The insurance industry in the Nordic region

The industry in general
The Nordic insurance markets have a wide distribution of conventional insurance services such as motor, building, transport, workers’ compensation and personal accident insurance. Volume growth is largely in line with GDP plus the impact of price changes over time. Profitability fluctuates relative to claims expenses.

The Nordic market is characterised by direct sales of insurances to private and commercial customers. Large corporate customers are approached either directly by the insurer or through an insurance broker. Customer contacts are based on telephone sales, insurers, insurance brokers, bancassurance and, on a smaller scale, via the Internet.

The price of an insurance product is determined on the basis of estimated claims expenses, selling costs and administrative expenses, and the desired level of profitability.

The Nordic insurance industry generated aggregate estimated earned premiums of around DKK 140bn in 2008 and accounted for some 1.8% of the region’s total GDP. The market is characterised by a few large companies holding relatively large market shares compared with other countries. The four largest companies in each country thus accounted for a total market share of between 64% and 87%. As the large companies also work on a pan-Nordic scale, the four largest insurers account for a total market share of around 46% in the Nordic region. In 2008, the large companies of the Nordic insurance industry reported sustained good core earnings from their insurance operations, although they were adversely impacted by the financial market turmoil.

CHALLENGES

Insurance and economic downturn
The insurance industry is characterised by a robust underlying business because consumers and businesses buy peace of mind by agreement or because insurance is required by law.

An economic downturn will, however, generally mean weaker growth as car and real estate sales decline. Likewise, the number of commercial policies and workers’ compensation policies will be affected by cyclical trends. These factors are to some extent offset by ongoing price increases.

Historically, weaker economic activity has generally not had an adverse impact on claims due to the combined effect of more cautious behaviour, lower mileage and the possibility of cheaper claims procurement. Furthermore, prior periods of weak economic activity have only to a limited extent been characterised by unusual increases in the number of, for example, burglaries and fraudulent claims.

Competition in the Nordic insurance industry
All the large Nordic insurance groups focus on operating their insurance business in a profitable and financially healthy way, and for the industry as a whole the past few years have therefore represented a stable and profitable period. Competition can roughly be classified as price competition and ser-vice competition. Small insurers have in recent years chosen to apply lower prices as a means of attracting customers, while the large companies have focused on service and extended coverage. The competitive environment in each of the markets is described in more detail on page 17 in the section on The Nordic insurance markets.

Investment performance
All insurance companies have investment portfolios consisting of funds dedicated to payment of claims at a later date. Such portfolios are generally invested in equities, real estate and bonds, but some industry players have also chosen to invest portfolios in hedge funds and structured financial products. Interim reports published by the Nordic insurance companies in 2008 clearly demonstrated the adverse impact which losses on securities have on a company’s investment performance and capitalisation.

The poor investment performance and in many cases lower equity will in the years ahead force players with inadequate financial strength to increase their earnings from insurance operations considerably, which will mainly be from prices.

TrygVesta has no structured financial products or hedge funds, and the proportion of equities in the investment portfolio was reduced already in 2007 and early in 2008. Furthermore, the bond portfolio consists of liquid, ordinary bonds with an average maturity of two years. 

The Nordic labour markets
In the years up to 2008, the entire Nordic region was challenged by a shortage of labour, partly due to wage pressure and partly due to difficulties in attracting and retaining labour. However, 2008 marked a shift towards rising unemployment and, probably, lower rates of pay increases. In the longer term, however, businesses face a number of challenges with the large post-war generation retiring from the labour market and being replaced by the much smaller number of young people born in the 1980s and 1990s. This is one of the reasons why governments in the Nordic countries seek to increase the supply of labour, for example by enhancing integration and lifting employment rates among immigrants from non-Western countries. 

OPPORTUNITIES

Claims procurement
Recent years’ strong economic activity has increased claims expenses due to higher wages and higher costs of materials. The weaker economic activity in 2009 will probably improve procurement conditions for companies focusing on procurement management. For many suppliers, insurance companies are a stable and attractive business partner due to the steady procurement of goods and services in connection with claims. This applies especially in periods of slowing economic activity.

Private health care insurance
The market for private health care insurance has grown strongly in the Nordic region in recent years, and particularly in Denmark. The Nordic welfare model is well developed, but as far as health care is concerned, an increased strain on public hospitals and the desire for shorter treatment times have triggered a requirement for private treatment, and private health care insurance is one way to meet this. Growth exceeded 70% in 2008. The strong growth was attributable to an increasing number of companies offering health care insurance in their pay packages. TrygVesta expects the total market for health care insurance in Denmark to exceed one million policies in 2009. The Norwegian market for health care insurance is smaller than the Danish market due to the strong public focus on health and welfare. The market is nevertheless seeing healthy growth with policies being regarded as a supplement to the public system.

Climate change
Insurance companies are, naturally, greatly impacted by weather related claims. The climate has warmed in the Nordic region, and it is expected generally to become warmer, damper and windier, thereby likely to increase claims expenses. TrygVesta regularly assesses the risk of changed claims patterns in order to price policies such as building and house insurance correctly. However, climate change also presents opportunities as we can advise customers on how to prevent damage, and we adapt our coverage in order to reduce customers’ concerns.

Implementation of Solvency II
TrygVesta has in recent years prepared for the new EU Solvency II regime, which will impact the capital structure of insurance companies and impose stricter requirements with respect to risk management and risk control skills. TrygVesta has applied an internal capital model (ALM) since 2002 as the basis for calculating the individual solvency need, supplemented by qualitative assessments of selected risk scenarios from the Group’s in-house risk management environment. The Solvency II regime will require enhanced expertise and core competencies, thereby potentially leading to greater consolidation in the market due to smaller players’ need for and lack of resources to meet the new sophisticated requirements.