The company offers traditional life and pension insurance, unit-linked insurance and non-life insurance. A calculation rate is used to determine provisions and premiums. The highest calculation rate is set by Finanstilsynet (the Financial Supervisory Authority of Norway). This interest rate is often called the calculation rate, and is 2.5 per cent for new insurance contracts. The calculation rate is the annual guaranteed rate of return on policyholders' funds. In most unit-linked insurance products, policyholders bear the financial risk. Non-life insurance policies are products generating payments related to policyholders' life and health. These products are not subject to profit sharing and are repriced annually.
Group contracts
Under group defined-benefit pensions, pension payments are disbursed from an agreed age and until the death of the policyholder. It can also be agreed that the pension payments cease at a certain age. A defined-benefit pension may include a retirement pension, disability pension, spouse pension and children's pension. Group defined-benefit pensions follow the regulations for the insurance industry effective from 1 January 2008. This means that policyholders pay in advance an annual premium for interest rate risk, insurance risk and administration. The company is entitled to change the premium annually. Interest in excess of the guaranteed rate of return is awarded to policyholders in its entirety. If the interest is between 0 and the guaranteed rate of return, the company can use additional allocations to meet the guaranteed rate of return, otherwise the company must cover the deficit. A positive risk result may either be used to increase the risk equalisation fund or be distributed to the policyholders. No more than 50 per cent of annual profits may be allocated to the risk equalisation fund. The company must cover any remaining losses after the risk equalisation fund has been used. The administration result is allocated in its entirety to the company. For short term risk contracts, the risk result is transferred directly to the company.
When a member terminates a pension agreement or a pension agreement ends, he or she is entitled to a paid-up policy. Rights earned on the termination date are continued in paid-up policies. Paid-up policies have a separate profit model where a minimum of 80 per cent of profits are distributed to policyholders. Profits for distribution consist of the interest result and the risk result. The administration result is allocated in its entirety to the company.
Group association insurance is pension insurance taken out by associations for their members. Association insurance can comprise retirement pensions, disability pensions, spouse pensions and children pensions.
Individual contracts
Individual annuity and pension insurance policies are savings schemes whereby the company disburses monthly amounts up until the death of the policyholder, or until the policyholder reaches an agreed age. This usually comprises a retirement pension, disability pension, spouse pension and children's pension.
Individual endowment insurance policies are contracts whereby the company disburses an agreed amount upon the death of the policyholder or when the policyholder attains an agreed age. Individual endowment insurance may also include disability cover, which is a one-off benefit for permanent disability.
For individual contracts sold prior to 1 January 2008, the past profit-sharing scheme applies, which implies that the interest result, the risk result and the administration result are included in the profits to be distributed between policyholders and the company. No less than 65 per cent of annual profits must be distributed to policyholders. The new regulations apply to contracts sold as of 1 January 2008.
Contracts where policyholders bear the risk
Defined-contribution pensions are group pension schemes where the employees bear the financial risk. However, full or partial hedging of the paid amount can be bought upon retirement age.
Individual unit-linked insurance polices are endowment insurance policies or annuity insurance polices where policyholders bear the financial risk.
Other sectors
Group life insurance policies are death-risk insurance policies taken out by employers or associations for their employees or members and, where applicable, also for their spouses and children. The amount recoverable under the policy is disbursed upon the death of the policyholder. Group life insurance may also comprise disability cover, which is a one-off benefit for permanent disability.
Employer's liability insurance is a one-year risk product which companies link to their pension agreements. This may be corporate group life insurance or accident insurance. Occupational injury insurance is mandatory for all enterprises.
Specification of liabilities to policyholders recorded in
the balance sheet as at 31 December 2010 DnB NOR Group 1)
Group Annuity and Endow-
Private Public association pension ment Group life Non-life Total Total
Amounts in NOK million sector sector insurance insurance insurance insurance insurance 2010 2009 Premium reserve 112 560 28 289 3 860 33 517 11 915 352 0 190 493 180 731 Additional allocations 3 020 903 163 1 322 285 0 0 5 694 5 550 Securities adjustment reserve 1 527 391 56 462 147 9 0 2 591 1 306 Claims reserve 184 0 23 234 238 445 689 1 813 1 414 Premium fund 2 773 1 602 41 336 0 0 0 4 752 4 410 Pensioners' profit fund 9 0 0 0 0 0 0 9 2 Other technical reserves 0 0 0 0 0 0 199 199 143
Liabilities to policyholders 120 072 31 184 4 143 35 871 12 585 806 889 205 550 193 556
Unrealised gains on bonds held to maturity 2) 1 100 865
Group insurance schemes- Individual defined-benefit pensions pension savings
1) Refers only to Vital.
2) Unrealised gains on bonds held to maturity are not included in balance sheet values.
Insurance risk
Within life insurance, insurance risk is mainly related to the likelihood of death and disability.
Insurance risk in Vital Forsikring ASA is divided, in varying degrees, between policyholders and the company. With respect to the non-life insurance products employers' liability insurance and certain pure risk products, the company is exposed to insurance risk. For group pension agreements and new individual pension and endowment insurance products, the company's risk represents its obligation to cover a possible negative risk result. The company is credited up to 50 per cent of any positive risk result in the form of allocations to the risk equalisation fund. With respect to individual insurance policies sold prior to 1 January 2008, the risk result is included in profits for allocation to policyholders and the company, where the company is entitled to receive up to 35 per cent of annual profits.
Risk for Vital Forsikring ASA related to changes in mortality rates is twofold. With respect to mortality risk coverage (mainly spouse and children's pensions) lower mortality rates will give an improved risk result and a more limited need for provisions. For pensions that are currently payable, lower mortality rates will result in extended disbursement periods and thus require greater provisions. It will be possible to cover the required increase in reserves relating to insurance risk by future surpluses on investment results. Due to higher life expectancy, vital needs to strengthen recorded premium reserves within individual and group pension insurance.
During 2010, Vital Forsikring ASA strengthened its reserves for individual pension insurance by NOK 973 million to reflect an upward adjust- ment of life expectancy assumptions. The remaining required increase in reserves is NOK 770 million, which will be recorded over the coming two years. The escalation plan has been approved by Finanstilsynet.
The life insurance industry has also started a process to update life expectancy assumptions in the calculation base for premiums and reserves for group pension insurance. An updated calculation base for group pensions will be introduced in close dialogue with the authorities. Vital Forsikring ASA assumes that the increase in reserves primarily will be financed be future surpluses on investment result, subject to approval by Finanstilsynet.
Disability risk is more exposed to short-term changes. Allocations covering incurred, unsettled insurance claims are under continuous review. No further needs for strengthening existing provisions relating to disability pensions or other disability products have been identified. With respect to existing contracts, insurance risk is subject to continual review by analysing and monitoring risk results within each business sector. In addition, the company applies reinsurance as an instrument to reduce insurance risk. The company's current reinsurance contracts cover catastrophes and significant individual risks within group and individual insurance. The reinsurance agreements imply that Vital Forsikring ASA is responsible for risk up to a certain level while the reinsurer covers excess risk up to a maximum defined limit.
Note 18 Insurance risk (continued)
In order to reduce insurance risk exposure, it is mandatory that policyholders undergo a health check before entering into a contract for individual risk products. Individual health checks are also required under small-scale group schemes. In connection with the sale of disability pensions, policyholders are divided into risk categories based on a concrete risk assessment in each individual case.
Vital Forsikring ASA's operations are concentrated in Norway. In this market, the portfolio is well diversified and without any concentrations of risk in specific geographical areas or industries.
The risk result arises when empirical data for mortality, disability and exit risk deviate from the assumptions underlying the calculation base for premiums and provisions. When the risk result generates a surplus, the surplus can be allocated to the risk equalisation fund. The risk equalisation fund cannot exceed 150 per cent of the company's total risk premiums for the accounting year. If there is a deficit on the risk result, the risk equalisation fund can be used. The risk equalisation fund does not apply to risk contracts with a maximum term of one year, paid-up policies or individual contracts regulated by the former profit sharing rules.
Risk result Vital Forsikring ASA
Group Annuity and Endow-
Private Public association pension ment Other Total Total
Amounts in NOK million sector sector insurance insurance insurance sectors 2010 2009
Risk result
Risk result in 2010 *) 410 133 (24) (889) 178 (50) (242)
Risk result in 2009 252 25 4 (255) 77 (11) 92
Sensitivities - effect on risk result in 2010
5 per cent reduction in mortality rate (15) (8) 0 (9) 2 7 (22) 10 per cent increase in disability rate (126) (37) (2) (16) (6) (13) (199)
*) Of which: Mortality risk 35 25 32 9 53 (3) 151 223 Longevity risk (52) (24) (21) (86) 0 0 (183) (336)
Disability rate 423 72 7 (3) 28 (47) 481 382
Other 3 60 (43) (809) 97 0 (692) (177)
insurance - defined-benefit pensions Group life
pension savings Individual
The table shows the effect on the risk result for 2010 of given changes in empirical mortality or disability data. The cost of introducing a new calculation base for annuity, pension and group association insurance is recorded under “Other”.
Permanent changes in the calculation assumptions will require changes in premiums and provisions. With respect to group life insurance and individual policies sold after 1 January 2008, it will be possible to finance higher premium reserve requirements by the risk result for the year, or by current or future investment results. For individual contracts sold prior to 1 January 2008, rising premium reserve requirements can be financed by profits for allocation or future profits for allocation. The table below shows the effect of changes in key calculation assumptions on gross premium reserves.
Calculation assumptions Vital Forsikring ASA
Effect on gross
Amounts in NOK million Change in per cent premiumreserve Mortality -5 +1 836 Disability +10 +2 150