The global economy is still quite uncertain, despite the occasional whiff of brighter news here and there. On a larger scale, there has been no turn for the better so far, and the general interest rate level has remained low. In its review last spring, the IMF warned about the potential threat posed by low interest rates and the challenges put forward by the forthcoming Solvency II regulation to European life insurers.

The EU’s Solvency II directive, scheduled to take effect at the turn of 2016, introduces a common approach to prudential regulation and modernises the existing regime, with a view to introducing clearer and more consistent protection for policyholders. In short, the regulation hones in on European insurers, their understanding and management of risk, and their resilience to any sudden shocks in the market.

Recognising that insurance firms have an important part to play in quantifying and managing risks for both businesses and individuals, the Solvency II requirements acknowledge that the sector must be made to withstand market volatility if it’s to serve its purpose. Cited often as a ‘Basel for insurers’, the regulation does for the insurance sector what Basel II did for banking and highlights the risk of insolvency.

The insurance industry in Finland boasts one of the highest penetration rates of all the EU member states, and local players account for much of its make up

The most often-cited part of the directive is that which stipulates firms must set aside enough capital to cover any insurance claims they’re likely to receive, though the regulation extends to matters of governance, risk management and disclosure also.

Finnish flair
Unlike a great many other European countries, life insurance companies in Finland have focused on preparing for the tightening of regulation and the lowering of interest rates in good time. Nordea Life has succeeded in this.

For Nordea Life, this has come in the form of strengthening the capital structure, by focusing on unit link and pure risk insurance business, and seeking sensible alternatives to products with guaranteed savings together with the customers. The insurance industry in Finland boasts one of the highest penetration rates of all the EU member states, and local players account for much of its make up. Where regulation and economic uncertainty have limited the capacity of European insurers to realise much in the way of growth, Finland’s own insurance companies have performed favourably, and are well positioned to capitalise on the forthcoming Solvency II requirements.

Nordea Life’s solvency ratio, for example, is nearly ten-fold that of the minimum required at present. The company’s balance sheet structure, in which over 80 percent of the insurance savings are unit-linked (see Fig. 1), sets excellent preconditions for solvency to be good under the regulation, which comes into force at the beginning of 2016. Unlike a number of other Finnish companies in the sector, Nordea Life has no need to apply for an exemption from the local financial supervisory authority, enabled by the transition provisions in the migration to the Solvency II calculation.

Early preparations for the low interest rate level and the forthcoming solvency regulation have allowed Nordea Life to optimise its capital efficiency, ensuring the interests of the insured without having to make allowances to the profitability targets set for the company.

At this stage, a few months ahead of the start of the Solvency II regulation, Nordea Life awaits the new regulation with calm and confidence. The company’s solvency will be ready for the new era, continuing its strong performance in the new regulation.

Continuous improvement
At the beginning of 2013, Nordea Life launched a strategy project to run until 2016. The vision of the ongoing strategy period is to be the most nimble and modern Finnish life insurer out there. Its mission is to be a cost-efficient life insurer that generates great customer experiences. The ambition is to create a platform for future profitable and sustainable growth, to increase process automation and thereby improve the company’s already impressive cost structure in order to meet the provisions set by the forthcoming Solvency II regulation.

This new process-driven operating model, focused on continuous improvement, has also been implemented and systematically advanced as a core factor of the Nordea Life strategy.

As part of the new operating model, a quality system was created for the company. It received well-deserved recognition when Nordea Life was awarded the ISO9001 quality certificate, becoming the first Finnish (and European) life insurer to achieve this feat. Lloyd’s Register Quality Assurance performed the quality audit in June 2015.

The strategic targets set for the company are based on the following four main themes: profitable products that sell well; selected segments and satisfied customers; automated, sound and efficient processes; and controlled operating costs.

The purpose of the strategic theme, focused on profitable products, has been to invest in product and service structures that seamlessly suit the bancassurance service model. This has required not only continuous R&D and the simplification of products, but also the letting go of those business models that Nordea Life chose to discontinue in view of its profitability targets.

Thus, for example, unit-linked capital redemption plans’ offering has also fulfilled the customer need of voluntary pension insurance policies that the company ceased to sell after 2012 due to new to regulation affecting heavily on the market. Moreover, the company has no longer a sales network of its own, as it now focuses on bancassurance only.

On the second point, maintaining a profitable and high-quality product structure has also required inputs into customer segments that fit neatly into Nordea Bank Finland’s core business operations. As part of this work, the company has sold its business operations in the Baltics and in Sweden so as to allow the provision of local services for these customers.

Furthermore the company has also sold its group pension insurance business to another Finnish actor, to which this type of insurance is part of its core business. The technical provisions of these assigned operations amounted to approximately €2.2bn ($2.49bn), accounting for about 18 percent of the company’s total technical provisions. These measures have allowed a continuous focus on the satisfaction of the customer segments that are important for Nordea Life.

Third, the continuous growth of customer volumes and the orientation of customer behaviour towards digital services has asked that we raise the degree of automation without compromising the high quality of the services. The development and continuous improvement of the processes has been a focus area aimed at improving customer experiences during the entire life span of the customer relationship.

Reform and restructure
Last year, some of the company’s operations were restructured. For instance, IT operations were outsourced to Nordea Bank Finland, a company belonging to the Nordea Group. One of the most important projects during the current strategy period, in view of the realisation of Nordea Life’s targets, has been the transfer towards one core insurance system at the beginning of 2016. Once implemented, this system will guarantee the company an important benefit of swiftness, as the changes required by external regulation will need to be taken into one IT-system only. This again will not only ensure rapid implementation, but also cost-efficiency and high quality that will show for the customers.

In terms of controlled operating costs, due to a prolonged stint of uncertainty in the global economy and the low level of interest rates, combined with the forthcoming Solvency II regulation, one of the company’s key themes has been to maintain a stable cost level (see Fig. 2). This has been possible through continuous improvement, the rationalisation of operations and the synergy benefits brought by one single core insurance system.

As the strategy period draws to its end, it can be said that the four themes described above have enabled Nordea Life to reform itself and become the most modern life insurer in Finland. Nordea Life’s mission is to create great customer experiences, operating as one team and utilising the top expertise of its employees. In Nordea Life’s view, only a committed workforce working with a spirit of solidarity is ready to strive for great customer experiences in a manner that distinguishes it positively from its competitors. Nordea Life will continue its work with more focus on pure risk life insurance and development of digital services, aiming to retain its position as the market leader in Finland.