Swedish insurers threatened with regulated dividend cuts

Dividends paid to investors in Swedish life and insurance companies could be cut by a new rule proposed by the Swedish Financial Supervisory Authority to guarantee savers’ future returns.

Finansinspektionen (FI) has proposed a discount rate “floor” to protect savers in insurance products. This is because the current low interest rate environment is effectively causing insurers to become sellers of shares in order to adhere to regulations.

“This proposal is intended to counteract insurance companies selling their shares short and buying interest-bearing assets. Otherwise, the companies’ actions risk creating a negative spiral of continued falling share prices and interest rates, which could further aggravate the situation. In the long run, there is a risk that insurance policy holders would receive smaller pensions,” FI said in its proposal.

“We would like to avoid short-sighted behaviour that could have consequences in the long run,” added Martin Andersson, director general of Finansinspektionen.

The discount rate floor, to last for one year, would be used by life insurance companies and occupational pension funds.

FI said that the current market conditions are “exceptional and difficult to predict”, which is why it “wishes to give insurance companies…the opportunity to calculate discount rates according to the current method, but based on the closing rates as of 31 May 2012.

According to the current regulatory framework the affected companies calculate the present value of their obligations to policy holders in accordance with a discount rate curve that is based on the relevant market rates. If the market rates fall, the value of the debt to the policy holders increases.

“Finansinspektionen would like to emphasise once again the importance of companies reviewing the fundamental problems with the guarantees given to customers that are difficult to fulfil in a situation with low interest rates,” the regulator added.

“The proposal is supplemented with a general guideline that the companies who have at some point during the period used the floor should be restrictive in paying dividends or making other distributions to their owners.”

The proposal will be put out for consultation on 11 June 2012.

FI’s move to provide exceptions to prevailing regulations mirrors action taken by UK regulator the Financial Services Authority in March 2003, when insurers were becoming forced sellers of shares after a prolonged equity bear market. The FSA sent a letter to insurance company heads, effectively allowing them respite from rules intended to ensure matching of assets with liabilities. The difference is that the FSA did not directly link dividend payments to investors with its proposal to reverse asset buying behaviour in the industry.

 

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