The sharp decline in the stock market that occurred in 2000-2002 and the subsequent drop in interest rates weakened companies' financial strength. Many companies saw a substantial decrease in their margin for risk taking when their risk-bearing capital was eroded.
To avoid a similar situation arising in the future, Finansinspektionen needed to work more preventatively. Following the occupational pension directive, general regulations were implemented so that FI in the future could identify companies that take more risk than their capital can bear.
This method of identification reduces the risk of companies needing to limit risktaking after a price decline in asset markets. In order to work preventatively, different types of systems are needed to identify at an early stage the companies that require closer investigation. A central part of the new supervision is the traffic-light model.
FI developed the traffic light model during 2005 to measure financial risks and the model was tested on life insurance companies and occupational pension funds the following year. During the test trials, companies holding less than one per cent of the industry’s assets received a red light.
In the spring of 2006, FI developed a technique to measure insurance risks within non-life insurance and during the fall of the same year FI could also measure insurance risks within life insurance, including sickness insurance and non-life annuities. The new methodology was tested on two volunteer reference groups consisting of eight non-life insurance companies and seven life insurance companies.
FI submitted complete traffic light model for review in November 2006. The model referred to life insurance and non-life insurance and included financial risks, insurance risks and expense risks. Companies had no major objections and their feedback was primarily related to details in how the risk calculations were designed.
FI has examined the test results and to a certain extent the feedback when designing the version that was presented on 6 March 2007.
