At the very end of its term, the previous Parliament adopted amendments to the Insurance Companies Act and certain related acts (Statutes of Finland 303–314/2015 and government proposal HE 344/2014 vp). These amendments implement the Directive on the Taking-up and Pursuit of the Business of Insurance and Reinsurance (Solvency II Directive (2009/138/EC)).
The aim of the Directive is to harmonise the regulation of non-life insurance, life insurance and reinsurance undertakings at the Community level and to increase transparency and stability in the insurance sector.
The amendments will enter into force in accordance with an implementation law mostly on 1 January 2016. The Solvency II Directive was already partly implemented in Finland last year with a Finnish 'Solvency 1.5' package, which concerned, in particular, insurance company management systems.
New Definitions for Small Insurance Undertakings
New definitions are now being introduced in the Insurance Companies Act relating to, e.g. small insurance undertakings. The definition of a small insurance undertaking corresponds to the definition of undertakings excluded from the scope of Solvency II due to their size.
A small insurance undertaking means an undertaking that fulfils the following conditions:
- its premium income does not exceed EUR 5 million,
- the total of its technical provisions does not exceed EUR 25 million,
- its business does not include insurance or reinsurance activities covering classes 11–15 (liability insurances and credit and suretyship insurances) under certain restrictions, and
- its business does not include reinsurance operations exceeding certain limits laid down in the Act.
The point of departure that has been adopted in Finland is that, as a rule, all provisions of the Insurance Companies Act apply to small insurance undertakings in order to secure the interests of the insured persons, although the Solvency II Directive would even allow small insurance undertakings to operate without a licence.
However, the right of small insurance undertakings not to observe the detailed Commission Regulation complementary to the Solvency II Directive and the technical standards was introduced in the Act to the extent that the provisions of the Regulation regard the provisions on the governance system or the disclosure of information laid down in the Insurance Companies Act. Special rules on the equalisation provision for small insurance undertakings were also introduced.
New Solvency Rules
The prudential requirements of the Insurance Companies Act currently in force will be replaced by new rules compliant with the Solvency II Directive. Two capital requirements are laid down for insurance undertakings: the prudential capital requirement and the minimum capital requirement. In the calculation of capital requirements, all substantial risks to the insurance undertaking are taken into account, the observation period being 12 months. An insurance company shall fulfil the capital requirements laid down in the new legislation with its own assets of a sufficient quality.
It is considered that falling short of the minimum capital requirement calculated in accordance with the legislation would seriously compromise insured interests. As a result, an insurance company failing to fulfil this requirement will be obligated to draw up a recovery plan and financing scheme. It will also be subject to coercive measures by authorities, such as a restraint on alienation and a negative pledge ordered by the Financial Supervisory Authority.
Changes to Equalisation Provision
The equalisation provision rules for insurance companies will change considerably. The equalisation provision has been used in Finland to prepare for years with a high damage rate and to even out variation between years. It has constituted a significant part of the capital adequacy of non-life insurance companies. The equalisation provision will be maintained in the new legislation, but it has been amended to correspond to the requirements laid down in the Solvency II Directive.
The equalisation provision will no longer apply to life assurance companies. As regards non-life insurance companies, a target amount for the equalisation provision will be set in proportion to the risks of the insurance business. There will also be a maximum amount for the equalisation provision, equal to four times the target amount. The current equalisation provision of a life assurance company and the amount exceeding the maximum amount of the equalisation provision of a non-life insurance company must be dissolved in accordance with a plan to be drawn up separately by 2026.
Changes to Supervision of Insurance Companies
The provisions concerning the supervision of insurance companies were also amended. For instance, the new legislation clarifies the general principles on which the Financial Supervisory Authority focuses while carrying out its supervisory activities. In terms of principle, the most significant change concerns the possibility to lay down additional own funds, in other words to raise the prudential requirement of an insurance company. In accordance with the amended Act, the Financial Supervisory Authority may, in exceptional cases, confirm an increased prudential requirement for an insurance company. In addition, the provisions on the supervision of an insurance group pursuant to Solvency II have been introduced in the Act.
Public Disclosure of Solvency and Financial Position
Finally, another important amendment to the Insurance Companies Act will be the insertion of a new chapter on the public disclosure of information concerning insurance undertakings' solvency and financial condition. In accordance with the revised law, insurance undertakings are required to disclose publicly, on an annual basis, a report on their solvency and financial condition. A public disclosure is also required in the event of any major development affecting the operation of the company.
Run-Off Companies Given Chance to Remain Outside Solvency II
An insurance company that has stopped granting new insurances and entered run-off by 1 January 2016 can observe the provisions of the previous law, provided that it has submitted a notification to the Financial Supervisory Authority, if the company administers its existing portfolio in order to terminate its activity by 31 December 2018 or is in liquidation and the liquidator has been nominated.