Financial position and risks of supervised entities as at 31 December 2016: Financial sector stable, profitability burdened by low interest rates, digitalisation requires investment
According to end-December information released today by the Financial Supervisory Authority (FIN-FSA), the overall capital position of the Finnish banking and insurance sectors is strong.
‘The earnings performance of the sectors is burdened by the low level of interest rates, but also the investment required by digitalisation,’ says FIN-FSA Director General Anneli Tuominen. ‘Changes are required, but they cannot be at the cost of risk management,’ Director General Tuominen points out.
Slight weakening of profitability, but improvement in capital adequacy in the banking sector
Banking sector profitability weakened slightly, but capital adequacy was strong and continued to improve. Costs were increased by digitalisation development projects, and, at the same time, banks had to ensure the health of their basic systems.
The banking sector's total capital ratio as at 31 December 2016 was 23.9% (30 June 2016: 22.9%) and the Common Equity Tier 1 capital ratio was 21.7% (30 June2016: 20.9%).
Pension reform enables higher investment risk-taking
The solvency position of employee pension insurance companies strengthened towards the end of the year, as the level of investment return exceeded the return requirement. The solvency ratio was 28.6% (30 June 2016: 26.0%). Higher risk-taking was reflected as an increase in the solvency limit, to 14.8% (30 June 2016: 12.6%), the highest level in the current decade. The risk-based solvency position for the employee pension sector averaged 1.9 (30 June 2016: 2.0).
The beginning of 2017 saw the entry into force of a number of reforms to the earnings-related pension scheme. Of these, the transfer of equity risk increasingly to the joint liability of the scheme enables higher investment risk-taking.
Life and non-life insurance sector solvency positions good
The investment return for life and non-life insurance companies was good. New business on life insurance policies decreased significantly, due particularly to a decline in the sale of capital redemption contracts. Non-life insurance companies’ premium income has not grown since the start of 2015. This, in turn, is the result of tighter price competition and the entry onto the market of foreign service providers. The profitability of non-life insurance was at a record high.
Solvency positions remained good throughout the year in both the life and the non-life insurance sectors. All companies fulfilled both the minimum capital requirement and the solvency capital requirement.
Regulation of the sale of investment products will tighten in 2018
Regulation of the sale of investment products will tighten in many respects at the start of 2018 and will also be extended to cover the insurance sector. The changes will affect, for example, staff competence requirements, remuneration and the obligation to obtain information.
- Anneli Tuominen, Director General
- Jyri Helenius, Deputy Director General
- Samu Kurri, Head of Department, Institutional Supervision
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