Varma - Annual Report 2012

Solvency strengthened considerably

Varma's solvency strengthened clearly throughout the year and is at a strong level. The legislative amendment that took effect at the beginning of 2013 did not have any major effect on our solvency position.

Good investment years accumulate strong solvency capital, which protects us against volatility in the capital markets. Varma's solvency and return on investments developed consistently throughout 2012, despite the economic uncertainties. At the end of 2012, Varma's solvency capital was EUR 7,716 million (6,520), or 28.0 (24.8) per cent of the technical provisions.


The broad diversification of our investment portfolio and a careful approach to risk management protected our solvency against market fluctuations. Solvency strengthened mainly due to the steady development in the investment markets.

Solvency capital acts as a risk buffer for investment activities, especially during an unstable economic situation. Good investment returns always necessitate risk taking, and the higher the returns we receive on earnings-related pension investments, the smaller the required increases in pension contributions will be in future. One percentage point more in investment returns in the long term means a two-percentage-point drop in pension contribution level.

Strong solvency protects against market fluctuations

Solvency capital is strengthened during profitable investment years and, correspondingly, weakened during poor economic periods. Strong solvency enables Varma to aim for higher returns by making higher-risk investments with a higher return potential. The higher the risk of investments, the greater the amount of solvency capital required.


The statutory requirements on solvency capital are dimensioned so that solvency capital will be sufficient also during lean economic periods. The key requirement is the solvency limit, which is based on the risk level of investments. Varma's solvency limit at the end of 2012 was 11.8 (9.9) per cent of the technical provisions, and the solvency capital's ratio to the solvency limit was 2.4 (2.5).

Solvency also has an effect on the amount of client bonuses. In other words, a higher degree of solvency means lower insurance contributions for customers. Owing to its strong solvency capital, Varma has been paying the most competitive client bonuses in the sector for years.

Legislative amendment boosts investment and insurance risk management

At the onset of the financial crisis in the autumn of 2008, the Finnish Parliament amended the solvency regulations so that earnings-related pension companies did not have to sell their holdings in Finnish listed companies in an unfavourable market situation due to the inflexible regulations.

The amendment helped to increase solvency capital and eased the solvency requirements. The temporary Act was extended until the end of 2012, which has secured the operation of earnings-related pension companies during investment market fluctuations following the financial crisis.

Legislation on the solvency mechanism of earnings-related pension companies was amended as of the beginning of 2013 with the aim of boosting the use of risk buffers, among other things. The new law combines the old solvency capital and equalisation provision to form the new solvency capital. The calculation of the solvency limit will be adjusted to take into consideration both the investment risk and the insurance risk. So far, earnings-related pension companies' insurance risks and investment risks have been examined exclusive of one another, and have thus also had separate minimum requirements. As a result of the new regulation, together they form a more efficient risk buffer.

The legislative amendment does not substantially alter Varma's solvency position.


The working groups, set up by the Ministry of Social Affairs and Health, continue their work aimed at the overall reform of the regulation on assets covering the technical provisions and solvency. The reform can take effect at the beginning of 2016, at the earliest.