question the company’s actuarial principles and require a report about its circumstances and financial position. - DFSA receives at least bi-annual statement of all liabilities in both life and nonlife and has issued a guidance note to Executive Order 1406. - Discount rates and mechanisms are defined for life and workers compensation business and are updated and published daily. Until 2008, undertakings are allowed to use a simplified rate, the average of three government bonds. - DFSA reviews technical provisions off-site and on-site; for nonlife, Finanstilsynet will run a stress test of liabilities off-site. In life insurance, technical provisions are reviewed by notification of the technical basis to the DFSA. - If requirements on technical provisions are not fulfilled, Finanstilsynet can require an increase of the technical provisions; violators may be liable to a fine. - Executive Order 1399 entitles Finanstilsynet to reduce the risk weighting of the solvency requirement if technical performance differs from past experience or technical risk transfer is insignificant. - All liabilities are valued at market value; nonlife claims liabilities do not require a market risk margin. - There have been no reports on shortfall of reserving levels. - Assessment: Observed. - Comment: None. ### Principle 21 — Investments - Description: - FBA section 159 (2) sets qualitative requirements on composition and diversification of investments; due to EU directives this specific requirement is limited to assets covering provisions. - FBA 24−26 and 29 prohibit permanent subsidiaries doing business outside core insurance business. - Assets covering provisions are limited to the 14 listed different classes of assets. - The qualitative requirement: funds under the charge of an insurance company or a pension fund shall be invested in an appropriate manner, and a manner advantageous for the insured parties, such that there is adequate security that the company can meet its obligations at all times. - The DFSA reviews performance through quarterly reports and through auditors’ reports twice a year; auditors must do specific non-notified controls of assets covering technical provisions. - FBA section 159 (2) requires the asset mix in general to be liquid with regard to the liabilities. - During on-site inspections Finanstilsynet requires a full list of all assets and analyzes investment strategy and diversification policies. Stress test (traffic light) measures mismatch in interest rate exposures and other assets compared to liabilities. - All financial assets are valued at fair value. Exception: loans with floating interest rates according to the Executive Order, section 49 are valued at par. - Guideline 9680 requires the board of directors to at least annually set the risk profile on the assets (equity, bonds, currency, credit and counterparty risk, derivatives). - FBA section 64 requires all members of the board or senior managers to fulfill fit and proper requirements; these do not include the head of investments or head of risk management if functions are separate from senior management. FBA sections 70 and 71 include no specific requirements on skills of certain staff. - Auditors must provide an annual long form audit report to the DFSA, including certification of compliance with rules of investment and existence of written procedures in all important areas, including investments. - Assessment: Largely observed. - Comment: Since the investment function is not subject to suitability requirements, the principle can only be assessed as largely observed. ### Principle 22 — Derivatives and similar commitments - Description: - Guideline 9680 requires undertakings to have in place limits on the use of derivatives and inherent risks before taking positions in derivatives. - Executive order on financial reporting, sections 43−45 requires that all derivatives in force be disclosed in the annual report. - Section 64 FBA requires the board has adequate knowledge related to the use of derivatives. - Guideline No. 9680 requires clear reporting lines and authorization levels if responsibility is delegated within the undertaking. - DFSA reviews board decisions during on-site inspections. Companies must have internal control and reporting on all investments including derivatives; internal control includes monitoring of risks. - FBA provides no specific requirements on skills for modeling and pricing of derivatives for certain staff. During on-site inspections Finanstilsynet reviews that undertakings have procedures on parameters to value OTC products or regularly receive alternative pricing from market participants. - Assessment: Largely observed. - Comment: Since usage of derivatives is not subject to suitability requirements, the principle can only be assessed as largely observed. ### Principle 23 — Capital adequacy and solvency - Description: - Calculation of technical provisions and other liabilities for solvency purposes are based on accounting valuation; asset valuation for solvency purposes is also based on accounting valuation measures. - FBA sections 130, 131, and 135 lay down eligible forms of capital elements, implemented from European directives; some EU-listed elements are either not considered eligible in Denmark (e.g. future profits) or only eligible with supplementary requirements (e.g. FBA sections 130 (1)–(2) on special bonus provisions (profit reserves)). - Solvency requirements set out in FBA section 126 and Executive Order No. 1399 are calculated as a percent of liabilities in life-insurance and a percent of premiums/claims in nonlife insurance, as set out in EU directives. The current regime is considered reasonably sensitive to size, complexity, and risks; EU Solvency II project expected to improve at a later stage. - Minimum capital requirements are laid down in FBA section 126 (1) no. 6-8, (4), (5), and 6, and 408. Executive Order No. 1399 lays down some exceptions. - The flat rate minimum capital requirement is € 3 million in most classes of business and € 2 million in nonlife (nonliability insurance). During a transitional period up to 2009, undertakings are allowed to continue business with a lower amount of capital (FBA section 408). - Some exceptions for small mutual insurance companies per FBA section 126 (4)−(6) and Executive Order No. 1399, section13. Small mutual insurers with a lower capital requirement must give special notice to policyholders. - If Finanstilsynet finds solvency position imprudent, it has power to adjust the capital requirement; supplementary capital requirement of the stress test (traffic light) usually increases capital requirement. - Solvency control levels are imposed if an undertaking does not fulfill solvency requirement. Under FBA 248, an undertaking must aim at restoration of financial position over a shorter period to be determined by the DFSA. Finanstilsynet receives reporting on all solvency control levels. - Branches of companies outside the EU are required to possess sufficient funds to cover the company's gross liabilities originating from insurance business directly written in Denmark. - There are about 28 companies operating under a granted exemption from Solvency I requirements. - Assessment: Observed. - Comment: None. ### Principle 24 — Intermediaries - Description: - DFSA has implemented the European Insurance Mediation Act (IMA). Undertakings carrying out insurance broker activities shall be licensed by Finanstilsynet. - Employees carrying out insurance broker activities for such undertakings must be licensed by the DFSA. - Intermediaries must pass exams of the Insurance Academy, established by the Danish Insurance Association. Finanstilsynet may withdraw the license if fit and proper requirements are not met. - IMA section 20 (2): an insurance broker undertaking shall, without delay, deposit funds entrusted to it in a special client's account and establish appropriate security for these funds. - If a broker solely uses one or several specific insurance companies without an explicit agreement, the customer must be notified no later than at the time of entering into a specific insurance contract and informed of the right to access names of insurance companies used. - It is illegal to carry out insurance intermediation without license; IMA section 54 (1) makes violation punishable by fine, unless more severe penalty applies. - Assessment: Observed. - Comment: None. ### Principle 25 — Consumer protection - Description: - Insurers and intermediaries shall operate in accordance with honest business principles and good practice, cf. FBA section 43 (1) and IMA section 19 (1). DFSA finds that it observes ICP 25, b. - An insurance company is required to obtain a profile of customers’ needs to ensure products sold are appropriate. - Insurers and intermediaries may not without due cause disclose or use confidential information obtained through duties, cf. FBA section 117 (1) and IMA section 18. - The insurance company shall provide information on the most important elements in the scope of cover, customer's options, and other important aspects prior to concluding a contract; information on any significant limitations must be provided prior to contract conclusion. - Regulation is available at Finanstilsynet's website; scope of FBA stipulates extent of provisions for cross-border offering, cf. FBA section 1 (3−5). Finanstilsynet also provides information to the public on request by telephone or in writing. - DFSA issues warning notices on its website if an insurer or intermediary carries out activities without a license. - Finanstilsynet publishes annual reports and other reports regarding insurance and intermediation and has published "frequently asked questions" on its website. - Finanstilsynet receives complaints on questionable behavior; disputes related to contractual issues or settlements are settled before a national complaints board. The complaints board has been notified of 2,812 cases in 2004. - Assessment: Observed. - Comment: None. ### Principle 26 — Information, disclosure & transparency towards the market - Description: - FBA applies to all financial undertakings and financial holding companies and contains general regulations regarding the annual report and audit. Reporting requirements are laid out in sections 186−188, 193, and 195. - The annual report shall give a true and fair view of the enterprise's assets and liabilities, financial position, and results for the year; consolidated financial statements must include the group’s assets and liabilities, financial position, and results. - Executive Order No. 1406 of December 14, 2004 on financial statements requires insurers to disclose detailed information—both quantitative and qualitative—on the financial position and performance; any disclosure necessary to give a true and fair view is required (section 87). - A description of accounting policies is required, including basis, methods, and assumptions (sections 89 and 128). Any uncertainties and changes in accounting policies shall be disclosed and explained. - A quantitative description of exposure to certain changes in market risks and insurance risks is required (sections 126−127). A qualitative description of exposure to financial risks and insurance risks and how these risks are managed is required (section 131). - In accordance with section 344 FBA, Finanstilsynet shall supervise compliance and examine insurers' accounts to check that financial statements are prepared in accordance with relevant legislation. For listed enterprises, this control is performed by Finanstilsynet together with the Danish Securities Council on behalf of the Danish Securities Council, which has powers laid down in section 197. *Source: _cr07119 - Section 71 of the FBA requires the board of directors of a financial undertaking to prepare* ### Section 197 in the FBA states that in order to ensure that the annual reports of financial ### _cr07119 - Section 197 in the FBA states that in order to ensure that the annual reports of financial ### Section 197 in the FBA — DFSA powers over annual reports - Section 197 in the FBA states that in order to ensure that the annual reports of financial undertakings and financial holding companies are in accordance with the relevant regulations the DFSA may: - (i) provide guidance; - (ii) take action against violations; and - (iii) order that errors be corrected and that violations be remedied. - Assessment: Observed - Comments: None ### Principle 27 — Fraud (insurance) - Requirement: The supervisory authority requires that insurers and intermediaries take the necessary measures to prevent, detect and remedy insurance fraud. - Description and legal basis: - The DFSA has the powers and resources to establish and enforce regulations and to communicate with enforcement authorities and other supervisors to deter, detect, record, report, and remedy fraud in insurance. - The FBA does not address insurer fraud; it is addressed in Danish legislation and insurance contract law. Committing insurance fraud is a crime under Danish law and will be prosecuted by the relevant branches. - FBA section 71 requires an insurer to have good administrative practices, full internal control procedures, the resources necessary for proper carrying out of its activities, and use these appropriately — contributing to procedures and controls to deter, detect, record, and report fraud. - Claim fraud is punishable under the Criminal Code, chapter 28, section 279. - If the policyholder deceitfully submits misleading information in underwriting, the insurance contract is not binding for the insurer, cf. section 4 of the Insurance Contract Act. - Insurance companies are required to set up internal control procedures to protect against fraudulent activity from staff and customers. - Undertakings carrying out insurance broker activities shall be licensed by Finanstilsynet, cf. IMA section 4 (1). Licensed insurance brokers are obliged to allocate appropriate resources and implement effective procedures and controls to deter, detect, record, and report fraud. - The insurance trade organization takes measures to prevent fraud, for instance by taking measures to establish a fraud register. Exchange of information between insurers with respect to fraud complies with chapter 9 of the FBA regarding disclosure of confidential information. Such a fraud register will be established in line with other protection legislation. - Finanstilsynet will issue public warnings in case of illegal provision of insurance and cooperates with supervisors in other jurisdictions, as appropriate. - Assessment: Observed - Comments: None ### Principle 28 — Anti-money laundering, combating the financing of terrorism (AML/CFT) - Requirement: The supervisory authority requires insurers and intermediaries to take effective measures to deter, detect and report money laundering and the financing of terrorism. - Legislative and supervisory framework: - The DFSA is responsible for the Danish Act on measures to prevent money laundering and financing of terrorism (Consolidated Act no. 132 of March 1, 2005—The Act on Money Laundering). This Act covers both life insurers and insurance intermediaries and implements Directive 2001/97/EC amending Council Directive 91/308/EEC (The 2nd Money laundering Directive). - The current Act on Money Laundering covers the FATF recommendations 4, 10, 13−15, 21, and special recommendation IV. FATF recommendation 5 is partially observed by the current Act. FATF recommendations 29−32 and special recommendation V are observed. - The DFSA proposed a new law adopted in 2006 (the bill on money laundering) to fully implement the EU 3rd Money Laundering Directive and thus comply with the FATF 40 revised recommendations, including recommendations 6, 8, 9, 11, 22, and 25. - Supervisory powers and practices: - Pursuant to section 346(1) of the FBA, the DFSA shall examine the circumstances of life insurers, which include inspections of individual undertakings. Finanstilsynet carries out such inspections periodically and has an inspection manual describing areas to review, including internal procedures to prevent money laundering. - Pursuant to section 347(1)−(2) of the FBA, life insurers shall provide Finanstilsynet with such information as is necessary for DFSA duties. Finanstilsynet may at all times, on proof of identity and without a court order, gain access to an insurance company and its branches or a financial holding company to obtain information, including during inspections. - If non-compliance with the Act on Money Laundering is ascertained, Finanstilsynet is expected to express criticism and order compliance. Sections 3, 4, 6, 9, and 10(2) of the Act on Money Laundering are subject to penalty (cf. section 13). - For insurance intermediaries, the DFSA shall, pursuant to the Insurance Mediation Act section 44(1), supervise compliance and may at all times, on proof of identity and without a court order, gain access to an insurance intermediary for information, including during inspections. - Under the new law on money laundering, the DFSA shall supervise both insurance companies and insurance intermediaries and may at all times, on proof of identity and without a court order, gain access to an insurance intermediary to obtain information, including during inspections. - Section 61 (1)−(2) and section 62(1) of the FBA require DFSA notification and authorization prior to any acquisition by a natural or legal person of a qualifying interest of 10 percent or more in an insurance company. - Finanstilsynet has authority to cooperate with the Danish Financial Intelligence Unit (FIU) and enforcement authority (Public Prosecutor for Serious Economic Crime). The terms of cooperation are not in writing but derive from Finanstilsynet’s duties. - Resources and institutional engagement: - The DFSA devotes resources to the AML/CFT area. Finanstilsynet's banking division has specialist expertise and day-to-day responsibility for interpretation and revision of the Act on Money Laundering. - The DFSA is kept up to date with AML/CFT standards through FATF membership, participation in FATF meetings, and participation in the Money Laundering Contact Committee appointed by the European Commission Services. - Customer due diligence and extraterritorial measures: - Pursuant to section 4 of the Act on Money Laundering, both life insurance companies and insurance intermediaries shall conduct a customer due diligence. - The new law requires life insurers and insurance intermediaries to ensure that branches and subsidiaries located outside the European Community apply AML/CFT measures at least equivalent to the 3rd Money Laundering Directive. - Assessment: Largely observed - Comments: The new law is expected to contribute to an improved supervisory framework to support activities on AML/CFT. ### Observance summary (Table 18) - Observance of IAIS Insurance Core Principles — Assessment Grade counts and lists: - Observed 18: 1, 2, 4, 5, 8, 9, 11, 12, 13, 14, 16, 17, 20, 23, 24, 25, 26, 27 - Largely observed 10: 3, 6, 7, 10, 15, 18, 19, 21, 22, 28 - Partly Observed: (none listed) - Materially nonobserved: (none listed) - Nonobserved: (none listed) - Not applicable: (none listed) ### Recommended Action Plan — key recommendations extracted from Table 19 - Conditions for Effective Insurance Supervision (CP 1) - Some more specific rule based requirements should be applicable to all companies. Guideline 9680 should guide companies to consider measures without defining minimum standards applicable to all companies. - The Supervisory Authority (CP 2) - None - Supervisory authority (CP 3) - The potential interference of the executive branches in the budget allocation should ideally be limited or restricted. Finanstilsynet must agree on its budget with the Ministry of Economic and Business Affairs, although expenses of the agency are covered by fees of the supervised entities. Finanstilsynet is subject to an annual budget reduction program for the public sector. - Supervisory process (CP 4) - None - Licensing (CP 6) - Consider requiring that the suitability of auditors and actuaries be assessed. Risk-based approach requires tighter and rule-based supervision in early years of new businesses; ongoing supervision does not demand comprehensive detailed operating plans. - Suitability of persons (CP 7) - Consider applying fit and proper requirements to a broader range of senior management. - Changes in Control and portfolio transfers (CP 8) - None - Corporate Governance (CP 9) - None - Internal control (CP 10) - Requirements to establish internal audit functions should be made compulsory for smaller companies. Guideline 9680 does not sufficiently define Finanstilsynet requirements; an executive order is recommended. - Market Analysis (CP 11) - Finanstilsynet should enlarge market analysis activities and obtain information, including on macro economic developments, to enable forecasting market trends. - Reporting to supervisors and off-site monitoring (CP 12) - None - On-site inspection (CP 13) - Risk-assessment should take company size into account. Larger life companies should be subject to a full inspection on a 4-year cycle. - Preventive and Corrective Measures (CP 14) - Consider a broader range of graduated sanctions. Finanstilsynet cannot impose fines; sanctions are biased toward drastic measures. During 2002−05, there were in total six noncompliances reported to the prosecutor. In 2005 (until November), 169 orders had been issued to ensure corrective actions. - Enforcement or sanctions (CP 15) - Finanstilsynet should have means to address management problems directly; currently it cannot dismiss controlling owners and managers or restrict their powers. Issuing an executive order should be considered. - Winding-up and exit from the market (CP 16) - None - Group-wide supervision (CP 17) - Simultaneous assessment of major risks in all countries of a Group impedes unsupervised risk transfer. Finanstilsynet supervises three financial conglomerates in the Danish market; MoU with Nordic countries facilitates consistent cross-border approach. - Risk assessment and management (CP 18) - Requirement to establish a risk assessment framework should be obligatory for all companies and expressed in an executive order. Finanstilsynet receives regular stress test reports (traffic light). - Insurance activity (CP 19) - Consider issuing an executive order with minimum requirements regarding insurance activity. - Liabilities (CP 20) - None - Investments (CP 21) - Consider more detailed suitability requirements. - Derivatives and similar commitments (CP 22) - Consider requiring suitability requirements for the derivatives function. - Capital adequacy and solvency (CP 23) - None - Intermediaries (CP 24) - None - Consumer protection (CP 25) - None - Information, disclosure & transparency towards the market (CP 26) - None - Insurance fraud (CP 27) - None - Anti-money laundering (CP 28) - See separate detailed AML/CFT assessment. ### Authorities’ Response — main points - General agreement with IMF assessment, with elaboration on issues. - Consideration will be given to establishing the DFSA as an independent institution by providing the agency a statutory basis in the legislation and to separating the regulatory and supervisory budget. The authorities emphasize ensuring adequate funds at all times; a more distinct division of the budget could improve transparency. - Fit and proper tests: - The fit and proper test in place is compliant with EU directives. The authorities will consider adjusting regulation so DFSA can take measures if persons employed in functions (auditors, actuaries, investment officers, derivatives functions) are not fit and proper, but note cost efficiency concerns and administrative burden. - The authorities view management responsibility for hiring suitable personnel as preferable, with DFSA able to act if a person is found not fit and proper. - Powers over owners and managers (ICP 15): - Authorities note DFSA can abolish voting rights of shareholders in cases where a qualified owner counteracts sound and safe operation and may give specific instructions to firms; they do not see a need for further measures. - Guidelines vs executive orders (ICP 6, 10, 18, 19): - The IMF’s concern that rules are set out in guidelines rather than executive orders is acknowledged. Authorities reiterate that internal auditors in Denmark participate in financial auditing and are not part of the company control system; they do not see a need for compulsory internal audit in small companies but will consider making requirements more detailed and converting guidelines into executive orders, weighing benefits against administrative burden considerations. *IMF staff report content unit: _cr07119* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07119.pdf_