Sweden’s Financial Supervisory Authority (FSA) has dropped plans to change its traffic light model for insurance companies and pension funds after criticism that this would impose additional capital requirements on those companies.
Insurers and pension funds would effectively have been required to hold a higher percentage of their assets in low-risk instruments such as government debt to hedge their regulatory interest-rate risk under the new model.
This would not only have restricted investment choice but could also have weakened liquidity in the corporate bond and mortgage bond markets, according to the industry.
The proposals had been sent out for consultation last October.
In announcing that the plans would be scrapped, the FSA said: “Changes to the model could thus have major consequences for companies’ asset allocation and may ultimately also be liable to affect Swedish capital market stability.”
The traffic-light model was first introduced in 2006, replacing statutory restrictions on investment within insurance company portfolios by a principles-based approach.
Its aim is to identify – by carrying out stress tests for equity, credit, interest rate, real estate and currency risks – companies whose capital buffer is highly exposed to financial risks.
The model also includes stress tests for underwriting risks such as longevity risk.
The tests assess whether insurers and pension funds can meet their pension promise obligation, with companies given an overall rating of ‘green’ (low risk) or ‘red’ (high risk). The ‘amber’ (medium risk) category was dropped some years ago because it was considered too ambiguous.
The FSA said it also identified a number of deficiencies in the existing model, not least because of continuing low interest rates.
© IPE International Publishers Ltd.
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