Management of disability risk by pension insurance companies

Pension insurance companies are instruments for the management of a public governance duty based on social security. When it joined the European Union, Finland negotiated an exemption to its Accession Treaty, based on which the Life Assurance Directive of the time (currently, the Solvency II Directive), is not applicable to pension insurance companies. This exemption is also based on the role of pension insurance as part of social security and the management of a public governance duty.

An employer in the private sector may arrange statutory pension insurance in its own pension foundation or fund, or by taking an insurance policy from a pension insurance company. Most employers have opted for a pension insurance company.

Competition among pension insurance companies

A key characteristic of the diversified pension system is competition between pension insurers. It is hoped that efficiency benefits will be achieved through competition. In pension insurance, however, the significance of competition is limited, since free competition is poorly suited to the social security nature of the activity and requirements concerning the administration of a public governance duty pose requirements for the content of the activity. Several characteristics of the pension system restrict competition. The insurance product is the same, and pension institutions are under an obligation to provide insurance. The operability of the system requires cooperation by pension institutions. Pension institutions in the private sector are responsible for each other’s bankruptcies. Due to the joint liability for bankruptcies, individual pension institutions are not allowed to take excessive risks deviating from the competition.

Competition between pension insurance companies has manifested itself in different forms, some of which have not been sound. “Competition” may have been focused, for example, on loans granted to the customer, their collateral – or the management of disability risk. All these elements of competition are characterised by a focus on, rather than the insurance product itself, another element that can be attached to it. In this case, the ultimate and sole task of the pension insurance company to be a provider of social security may be blurred.

Management of disability risk

The management of disability risk is allowed for pension insurance companies when it consists of the provision of advice and information, comparable to claims prevention. In this case, the management of disability risk must focus on customers based on their risks, and its objective must be the reduction of the disability risk for which the pension insurance company itself is responsible. For the purposes of management of disability risk, a fee is levied as part of the pension insurance premium whose amount is determined on common grounds. The amount of the fee sets a limit on the scope of these activities.

Disability risk management services were launched in the pension sector in the 1990s, when the industry sought to train medical doctors in key considerations related to disability pension decisions. As these services have become more extensive, their content in the light of activities allowed for pension insurance companies has fallen under scrutiny, i.e. whether the services provided by the companies remain within the boundaries allowed by regulation. Under competitive pressure, the activities have begun to take on forms that compete with companies providing services maintaining working capacity in the wellbeing sector. This has made it difficult to differentiate services provided by pension insurance companies from the general enhancement of working capacity.

Summary

Pension insurance is part of social security. Its nature as social security defines the activities of its providers and their boundaries – only the conduct of statutory pension insurance is allowed. The management of disability risk is permitted for pension insurance companies as part of risk management belonging to the insurance business. It may not amount to more than that, however. The activities in pension insurance companies must be related to their statutory duties and be subordinate to them.

A more detailed view on the FIN-FSA's policy line on the management of disability risk can be obtained by studying the supervision release 55/2019 (in Finnish) published on 28 October 2019.