Customer Benefits

Role of ownership in a mutual company

In a mutual company, ownership is based on ongoing customer relationships. None of the owner-policyholders has invested equity-related assets in the company. This kind of ownership is not recognised through dividends or any other return on equity.

In normal operational circumstances, ownership in a mutual company means primarily the right to participate in the company’s administration. At Suomi Mutual, this means the right to vote in the election of the Policyholders’ Representative Assembly, which acts as the General Meeting. The next election will be held in autumn 2009. Ownership ceases when the insurance contract expires and no compensation is paid related to ownership in connection with the expiry.

Excess capital refunded to policyholders

Although policyholders in a mutual company have not invested any equity-related assets in the company, the company’s net assets belong to them.

Suomi Mutual ceased to underwrite new insurance at the beginning of 2005 and the company is in a run-off state. Its task is to manage its insurance and investment portfolios for the benefit of its customers. As insurance policies expire, the company’s need for solvency capital decreases. The solvency capital released in this manner is refunded to the company’s policyholders. The refunds are not based on the policyholders’ status as owners but on their status as insurance customers. The refunds depend on the company’s investment returns. If the returns are negative, it may not be possible to provide any refunds.

In 2005, Suomi Mutual announced the principles according to which the solvency capital would be refunded to the policyholders in a manner that would treat them as fairly as possible . At first, the refunds were directed into special additional benefits, which are paid to current policyholders whose insurance policies at Suomi Mutual were already effective on 1 July 1997. The holders of this portion of the insurance portfolio had previously been given a conditional promise of new special additional benefits. In accordance with previously announced principles, the amount of excess refunds was confirmed at EUR 840 million – the amount conditionally declared – plus interest to be credited as of 1 January 2005 on the portion yet to be refunded. At the end of 2008 about EUR 220 million of this conditionally promised amount remains to refunded.

For many years, the company’s solvency has clearly exceeded the unpaid portion of the conditionally declared special additional benefits on the insurance portfolio defined in the previous paragraph. For this reason, the Board decided in 2006 to extend the solvency capital refunds to cover the entire insurance portfolio.

Uncertainty about the future led to substantial decreases in additional benefits

The year 2008 was a difficult one for investment markets. The downward slide that started at the end of 2007 continued and accelerated during the last months of 2008. In early autumn it was even feared that the whole financial sector would collapse. There were losses in practically all asset categories. However, as interest rates dropped at the end of the year, at least government bonds produced positive returns.

The company’s Board of Directors met in late October to decide on additional benefits for 2008. There was little optimism in the air and the Board opted for a minimal solution: only insurance contracts with a contractual interest of less than 4.5 per cent were granted a customer bonus of 0.7 per cent.

As a result of earlier decisions on additional benefits, a large proportion of the contracts with a contractual interest of 4.5 per cent will get an annual bonus of 2.7 per cent. Their total interest rate will thus be more than 7 per cent. Furthermore, a large proportion of the risk insurances have been granted a 30 per cent reduction in insurance premiums as a permanent additional benefit.

Considering the circumstances, the company’s solvency remains good. The main aim of the decision on additional benefits described above is to ensure that the company can have a secure operational basis in the future. When the economy starts to recover, Suomi Mutual will be able to take more risks in a controlled fashion and, consequently, seek additional returns.

Impacts of changing solvency requirements on customer bonuses

The Solvency II project that is now under way in the European Union will result in a new solvency directive covering insurance companies (cf. Basel II for banks). In preparation for the changes, a chapter on proactive monitoring was incorporated in Finland’s new Insurance Companies Act, which came into force in October 2008. In the future the risks taken by the company in its operations will have a direct bearing on its solvency requirement. Suomi Mutual foresaw this development by adopting a control system meeting the new requirements at the start of 2008.

However, Suomi Mutual was not required to make major changes in asset-related risks because the company already sets its own internal solvency targets on the basis of the risks related to its asset items. The most significant change for the company is that when solvency is calculated the technical provisions will be differentiated from the policyholders’ insurance savings. This is because the technical provisions will be calculated as the present value of future cash flows and the prevailing market interest rate will be used instead of a fixed rate. In practice this will mean that the amount of technical provisions in the solvency calculations will fluctuate in line with changes in the interest rate. However, insurance savings will still increase by the technical interest rate laid down in the contract and also by the additional benefits given.

As a result of the changes described above, the prevailing interest rates no longer have the same impact on customer bonuses as before. In future, customer bonuses will be influenced more by how well the company has controlled the interest rate risk of its balance sheet and how successful it has been in its risk taking. The control system and the requirements it sets for the company’s solvency are described in greater detail in the risk management section of the financial statements.

Long-term liabilities

Life and pension insurance contracts are often made on a long-term basis. For this reason, Suomi Mutual’s liabilities are also on a long-term basis. In the 2006 annual report, diagrams were used to describe the estimated future trends of the company’s insurance portfolio. The company will be making similar reviews annually when planning its long-term operations.

The conclusions remain the same as in 2006:

• the company’s balance sheet and, consequently, the technical provisions will decline slowly
  
  
• the number of insured will, in relative terms, • decrease more rapidly even though they will still total almost 100,000 twenty years from now (at the moment the total is about 330,000)
  
  
• the amount of premiums written will drop fairly rapidly and in 3-4 years time it will be less than EUR 50 million (at the moment it stands at about EUR 75 million).

Forecasts of the trends concerning technical provisions and the balance sheet are used by the company in the planning of its investment operations. A run-off company must be able to match the duration of the investment periods with the expiry of its liabilities.

Based on forecasts, it is safe to say that the company’s run-off state will not generate a need to redirect investments in the near future. The company can for example allow its risk position and the market outlook to determine its investment allocation.