Solvency is at a record-high level
Varma’s solvency continued to develop favourably throughout the year and is at a record-high level measured in both euros and relative terms.
At the end of 2013, Varma’s solvency capital was EUR 9,140 million (7,716), or 31.6 (28.0) per cent of the technical provisions. Strong solvency upholds confidence in pension provision and, along with better investment returns, mitigates the most severe pressure to increase pension contributions. Strong solvency is a strategic choice for Varma.
Legislation on the solvency mechanism of earnings-related pension companies was amended as of the beginning of 2013, boosting the use of risk buffers, among other things. The legislative amendment did not substantially alter Varma’s solvency position.
Strong solvency capital acts as a risk buffer for investment activities and provides protection against volatility in the capital markets. 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. Solvency capital also includes the equalisation provision, which helps to carry insurance risks.
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. The insurance risk is also taken into account in the calculation of the solvency limit. Varma’s solvency limit at the end of 2013 was 14.5 (11.8) per cent of the technical provisions, and the solvency capital’s ratio to the solvency limit was 2.2 (2.4).
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 and efficient operations, Varma has been paying very competitive client bonuses for many years.
An extensive reform of the regulations on assets covering the technical provisions and solvency is being prepared under the guidance of the Ministry of Social Affairs and Health. The reform could take effect at the beginning of 2016, at the earliest.