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Discount Rate Risk in Technical Provisions

Discount rate risk in technical provisions is the main risk affecting the adequacy of technical provisions. The guaranteed interest rate in policies is fixed for the whole policy period. Thus, if market interest rates and expected investment returns fall, technical provisions may have to be supplemented.

In most with-profit policies, the guaranteed interest rate is 3.5 per cent. In individual policies sold in Finland before 1999, the guaranteed interest rate is 4.5 per cent, which is also the statutory maximum discount rate of these policies. With respect to these policies, the maximum discount rate used when discounting technical provisions has been decreased to 3.5 per cent. As a result, technical provisions have been supplemented with EUR 86 million (EUR 95 million in year 2009). In addition, EUR 61 million has been reserved to lower the interest rate of with-profit liabilities to 2.5 per cent in 2011 and to 3.0 per cent in 2012. So due to relatively low market interest rates, Mandatum Life has increased liabilities in total by EUR 147 million.

The provisions related to each product type and guaranteed interest rates are shown in table "Analysis of the change in provisions before reinsurance, Mandatum Life, 2010". The table also shows the change in each category during 2010.

Analysis of the change in provisions before reinsurance, Mandatum Life, 2010

EURm

Liability 2009

Premiums Claims paid

Expense charges

Guaran-
teed interest

Bonuses

Other Liability 2010 Share %
Mandatum Life parent company
                 

Unit-linked total

2,258

786

-320

-36

0 0

288

2,977

40%

Individual pension insurance

646

93

-7

-12

0 0

109

829

11%

Individual life

1,032

197

-129

-11

0 0

89

1,178

16%

Capital redemption operations

398

454

-181

-9

0 0

66

729

10%

Group pension

183

42

-3

-4

0 0 23

241

3%











With-profit and others total

4,413

271

-436

-36

158 1 21

4,391

58%

Group pension

2,456

169

-186

-8

84 1 -15

2,500

33%

Guaranteed rate 3.5%

2,419

159

-184

-7

83 0 -12

2,458

33%

Guaranteed rate 2.5% or 0.0%

37 10

-2

-1

1 0 -3

42

1%

Individual pension insurance

1,383

34

-145

-8

61 0 -4

1,322

18%

Guaranteed rate 4.5%

1,202

24

-126

-7

55 0 -14

1,134

15%

Guaranteed rate 3.5%

150

7

-15

-1

5 0 8 154

2%

Guaranteed rate 2.5% or 0.0%

32

4

-4

0

1 0 2 34

0%

Individual life insurance

351

36

-53

-10 12 0 -2 335

4%

Guaranteed rate 4.5% 87 6

-10

-2 4 0 -2 83

1%

Guaranteed rate 3.5% 214 13

-34

-4 7 0 -1 195

3%

Guaranteed rate 2.5% or 0.0% 51 17

-9

-4 1 0 1 57

1%

Capital redemption operations

57 1

-37

0 1 0 0 21

0%

Guaranteed rate 3.5% 49 0

-34

0 1 0 0 15

0%

Guaranteed rate 2.5% or 0.0% 8 1

-3

0 0 0 0 6

0%

Future bonus reserves

18 0 0 0 0 0 -18 0

0%

Reserve for decreased discount rate

95 0 0 0 0 0 52 147

2%

Assumed reinsurance

3 2

-1

0 0 0 -1 3

0%

Other liabilities

49 30

-14

-11 1 0 9 64

1%

Mandatum Life parent company total

6,671

1,057

-756

-72 158 1 309

7,369

98%











Subsidiary SE Sampo Life Insurance Baltic 119 60

-26

-3 1 0 15 165

2 %

Unit-linked 100 58

-24

-3 0 0 15 147

2 %

Others 18 3

-2

-1 1 0 -1 18

0 %

Mandatum Life group total

6,790

1,117

-782

-75 159 1 323

7,534

100

 

Technical provisions related to with-profit policies still constitute a larger part of the total technical provisions compared to unit-linked policies. However, the amount of unit-linked technical provisions has been increasing whereas the amount of technical provisions related to with-profit policies has remained stable during the past years. Thus, the proportion of unit-linked technical provisions of total technical provisions is increasing. The development of the structure and amount of Mandatum Life's technical provisions is shown in the figure "Development of with-profit and unit-linked technical provisions, Mandatum Life, 2002-2010".

Table "Expected maturity of insurance and investment contracts before reinsurance, Mandatum Life, 31 Dec 2010" shows the expected maturity and duration of insurance and investment contracts of Mandatum Life. The sensitivity of technical provisions to changes in discount rates can be assessed on the basis of the durations shown in the table.

Expected maturity of insurance and investment contracts before reinsurance, Mandatum Life, 31 Dec 2010

EURm Duration 2011-2012 2013-2014 2015-2019 2020-2024 2025-2029 2030-2034 2035-
Mandatum Life parent company
               

Unit-linked total

8.1

555

424

800

522 375

257

363

Individual pension insurance

11.5

41

73

195

182 154

113

142

Individual life

5.2

363

216

322

145 81

47

39

Capital redemption operations

8.1

141

118

225

135 89

60

109

Group pension

13.1

10

18

58

61 50 37

72










With-profit and others total

8.6

1,129

868

1,644

1,156 833 582

946

Group pension

10.3

496

467

1,025

827 638 479

833

Guaranteed rate 3.5%

10.3

483

458

1,012

817 631 474

819

Guaranteed rate 2.5% or 0.0%

8.9

13

9

13

9 7 5

14

Individual pension insurance

6.4

334

323

498

274 160 81

82

Guaranteed rate 4.5%

6.4

290

283

435

238 135 66

66

Guaranteed rate 3.5%

7.0

35

33

53

30 21 13 12
Guaranteed rate 2.5% or 0.0%

6.9

8

7

9

6 4 2 4

Individual life insurance

5.3

143

58

92 41 27 17 28
Guaranteed rate 4,5 %

7.4

24

18

29 13 11 7 15

Guaranteed rate 3.5%

4.2

105

29

42 19 11 7 10
Guaranteed rate 2.5% or 0.0%

5.9

14

11

21 9 4 3 3

Capital redemption operations

2.7

16

1

2 1 1 2 0
Guaranteed rate 3.5%

0.5

15

0

0 0 0 0 0

Guaranteed rate 2.5% or 0.0%

8.9 1

1

2 1 1 2 0

Future bonus reserves

1.0 0 0 0 0 0 0 0

Reserve for decreased discount rate

3.7

77 17 25 14 7 3 4

Assumed reinsurance

0.5

3

0

0 0 0 0 0

Other liabilities

0.8

60

2

2 0 0 0 0
Mandatum Life parent company total

8.4

1,684

1292

2,444

1,678

1,208

839

1,309










Subsidiary SE Sampo Life Insurance Baltic
35

15

41 29 12 19 33
Unit-linked
31

13

35 24 10 19 32
Other
4

2

6 5 2 1 1
Mandatum Life group total

 

1,720

1,306

2,485

1,707

1,220

859

1,342

 

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