SWEDEN - The Swedish Financial Supervisory Regulator has unveiled a revised proposal for its "traffic light" solvency tests for pension funds and life companies.
The new model only makes use of the “red” status, whereas previous models used two scenarios.
The regulator also made some changes to the stress tests and has put the new draft out for consultation.
Under the draft model released yesterday, equity risk is divided into Swedish and foreign equities. Insurance companies and occupational pension funds must be able to withstand a price fall of 40% for their Swedish equities and 35% for their foreign equities.
Real estate risk is measured in terms of a price fall of 35%, rather than of 40%, the exchange rate risk is measured in terms of a change of 10% rather than of 12%, as stated in Draft 2 and the real interest-rate risk is included in the model.
On the whole, it is estimated that the model now being circulated for comment is in line with the red scenario in Draft 2, but with a variation depending on the individual company’s/funds asset portfolio.
Comments on the proposal must be submitted by 27 October. The model will be finalised in mid November.
According to pension consultants, Soderberg & Partners, five Swedish life companies would be shown the 'red light' by the regulator if the new “traffic light'” solvency test had been introduced today.
The five affected companies are - according to the study - SPP Liv, Handelsbanken Liv, Nordea Liv, Salus Ansvar and SEB Trygg Liv.
However, Soderberg & Partners analyst Johan Lindquist said only two of the above companies are likely to officially be given the “red light” when the new model is introduced in 2006.
There are two companies who will get the red light anyway, that is SalusAnsvar Liv and SEB Trygg Liv Nya, because they have no risk capital at all, he said.
Lindquist said SPP Liv, Handelsbanken Liv and Nordea Liv are expected to receive capital injections from their parent companies if necessary, and also to change their asset allocations to avoid the 'red light'.
They can invest more in bonds with long duration and they can change their investments in the stock market from just normal stocks or equities to derivatives, he said.
The Swedish system is very tough on equity but easier on derivatives.
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