The NorwegiaN FiNaNcial iNdusTry 2012

contents

welcome to The Norwegian Financial industry 2012 4

status 5Europe hits Norwegian economy 6

Standing firm 8

Weaker life results 12

Profit despite bad weather 16

Topics 21The financial hub of society 22

The challenge of putting Solvency II into practice 24

Proposed new capital adequacy rules 26

The consequences of new technology 28

Adapting to a changing climate 30

New threats 32

Long-term collaborative process 33

Interesting times 34

The Norwegian Motor Insurers’ Bureau is there for you 36

Financial literacy among the young 38

Donations of NOK 4.1 billion in eight years 40

FNo 41This is Finance Norway 42

Department structure 43

Management structure 44

Committees and boards 45

Members of Finance Norway 46

CONTENTS

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welcome to The Norwegian Financial industry 2012

A strong, efficient and well-run industry

The Norwegian financial industry is strong, efficient and well-run. It is an essential part of the infrastructure of modern society and shares its destiny.

Accounting for around 2 per cent of employment and 6 per cent of mainland GDP, the Norwegian financial industry is a key contributor to society. It has also improved its productivity considerably in recent decades. Measured as value added per hour worked in fixed prices, produc-tivity in financial services increased by 150 per cent from 1990 to 2010, while productivity in the mainland economy as a whole grew by just over 45 per cent.

The Norwegian Business School’s research project “A knowledge-based Norway” singles out the financial industry as one of the most profitable in Norway, noting its impressive track record of growth over the past decade. Despite the financial crisis of 2008-09, growth in value added has been faster than in other industries over the past ten years, and employees, shareholders and government have all profited from this through higher wages, higher earnings and higher tax revenue.

lessons from the financial crisisThe financial crisis brought home to everyone how vulnerable society is when financial markets collapse. The crisis was triggered by the implosion of the subprime mortgage market in the USA, but the seeds of the crisis were sown by the considerable imbalances that had been allowed to build up in the global economy over a number of years, leading to a sharply increased supply of liquidity, low interest rates and the formation of bubbles.

The global financial crisis has now been followed by a sovereign debt crisis in a number of European countries. There is great uncertainty, and the consequences will be with us for a long

time. Norway has emerged stronger from the crisis than maybe any other Western economy, thanks to a favourable industrial structure, robust government finances, swift action from the authorities, strong financial institutions, and sound and comprehensive regulation and supervision. It is important to bear this in mind when drawing conclusions about the financial crisis.

When the crisis erupted, many countries had to pass the bill on to taxpayers, but not in Norway. The Norwegian state did not have to save any banks from going under or lose money on rescue operations. The financial industry was not a drain on the treasury during the financial crisis – quite the opposite. The state actually gained from the central bank’s swap arrangement, and the risk to the state was limited.

action for a better bond marketThe problems that did arise in Norway were not due primarily to the domestic situation but imported through our considerable dependence on global financial markets as a source of funding. Norwegian financial institutions had net foreign borrowings of NOK 1 160 billion at the end of the third quarter of 2011. Reducing this dependence on borrowing abroad will make an important contribution to strengthening financial stability in Norway. Among other things, Norway needs a larger, broader and more liquid bond market.

New rules and low ratesThe EU has been working for a number of years on a brand-new set of capital adequacy rules for insurers, Solvency II. Even under the new rules, the greatest underlying risk for life companies with long pension obligations will be whether they can generate the returns needed to pay guaranteed benefits. An

extended period of low interest rates could therefore prove problematic. This is a significant challenge for both the authorities and the industry which must be adequately addressed.

limited scope for unilateral rulesThere is considerable international competition in the financial industry, as the mix of players in the Norwegian market clearly shows. It is therefore crucial for Norwegian regulation to reflect the rules agreed internationally and the implementation timetable set by the EU. More exacting or pre-emptive changes in Norway would erode the competitiveness and market share of Norwegian players. Nordic harmonisation has to be seen as an absolute minimum.

The financial industry is the backbone for all economic activity, extending loans and credit, managing savings, executing payments and offloading risk. Overly heavy-handed or interventionist regulation of the industry could undermine the efficiency of the economic system, jeopardising the economy’s growth potential and, ultimately, employment. The degree of regulation of the industry must therefore be balanced against the need to sustain economic growth.

A misfiring financial industry would have serious consequences for households, businesses and others needing shelter from risk. It is crucial that the financial sector can continue to play its role as catalyst and growth engine for the economy, not least in these turbulent times.

Arne HyttnesManaging Director, Finance Norway

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STATUS

upswing in the Norwegian economy Activity in the Norwegian economy continued to grow in 2011. Mainland GDP, which excludes oil and shipping, increased by around 2½ per cent. Employment rose rapidly, and unemployment was stable at just over 3 per cent, which is very low by both historical and international standards. Household disposable income increased signifi cantly, due partly to low interest rates, higher employment and substantial real wage growth. Consumer spending however, disappointed with only relatively weak growth in 2011. Activity in the housing market was nevertheless high, with solid turnover and strong price growth.

Two-speed industry2011 brought solid growth in the business sector, but this is now expected to slow somewhat, and there are clear signs of divergence in industrial performance. While lower activity and falling prices are being reported particularly in export-oriented industries, there has been a marked increase in construction activity, fuelling strong growth in housing investment. Engineering, ship-building and rig- building companies have also been booming, especially those supplying the oil sector. Petroleum investment soared in 2011 and is now making a clear contribution to growth in the mainland economy.

great uncertainty internationallyThe global economy is wracked with uncertainty as a result of the debt crisis in Europe. Economic growth declined towards the end of the year, and the growth outlook has deteriorated. The coming years will see many countries having to rein in public expenditure, and households in some countries face high unemployment and low wage growth.

Especially anaemic growth is anticipated in the euro area, and the risk of a severe economic downturn in the region has increased. Other countries, including emerging markets, are being hit by the financial turmoil and weaker export demand. Weak growth and financial unrest have prompted highly expansionary monetary policy, and central bank rates in most industrialised countries are close to zero. Several central banks have also resorted to quantitative easing to bring down long-term interest rates and stimulate economic activity.

low interest rates here to stayThe Norwegian central bank, Norges Bank, has a target of annual consumer price inflation of approximately 2.5 per cent over time. The bank cut its key policy rate sharply in 2008 and 2009 to counter the negative effects of the financial crisis, taking it down to a record-low 1.25 per cent in June 2009. From late 2009 through to May 2011, it was gradually raised again by a total of 1 percentage point as the economy recovered. Due to the financial turmoil, higher risk premiums and a bleaker outlook for the global economy, the policy rate was then cut by half a point in December 2011 to 1.75 per cent, and it is expected to remain low.

low inflation, strong currencyInflation fell markedly in 2010 and remained low throughout 2011. Low inflation globally coupled with a strong Norwegian krone has led to falling import prices, and prices for domestically produced goods and services are rising very slowly due to limited cost pressure. Core inflation as measured by the CPIXE (consumer price index adjusted for tax changes and excluding temporary changes in energy prices) ranged from 0.8 to 1.6 per cent

in 2011 and stood at 1.2 per cent in February 2012.

The krone depreciated during the financial crisis but has since recovered to high levels. A strong krone undermines competitiveness and makes it harder for Norwegian companies to sell their goods abroad. A unilateral interest rate hike in Norway can result in a stronger krone, and so the scope for changes in Norwegian rates is heavily dependent on those of our trading partners.

strong employment growthEmployment fell markedly during the economic downturn that followed the financial crisis, decreasing by almost 50 000 people from the second half of 2008 to the beginning of 2010, but recovered strongly in 2011 to end the year higher than before the downturn. There was solid growth in both the private and public sectors, especially in construction and business services, and employment in manufacturing stopped falling.

Unemployment rose by roughly 1 percentage point from a low in 2008 to 3.5 per cent at the beginning of 2010, but has dropped back somewhat since and held at around 3¼ per cent of the labour force during the course of 2011. Global financial turmoil and weaker growth prospects in Norway’s export markets will probably lead to slightly higher unemployment ahead.

cautious consumersHousehold consumption grew weakly in 2011 after rising strongly in 2010. Lower consumption of electricity can explain part of the downturn, but consumption of other product groups was also weak. This came despite high real wage growth, low interest rates and low power prices.

Households are increasingly choosing to save rather than to spend, and the savings ratio has risen to high levels.

europe hits Norwegian economyActivity in Norway has held up well, thanks to low interest rates, a buoyant oil sector and strong population growth, but there are signs that weak global growth is now weighing on the Norwegian economy.

THE NORWEGIAN ECONOMY

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This has to be seen in the light of the uncertain economic times and growing pessimism among households. According to Finance Norway and TNS Gallup’s indicator, household sentiment declined during the course of 2011, but picked up somewhat in the first quarter of 2012.

high levels of activity House prices in Norway have risen markedly since the financial crisis and continued to climb in 2011, ending the year 8.5 per cent up on a year earlier. Demand for housing has outpaced supply in recent years, with low interest rates, strong income growth and high population growth leading to rapidly rising demand for housing.

Residential construction spent several years at very low levels, but housing starts picked up sharply in 2011, climbing 24 per cent from 2010. This upswing in home-building will promote a better balance between supply and demand in the housing market, but growth has slowed again in recent months.

debt growing fasterAfter bottoming out below 4 per cent in March 2010, debt growth accelerated gradually in 2010 and 2011. Twelve-month growth in gross domestic debt (C2) was 6.7 per cent in December 2011, up from 6.1 per cent a year earlier.

Growth in household debt is now above 7 per cent on a 12-month basis and at its highest since December 2008. The ratio of debt to disposable income

in the household sector is now high at more than 200 per cent. A growth rate in excess of 7 per cent means that debt is rising faster than disposable income, further increasing households’ debt burden.

Debt growth in the business sector is highly cyclical and fell sharply in the wake of the financial crisis. It picked up again from early 2010, but higher borrowing costs and more restrictive lending policies will probably put a damper on growth ahead.

solid growth in trade surplusBetter terms of trade have generated substantial income for Norway in recent years. This is because Norway is a net exporter of goods for which prices have risen sharply, including oil and gas, marine transport and metals. At the same time, an increase in imports from low-cost countries has brought markedly lower growth in prices for imported goods and services.

After peaking at close to NOK 450 billion in 2008, the trade surplus fell back in the aftermath of the financial crisis but has since recovered strongly to almost NOK 400 billion. The trade surplus depends mainly on developments in the global economy and oil prices, and will continue to grow if oil prices hold at their current high levels.

Fiscal policyNorway has very strong public finances thanks to its substantial revenue from North Sea oil, allowing the government

to be very flexible in its fiscal policy and step up public expenditure to counter downturns in the economy.

The government’s “fiscal rule” requires petroleum revenue to be phased into the Norwegian economy gradu-ally, roughly in line with the expected real return on the Government Pension Fund Global, estimated at 4 per cent. However, the rule permits the spending of petroleum revenue to be adjusted in line with the economic climate, with the result that it will typically move some-what above the 4 per cent path when times are tough and somewhat below it when the economy is thriving.

Thus the spending of petroleum revenue was taken well above 4 per cent to counter the effects of the financial crisis, and the government has moved towards a more neutral fiscal policy as the economy has recovered. A weakly expansionary budget has been presented for 2012.

The phasing in of petroleum revenue in line with the fiscal rule makes a major contribution to growth in the Norwegian economy, including in periods of extreme pressure on the economy. However, a substantial increase in expenditure is expected in future years due to an ageing population, and there have been calls for the fiscal rule to be revised so that petroleum revenue is phased into the Norwegian economy somewhat more slowly. n

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THE NORWEGIAN ECONOMY

Norway’s banks emerged from 2011 with a stronger capital position, even though earnings were somewhat down from 2010. A larger share of profits than usual was used to bolster equity, and some banks raised capital in the market. Banks are working on developing the market for covered bonds so that they are better equipped for future challenges, not least in terms of liquidity. Rapid technological advances are giving rise to expectations of further efficiency gains in payment services, tougher mortgage guidelines from the regulator, the Financial Supervisory Authority of Norway (Finanstilsynet), have attracted considerable attention, and there is great uncertainty about the taxation of the financial industry. The worry is that changes will be bigger and quicker in Norway than in the countries from which key competitors operate.

sovereign debt crisis and financial turmoil The sovereign debt crisis and a weak global growth outlook have led to considerable uncertainty in financial markets. Government bond yields have soared in countries with weak public finances and plummeted in those viewed as safe havens, such as Germany, the USA and Norway. Meanwhile risk premiums in the money market have risen sharply. Banks’ funding situation was challenging at times in 2011, and new loans are now attracting considerable risk premiums.

The sovereign debt crisis in the euro area has led to more expensive funding for banks in Norway as well. The interest rate a bank has to pay in the market depends partly on general money market rates and partly on the degree of risk associated with the bank. Changes in central bank rates will normally have a major influence on money market rates, but recently they have risen independently of Norges Bank’s

policy rate. Yields on Norwegian banks’ bonds, including covered bonds, have also climbed as a result of the financial turmoil. As banks gradually refinance their debt at these higher rates, their funding costs will rise.

Equity markets were hit by weaker growth prospects, nervous investors and considerable volatility in 2011, with prices falling sharply during the year. The S&P Global 1200 index, which includes around 70 per cent of the world’s stock markets, lost 5 per cent in 2011, while the Oslo Stock Exchange’s benchmark index fell by 12.5 per cent. Share prices have bounced back strongly in early 2012, however, and investors have become less nervous.

The bond marketThe importance of a well-developed and well-functioning bond market has become ever more apparent in the light of new capital adequacy rules for banks (CRD IV) and insurers (Solvency II). The national market for NOK-denominated bonds is currently limited in terms of both volumes and liquidity, but has strengths that suggest it has the potential to move in the right direction. Thanks to the country’s strong economy and public finances, both international and domestic investors generally have considerable confidence in the Norwegian market.

The bond market is of great importance to society, most notably as a source of capital for business. A sound and efficient bond market will additionally serve as a good benchmark for the pricing of credit for Norwegian industry. It is also important for financial stability that there is a bond market that can take the pressure off the banks if they need to cut back on lending without this leading to a sharp decrease in credit for the business sector. The more stringent new capital requirements for banks could have precisely this effect.

Covered bondsThere has been strong growth in the market for covered bonds in Norway since legislation in this area was introduced in 2007. More than 20 Norwegian mortgage companies have been set up and are active issuers of covered bonds, which are now the largest class of bonds in the Norwegian market, larger than the market for government bonds. All covered bonds issued in Norway are listed on the Oslo Stock Exchange or the alternative market Oslo ABM. In time, growth in this market may make covered bonds the benchmark for other fixed-income markets rather than the government bond market.

Banks and mortgage companies rely heavily on the bond market to fund their operations, because the proportion of loans financed through bank deposits is falling. The largest institutions borrow both in the domestic market and abroad. Since the financial crisis in 2008, the international market has been highly volatile and sometimes unavailable to private Norwegian issuers. This has increased the importance of having a large and liquid market in Norway.

The new liquidity standards being introduced for Norwegian financial institutions need to be met with particularly liquid securities, which are currently scarce in the Norwegian market. As banks’ operations are primarily based on the krone, they need krone liquidity. The covered bond market is not currently sufficiently liquid to satisfy the exacting requirements of CRD IV.

Developing the Norwegian covered bond market so that it can meet stringent new liquidity standards will be a major challenge, and important for Norwegian financial institutions’ ability to comply with CRD IV. Both market participants’ actions and the authorities’ implemen tation of the new rules will play a key role.

standing firm

BANKS

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Norway’s banks are standing firm despite the economic turmoil in Europe but have plenty of challenges ahead.

deposit guarantee schemeThe European Commission unveiled proposals for a revised Deposit Guarantee Scheme Directive in summer 2010. The directive is to be adopted using the co-decision procedure, which means that the European Parliament, Council of Ministers and European Commission must all agree on an identical text. Although there seems to be a consensus on the key features of the directive, there is still disagreement on some significant points, particularly concerning a number of financial matters and the timing of repayments.

From a Norwegian angle, the issue of whether the existing guarantee scheme covering deposits up to NOK 2 million can be retained is key. The authorities, backed by Finance Norway, have actively lobbied the various European bodies, but the outcome is still unclear. The Norwegian guarantee fund is significantly larger than that proposed by the EU, so an increase in minimum size would have no immediate consequences for Norway.

However, while the Commission is proposing a reduction in the payment deadline from 20 days to seven days, the Parliament is looking for a change to five days (with some exceptions), and the Council is sticking to the existing 20 days. In Norway, the Ministry of Finance has proposed, in line with the Financial Crisis Commission, that the payment deadline is set at seven days.

In a consultation response to the ministry, Finance Norway stressed

the importance of rapid repayment of guaranteed deposits but noted that the payment deadline should be harmonised with the new EU rules once they are finalised. The deadline should also be realistic, and the planned tests should be performed and evaluated before any decision is taken on a new deadline.

New mortgage guidelinesFinancial regulator Finanstilsynet published revised and more stringent guidelines for responsible mortgage lending practices on 1 December 2011. The key changes are as follows:

• The loan-to-value ratio (LTV) must not normally exceed 85 per cent of a property’s market value and must include all loans secured against the property.

• An LTV above 85 per cent requires additional collateral to be provided or a special assessment to be performed.

• Where the LTV exceeds 70 per cent, repayments of principal should be required from the first payment.

• The normal LTV for home equity loans has been lowered from 75 to 70 per cent of the property’s market value.

The revised guidelines are based on proposals from Finanstilsynet that encountered opposition from several quarters, and so the final decision took a relatively long time. Finance Norway argued strongly that more stringent guidelines will reduce the supply of credit and not the demand for credit.

Supply-side regulation of this kind has historically proven to be ill-suited as an instrument of economic policy, and tougher equity requirements will primarily affect first-time buyers who have good earning capacity but are unable to obtain additional collateral or equity elsewhere.

Housing cooperatives OBOS and NBBL and the construction industry were also critical of the changes, and the State Housing Bank and the Association of Local and Regional Authorities expressed concern over the inclusion of all loans in the recommended maximum LTV of 85 per cent, because this could affect starter loans from the State Housing Bank based on municipal credit ratings. These are important means of helping young and disadvantaged people to enter the housing market and are issued largely as a top-up loan together with ordinary bank loans.

Both a majority of the Parliamentary Finance Committee and the Minister of Finance have, however, stated that as long as bank and municipal credit ratings remain prudent, the changes to Finanstilsynet’s guidelines should not prevent the combined credit exceeding 85 per cent of the property’s market value as today.

Taxation of the financial industryThe national budget for 2012 revealed that the Ministry of Finance has embarked on an internal process to examine the Financial Crisis Commission’s proposals for new taxes

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and duties for the financial industry. The ministry’s analysis suggests that it would be possible both formally and practically to introduce an activity tax, and the design and consequences of such a tax are now being explored further.

The ministry is also considering whether it would be appropriate to introduce a stability duty in Norway, and whether such a duty would be well-suited to the role described by the Financial Crisis Commission, namely to correct a market imbalance, promote financial stability and help finance government intervention in a crisis scenario.

The financial industry’s view is that we must see the effects of ongoing regulatory initiatives and tax proposals in the EU before reaching any decision on new taxes for Norwegian financial institutions. The introduction of an activity tax would fuel uncertainty and impair the financial sector’s capacity to comply with the new requirements. The main challenge at present is to strengthen banks’ capital and liquidity. Additional taxation would lead to undue distortion of competition to the disadvantage of Norwegian banks and make it harder to meet the authorities’ expectations of an adequate supply of credit to prevent an excessive reduction in economic activity in a downturn.

card use growing BankAxept, the Norwegian banks’ national system for card payments, is owned and managed by Finance Norway. The individual banks compete with each other to issue cards and process payments. Eight out of ten card payments in Norway use the BankAxept system. A total of 1.1 billion transactions were made through the system in 2011, with a total value of NOK 387 billion.

While the use of BankAxept is continuing to grow, international card networks such as Visa and Master-Card are gaining ground in Norway, probably because they often offer customer benefits such as interest-free credit, discounts on purchases and free insurance.

Fewer cash withdrawalsThe importance of cash as a means of payment for goods and services is waning as the use of cards increases, and the trend in recent years has been towards fewer cash withdrawals from ATMs and stores when we shop. Cash withdrawals have fallen by 37 per cent over the past decade from 232 million to 146 million a year. This is good news for society, as cash payments are generally more costly than electronic card payments.

Bankaxept goes chip-only Magnetic stripes ceased to be used for BankAxept transactions from 1 December 2011, and only smart cards with chips are now accepted. Chip technology increases security and helps maintain confidence in BankAxept as a secure payment solution. The transition from magnetic stripe to chip technology was made without any major problems for consumers, merchants, banks or terminal suppliers.

special users Some people are unable to open a bank account or obtain a payment card, generally because they lack the proof of identity required under money- laundering legislation.

Finance Norway has therefore drawn up interbank rules on BankAxept cards for special users. These cards can be issued only to those receiving statutory benefits from the Norwegian Labour and Welfare Administration or a local social welfare office, asylum seekers and refugees. The welfare office loads the payment card with the relevant amount of benefit and gives the card to the welfare recipient, who can use the card with a PIN in Norwegian cash machines and in-store terminals. The card can be topped up again by the welfare office, which remains the formal owner of the balance on the card.

The individual banks develop and market the actual payment cards on the basis of these rules.

Focus on stable operation BankAxept is an efficient payment system that delivers a large number of payments quickly, securely and stably at low cost. The importance of the BankAxept system for customers and society in general necessitates high standards of operational stability and effective contingency solutions at every stage of the transaction process, and so considerable resources are invested in safeguarding stability and security in the card system.

Downtime resulting in consequences for the general public is rare with the BankAxept system, this did happen at Easter 2011 when operational problems at one of the companies involved, prevented a large number of customers from using their cards. The incident showed that there was room for improvement in the infrastructure, and corrective action was quickly taken.

In the wake of these problems, Finanstilsynet has taken a close look at banks and operators in the card system and Finance Norway as owner and manager of the BankAxept system. In a circular to the banks, the regulator

has described the actions that it believes banks should take to avoid similar problems in the future. Finance Norway and Finanstilsynet have engaged in dialogue to ensure increased operational stability in the BankAxept system. One step taken by Finance Norway has been to start up a forum to promote coordination and communication between key players in the processing of BankAxept payments.

More than 3 million Bankids BankID is an electronic ID issued by banks in Norway to household and business customers. More than 2.7 million people have one or more BankIDs, and the total number of BankIDs issued passed the 3 million mark towards the end of 2011. Almost 70 per cent of the population over the age of 15 now has a BankID.

BankID is used by 130 banks for secure access to online banking and purchases of goods. It is also used by more than 200 businesses, public bodies and municipalities for secure identification and signing of contracts. The Brønnøysund Register Centre and the Norwegian Mapping Authority are among the largest users of BankID signing other than banks. Awareness of this feature is limited: a survey has shown that fewer than 30 per cent of managers in the business and public sectors know that BankID can be used to conclude legally binding contracts.

Bankid and id-porten In spring 2010 the Agency for Public Management and eGovernment (Difi) rejected BankID’s bid to be part of the ID-porten eID portal for the Norwegian public sector because message encryption services were not included in the product. Message encryption solutions are currently being explored so that BankID could be used in the portal. The public sector could see a sharp increase in electronic communication with the populace if BankID is accepted.

Bankid ever more mobile The number of customers with a mobile BankID solution, where the BankID is stored on their phone’s SIM card and can be used without a one-time code generator, more than trebled to 70 000 in 2011. DNB Bank, Skandiabanken and members of the Terra and SpareBank1 alliances now offer BankID for mobiles, and more banks and telecom operators have plans to launch the service.

2011 saw work start on the development of an app enabling customers to shop and log in using their BankID from tablets and smartphones with the iOS and Android operating

BANKS

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GOOD RESULTS FOR NORWEGIAN BANK GROUPSBanks’1 earnings fell from NOK 26.5 billion in 2010 to NOK 24.3 billion in 2011, or from 0.76 to 0.65 per cent of average total assets (ATA). The figures for 2010 were boosted by a substantial one-off gain from the merger of payment service providers Nordito (BBS and Teller) in Norway and PBS in Denmark to form Nets. Banks also reversed substantial provisions for AFP early retirement pensions following changes in the law. Allowing for these non-recurring effects, earnings were largely unchanged relative to ATA from 2010 to 2011.

SLIGHT DECREASE IN NET INTEREST INCOMEBanks’ net interest income fell slightly relative to ATA in 2011. Net interest income came to NOK 55.6 billion, or 1.49 per cent of ATA, compared with NOK 53.0 billion and 1.51 per cent in 2010. Banks were not required to make payments into the Norwegian Banks’ Guarantee Fund in 2011. Allowing for this, the drop in net interest income was somewhat larger.

LOW LOAN LOSSESLosses on loans and guarantees totalled NOK 6.9 billion in 2011, or 0.18 per cent of ATA, compared with NOK 6.3 billion and 0.18 per cent in 2010.

STABLE COSTSBanks’ costs have grown more slowly than ATA for a number of years. In 2011 operating costs totalled NOK 41.4 billion, or 1.11 per cent of ATA, compared with NOK 37.7 billion and 1.08 per cent in 2010. Note, however, that former AFP early retirement pension obligations were taken to income in 2010 without new provisions being calculated, leading to a substantial reduction in operating costs that year. Allowing for this, there was a slight decrease in costs relative to ATA in 2011.

SECURITIES AND FOREIGN EXCHANGEBanks recorded net gains on securities and foreign exchange of NOK 8.3 billion in 2011, or 0.22 per cent of ATA, compared with NOK 7.7 billion and 0.22 per cent in 2010. Other important sources of income for the banks are commission and other revenue from banking and payment services.

SOUND CAPITAL POSITIONBanks’ Tier 1 capital ratio (parent bank) was 11 per cent at the end of 2011, up from 10.7 per cent at the end of 2010, while the total capital ratio (parent bank) fell from 14.2 per cent at the end of 2010 to 13.6 per cent at the end of 2011.

STABLE DEPOSIT-TO-LOAN RATIODeposits are banks’ most important source of funding. Customer deposits at Norwegian banks increased by 7.6 per cent from 2010 to 2011, while the deposit-to-loan ratio for banks and mortgage companies was stable at 54 per cent.

1 Bank groups, i.e. banks and mortgage companies combined.

Source: Finanstilsynet

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systems. This can be expected to be very popular.

equal status Under Norwegian law, cash is the sole form of legal tender. This means that creditors, such as shops, are not allowed to refuse payment in notes and coins.

However, the bulk of payments in Norway are made from deposits in bank accounts, or electronic money. Along with three other organisations, Finance Norway asked the Ministry of Finance to explore the possibility of giving electronic money equal status with cash. Traders could then choose whether to accept both electronic money and cash or just one. This change in the law would have security and efficiency benefits for the individual merchant, employees and society in general.

The ministry has decided against such a review out of concern that equal status would undermine the predictability of cash and create problems for those unable to settle in other ways.

Norwegians are world leaders in the use of cards, and virtually all merchants have card payment terminals. Norway is therefore in the best possible position to become all but independent of cash in day-to-day life. A review could have shed light on the strengths and weak-nesses of giving electronic money and cash equal status.

e-bills through all online banksIf a consumer has an online account with more than one bank, the customer’s e-bills are viewable through all of these banks, and the customer can then choose from which bank to pay the bill.

Customers seem to be happy with this solution. If a customer changes bank, e-bills will also be viewable through the new online bank. However, the Data Inspectorate has stated that it is unclear who is the data controller for the purposes of the Personal Data Act when personal data are available through all of the customer’s online banks.

Finance Norway has drawn up new interbank rules for e-bills with clear requirements for informing consumers that their e-bills will be viewable through all of their online banks. The rules also clarify the issue of who is the data controller. In addition, Finance Norway has produced templates for online banking agreements where the terms and conditions for viewing through all online banks are clearly expressed, as well as templates for information that banks can publish on their websites. n

BANKS

Life insurers posted weaker results in 2011. Earnings for the year before distributions to policyholders and tax came to NOK 6 billion, according to The Financial Supervisory Authority of Norway, less than half the level in 2010. The decline was due to lower long-term interest rates during the year and falling stock markets, leading to a low return on life companies’ securities portfolios. Performance was, however, significantly better in the fourth quarter than in the third. The value-adjusted return, which excludes unrealised gains, fell from 6.8 per cent in 2010 to 2.8 per cent in 2011.

A substantial proportion of policy-holders’ funds at life companies have a guaranteed return. In order to fulfil this guarantee, buffer capital was significantly reduced during the year, falling by NOK 6 billion to NOK 43 billion, or 5 per cent of total assets, although levels varied considerably from company to company. The allocation to equities for policyholders’ funds fell from 17 per cent at the end of 2010 to 13 per cent at the end of 2011 through a combination of sell-offs and lower prices. “This limits companies’ risk from any further fall in share prices,” commented The Financial Supervisory Authority of Norway.

regulatory changes • Changes to the legislation on private

pensions came in during the year, allowing the flexible release of retire-ment pensions from the age of 62 in combination with the social security retirement pension and a private AFP early retirement pension and/or continued employment.

• A new AFP early retirement pension scheme for the private sector was introduced from 2011, designed as an add-on to the social security retire-ment pension without any offsetting of earnings. The Ministry of Finance is currently consulting on accounting

weaker life results

In addition, Europe’s new Solvency II rules will enter into force from 2013, with reporting due to start up in 2014. After a transition period, the new rules are expected to result in tougher capital requirements for Norwegian life insurers. Finance Norway submitted a consultation response on 6 January 2012.

Proposals for new rules for paid-up policies from the Banking Law Commission (report NOU 2012:3 “Paid-up policies and capital require-ments”) are currently out for consul-tation with a deadline for responses of 25 April 2012. The plan is to introduce new rules from 2013. In addition, the commission is exploring new rules for private occupational pensions, including new insurance-based products, and is expected to consider changes to private schemes in the light of the new disability scheme in the social security system. The Ministry of Labour is expected to put proposed changes to the disability scheme in public sector schemes out for consultation in spring 2012. It is also expected to publish a bill with new rules for public occupational pension schemes for those born from 1954 onwards by the end of this year.

resulTs By class oF BusiNess individual endowments This product is sensitive to movements in interest rates, and investments generally vary somewhat from year to year. The risk cover for death makes up the bulk of this class and was largely unchanged from 2010, but the figures suggest increased interest in the risk cover for disability in 2011. The number of invest-ments (new policies) grew by 15 per cent in 2011. Several players compete solely in the market for risk cover for death and disability, and these policies account for more than 30 per cent of gross premiums written in this class.

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for the new scheme, the deadline for responses passing on 16 February 2012.

• The rules for occupational pensions for those born before 1954 and AFP early retirement pensions in the public sector were aligned with the pension reform for 2011.

• The maximum guaranteed interest rate for life policies, which is set by The Financial Supervisory Authority of Norway, was lowered to 2.5 per cent for all policies written after 1 January 2011.

• Changes to the Investment Manage-ment Regulations for life insurers and pension funds entered into force on 1 January 2011, with further amend-ments coming in from 1 July 2011. These mainly concern the restrictions on investing in property through real estate investment trusts etc.

• The Financial Supervisory Authority of Norway presented proposals on 8 March 2011 for a number of changes to the Insurance Activity Act, includ-ing proposals for a new buffer fund.

• Finance Norway sent a letter to the Ministry of Finance on 13 April 2011 recommending various changes to the act.

• The Ministry of Finance consulted on report NOU 2011:8 on new financial legislation with a deadline of 30 September 2011. Finance Norway duly submitted a response.

• The Ministry of Finance introduced a rule change in December allowing companies to raise the limit for individual accumulation of supplementary provisions from 2 per cent to 3.5 per cent.

• The same month, Parliament approved rules for a new disability benefit in the social security system from 2015.

2011 brought weaker results and reduced buffer capital at life insurers due to the economic situation with low interest rates and turbulent stock markets.

LIFE INSURANCE

13

t

year 2011 2010 2009 2008 2007

iPa PeNsioNs

Life insurers 55 800 56 800 54 500 60 400 68 900

iPs PeNsioNs

Life insurers 1 300 900 500 100

Banks 700 700 700 700 700

Securities funds 2) 500 600 500 400 700

1) The IPS individual pension scheme was introduced from 2008, while new business under the IPA individual pension scheme was suspended in 2006. The table shows IPS and IPA pensions together for banks and securities funds from 20082) Securities fund management companies.

Source: Life insurers: Finance Norway’s “Provisional life statistics” for 2011 and 2010 and “Market shares – final figures and accounting statistics” for earlier years. Banks: Statistics Norway from 2006. Securities fund management companies: Norwegian Fund and Asset Management Association. Figures are rounded.

Total assets as at 31 december, iPa and iPs pensions 1)

NOK million

As an alternative to individual pensions, the self-employed can choose instead to save under the Defined-contribution Pensions Act with a higher premium ceiling, and this form of saving is included in the figures for group pensions.

group pensions More than a million Norwegians now have a defined-contribution pension. The number has grown every year since the Mandatory Occupational Pensions Act was passed in 2006.

Approximately 8 900 defined-contri-bution pensions were taken out in 2011, and these accounted for 94 per cent

of new private occupational pensions during the year.

There is still a trend in the private occupational pension market for defined-benefit schemes to convert to defined-contribution schemes. Around 300 000 people still have private defined-benefit pensions under the Company Pensions Act. Figures from Finance Norway show that 460 defined-benefit schemes converted in 2011, with around 15 000 people switching to defined contributions. This makes a total of around 3 860 schemes that have converted since 2002, not including schemes not covered by Finance Norway´s statistics. The conversion

process often means that employees who are already members of a defined-benefit scheme remain in a “closed” defined-benefit scheme, so it is mainly new recruits who join the new defined-contribution scheme.

Most defined-contribution schemes are supplied by life companies, although some are managed and administered by securities fund management companies and banks. However, a large proportion of sales are made through banks on behalf of the life companies responsible for the pensions.

Statistics from Finance Norway for defined-contribution schemes at life companies, banks and securities funds show that the proportion of schemes with contributions at the minimum permitted rate is falling. At the end of 2011, 68 per cent of schemes had contributions at the minimum rate, down from 76 per cent in 2008 when the statistics began. This may be because many companies converting their schemes introduce rates above the minimum requirement. The statistics also show that more than 7 per cent of schemes have contributions at the maximum permitted rate, compared with 6 per cent in 2008. Around 37 per cent of members have linked disability cover to their defined-contribution pension, and only 6 per cent of these qualify for paid-up benefits.

individual pensions The option of having individual pensions paid from the age of 62 through an increase in the payout period was introduced in 2011. This means, for example, that payments can be combined with early unlocking of the social security retirement pension, occupational pensions and AFP early retirement pensions.

There was a 40 per cent increase in assets in individual pension scheme from 2010 to 2011. Around 3 900 new pensions were taken out with life insurers, down 44 per cent on 2010. Gross premiums written fell by 7 per cent to NOK 223 million.

The relatively low level of individual pensions can be seen in the light of

asymmetrical tax rules, low premium ceilings and negative media coverage over a number of years. New rules on the taxation of pensioners also led to limited marketing of this product in 2011.

LIFE INSURANCE

14

t

year 2011 2010 2009 2008 2007

Life insurers 52 000 42 000 29 500 16 300 11 700

Banks 200 200 100 100 50

Securities funds* 12 500 9 800 1 400 800 600

* Securities fund management companies.

Source: Life insurers: Finance Norway’s “Provisional life statistics” for 2011 and 2010 and “Market shares – final figures and accounting statistics” for earlier years. Banks: Statistics Norway. Securities fund management companies: Norwegian Fund and Asset Management Association. Figures are rounded.

Total assets as at 31 december, defined-contribution schemes within the tax regulationsNOK million

year 2011 2010 2009 2008 2007

Total assets 904 000 852 200 742 200 694 400 737 800

- of which additional reserves 25 300 22 800 19 200 13 200 24 800

1) The introduction of new accounting regulations in 2008 means that comparative data for previous years cannot be provided 2) Premium income = gross premiums written + reserves transferred – reinsurance3) Benefits paid = gross benefits paid + changes in provisions + premium reserves transferred out – reinsurance

Source: The Financial Supervisory Authority of Norway for 2011, Finance Norway’s “Market shares – final figures and accounting statistics” for earlier years. The statistics cover only Norwegian life insurers. In previous reports, traditional life insurers and unit-linked companies were separated. The figures from Finance Norway include only Finance Norway’s members. Figures are rounded.

Balance sheet as at 31 december NOK million

year 2011 2010 2009 2008

Premium income 2) 85 100 78 000 70 300 75 100

Net return on policyholders’ funds 20 000 44 800 34 800 -7 500

Benefits paid 3) 54 000 50 300 44 200 62 700

Insurance-related operating expenses 5 800 5 600 5 500 5 600

Change in market value fluctuation reserves 9 400 -10 500 -4 500 -15 200

Earnings before distributions and tax 6 000 4 800 3 800 -1 600

results 1)

life insurersNOK million

year 2011 2010 2009 2008 2007

Equities, securities funds 36.6 39.4 29.8 28.5 43.6

Property 0.0 0.2 0.7 0.8 3.0

Loans 5.1 6.0 9.1 6.0 3.8

Bonds 55.5 50.6 56.7 58.5 39.3

- of which certificates 8.6 5.4 2.5 2.8 -

Bank deposits 2.4 2.8 2.7 4.1 4.8

Other 0.4 1.0 0.9 2.1 5.5

Source: Statistics Norway. The statistics cover all Norwegian life insurers. Units in bond and money market funds are included under equities and securities funds. Prior to 2008 the figures include own funds.

allocation of policyholders’ funds as at 31 december, percentage of total

LIFE INSURANCE

15

year 2011 2010 2009 2008 2007

individual endowments

Gross premiums due 8 500 8 700 8 800 7 000 14 500

Gross benefits paid 6 900 6 300 5 500 21 300 19 600

individual pensions

Gross premiums due 1 600 1 800 2 200 2 200 4 300

- of which IPA pensions 150 150 250 650 1 000

- of which IPS pensions 200 250 250 100 n.a.

Gross benefits paid 7 000 10 300 8 600 12 900 19 300

group life

Gross premiums due 3 600 3 500 3 500 3 400 3 300

Gross benefits paid 2 200 2 000 2 500 2 400 2 000

group pensions

Gross premiums due 58 500 53 400 48 300 53 300 45 000

Gross benefits paid 24 400 22 400 19 100 18 000 16 200

Source: Finance Norway’s “Provisional life statistics” for 2011 and 2010 and “Market shares – final figures and accounting statistics” for earlier years, and FinanceNorway’s benefits statistics. The statistics cover Finance Norway’s members, including branches of foreign companies and non-life insurers which sell life insurance.

Premiums and benefits, life productsNOK million

year 2011 2010 2009 2008 2007

Death 2 100 2 100 2 500 2 600 2 100

Insurance term expiry 900 900 800 1 000 1 000

Pensions, excl. disability pensions 22 600 21 000 18 500 17 400 16 300

Lump-sum disability benefits 1 000 900 1 100 1 100 1 100

Disability pensions 7 500 7 100 6 200 6 000 5 700

Surrenders 6 400 9 000 6 600 26 400 30 900

Total 40 500 41 100 35 700 54 500 57 100

Source: Finance Norway. The statistics cover Finance Norway’s members, including branches of foreign companies and non-life insurers which sell life insurance.

Benefits by causeNOK million

year 2011 2010 2009 2008 2007

Individual endowments 990 000 980 000 980 000 990 000 967 000

Group life (number of members) 2 300 000 2 500 000 2 600 000 2 600 000 2 841 000

individual pensions

Policies not in payment 860 000 840 000 860 000 707 000 604 000

Policies in payment 250 000 210 000 210 000 223 000 259 000

group pensions

Active members 2 800 000 2 600 000 2 400 000 1 615 000 1 555 000

Pensioners 1) 370 000 340 000 310 000 310 000 289 000

Active, withdrawn from group schemes (paid-up policies and pension capital certificates) 1 500 000 1 350 000 1 100 000 983 000 802 000

1) Prior to 2010 the number of pensioners is reported on this line.

Source: Finance Norway’s statistics “Number of policies and number of insured”. The statistics cover Finance Norway’s members, including branches of foreign companies and non-life insurers which sell life insurance. The figures for 2011 are provisional. Association insurance is included in the figures for individual pensions.

Number of life policies as at 31 december

Norwegian non-life insurers are estimated to have made a combined profit of NOK 7.6 billion in 2011, down almost NOK 3 billion on 2010. Investment income almost halved to NOK 4 billion, and bad weather at the end of the year brought an increase in claims.

The operating margin (operating profit relative to premium income) fell sharply from 2010 to 2011 due to lower investment income. Although investment income fell by almost 50 per cent in 2011, it was still a relatively good year compared to the disastrous year of 2008 when investment income was negative. Operating profit was in line with the average for the past five years but down almost 30 per cent on 2010.

The loss ratio also rose following a number of major natural disasters. The solvency margin (equity, contingency reserves and tax-free provisions relative to premium income) fell from 148.8 per cent in 2010 to 134.9 per cent in 2011, while equity fell from just over NOK 50 billion to around NOK 46 billion.

A number of adjustments were made to the calculation of technical provisions in 2011, with the abolition of administrative provisions and the inclusion of both expected direct and indirect claims handling costs in claims provisions. This led to somewhat increased claims expenses and a corresponding decrease in operating costs.

Premium income increased by 5 per cent and claims expenses by 7 per cent, pushing up the loss ratio from 71.4 per cent in 2010 to 72.9 per cent in 2011. While the cost ratio (costs relative to premium income) fell, the combined ratio (loss ratio plus cost ratio) still gained 0.8 percentage point.

The cost ratio has fallen over the past decade as a result of companies taking action to make their operations more efficient. Costs in non-life insurance are now down to around 20 per cent of premiums, compared to around 25 per cent in 2002. Had the cost ratio still been up at 25 per cent in 2011, costs would have been almost NOK 2.7 billion higher than they were. At the same time, premiums have not kept up with inflation due to stiff competition.

substantial natural disastersThere were a number of major natural disasters in Norway in 2011, the greatest being Storm Dagmar over the Christmas period, resulting in estimated claims of almost NOK 900 million. There were few large natural disasters in Norway in 2010, the biggest being the landslide in Lyngen with an estimated total cost close to NOK 30 million. Total payouts from the Natural Perils Pool for 2011 are estimated at NOK 1.9 billion. This does not include consequential losses relating to boats, cars and business interruption. The Natural Perils Pool does not cover infrastructure such as roads, power lines, fixed and mobile telephony networks, or damage to forests and agricultural land.

Storm Dagmar affected large parts of the country, most notably the western county of Møre og Romsdal, which accounted for about half of the almost 15 000 claims registered. Neighbouring Sogn og Fjordane accounted for almost 20 per cent of claims, and Østlandet in the southeast for 13-14 per cent.

There were also several other major events in 2011. These began with flooding in March/April, followed by more severe floods in June estimated to have cost more than NOK 200 million. There was further flooding at the end of July and again in August/September on the river Ålen in Trøndelag. Storm Berit also brought a storm surge in Nordland in November. One common denominator

for all of the floods in summer 2011 was an extreme amount of rain falling in a very short space of time.

Figure 1 on the following page shows total claims on the Natural Perils Pool from 1983 to 2011. It shows the importance of adjusting claims volumes for increases in asset values: adjusting for inflation alone has less of an effect than also allowing for the value of buildings and contents having risen faster than the consumer price index. This full adjustment gives an idea of just how large buildings and contents claims would have been had a storm as severe as that in 1992 hit in 2011. Other major events shown in the chart include the storm surge in the Oslo and Akershus area in 1987 and the storm in Nordland in 2000.

lower loss ratio2011 brought fewer water losses and lower fire claims than the cold winter of 2010, which saw heavy losses due to frost damage in the house, apartment and leisure home segments. Almost 75 per cent of premiums collected in 2011 went out again on claims, compared to around 90 per cent in 2010.

Numerous water losses Claims following water damage to private residences fell by 14 per cent in 2011 and fire claims by 7 per cent, but water claims were still 34 per cent up on 2009. Fire claims have traditionally accounted for the largest number of payouts on household policies, but water losses exceeded fire losses for the first time in 2010. Water claims totalled NOK 2.7 billion in 2010 and almost NOK 2.4 billion in 2011, while fire claims came to just under NOK 2.7 billion in 2010 and NOK 2.5 billion in 2011.

Profit despite bad weather Despite much bad weather and substantial water losses, Norwegian non-life insurers made a profit in 2011. Storm Dagmar caused extensive damage nationwide, especially in the southwest.

NON-LIFE INSURANCE

16

NON-LIFE INSURANCE

More fires, lower payoutsThe number of household fires rose by almost 17 per cent in 2011, but payouts on fire claims fell by almost 7 per cent. The higher number of fires was due to bad weather with numerous lightning strikes. Lightning strikes generally cause less damage than other types of fire, with the result that fire claims overall did not increase. Low number of break-insThe number of homes suffering break-ins and burglaries was down by around 5 per cent on 2010 and almost 8 per cent on 2009, and payouts fell in nominal terms from NOK 619 million in 2009 to NOK 490 million in 2011.

Water losses up, break-ins downFigure 2 shows the number of water losses and the number of home break-ins and burglaries from 1992 to 2011. Water claims were six times higher in 2010 and five times higher in 2011

than in 1992 (inflation-adjusted), while break-in claims were almost unchanged. The number of break-ins has trended downwards since 1992, with a small

peak in 2008, while the number of water losses has trended upwards, peaking in years with high levels of frost damage, such as 1996 and 2010.

chart 1: annual natural disaster payouts 1980-2011 (NoK million)

Nominal payouts CPI-adjusted payouts Value-adjusted payouts

Year

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*201

1

4 500

4 000

3 500

3 000

2 500

2 000

1 500

1 000

500

0

Water payouts Break-in payouts Water claims Break-in claims

chart 2: water losses and break-in losses

Year

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*201

1

7

6

5

4

3

2

1

0

- 120 000

- 100 000

- 80 000

- 60 000

- 40 000

- 20 000

- 0

Clai

ms

inde

x

Num

ber

of lo

sses

17

t

all buildings and contents insured against fire are automatically also insured against natural disasters under the terms of the Natural Perils insurance act. The scheme is administered by the Norwegian Natural Perils Pool, of which all Norwegian non-life insurers are members. The scheme provides compensation for losses caused by landslides, storms, floods, storm surges, earthquakes and volcanic eruptions.

statutory scheme The natural perils scheme is a statutory insurance scheme. all those taking out fire cover for buildings and contents are therefore also covered against natural perils. The upper limit for compensation for one natural disaster event is NoK 12.5 billion.

equal premiumrate for all The premium paid is the same whether you live in a high-rise in oslo or out in the wilds on the west coast. From January 2012 the natural perils premium is 0.07 per cent of the fire insurance premium.

The Norwegian Natural Perils Pool

commercial buildings claims still high Claims in commercial insurance came to 82 per cent of premium income in 2011, down from 90 per cent in 2010. Owners of large commercial and industrial buildings often have a high deductible on their policies, with the result that small losses are covered by the policy-holder rather than the insurer. These tend to include break-ins, burglaries and water damage. Out of total payouts of NOK 5.8 billion on commercial policies in 2011, fire claims accounted for NOK 3.3 billion, up 12 per cent from NOK 2.9 billion in 2010, while water claims fell from NOK 1.6 billion to NOK 1.1 billion. Water claims fell in almost every county in Norway, with the largest percentage decrease in Nordland.

Fire claims accounted for 57 per cent of commercial buildings payouts in 2011, and water claims for 20 per cent, down from 25 per cent in 2010. As in the residential sector, break-ins and burglaries have fallen markedly in recent years in the commercial sector, covering everything from shops to industrial buildings. These losses do not, however, account for a large proportion of overall claims, just 4 per cent in 2011. Payouts fell to around NOK 213 million in 2011, a drop of almost 40 per cent in two years, and the number of break-ins, burglaries and raids decreased by around 30 per cent during the same period due to better security, especially at shops selling valuable goods.

Better motor resultsTil tross for et stort salg av nye biler Despite high new car sales in 2011, motor claims fell by NOK 417 million to just over NOK 11.8 billion. The loss frequency (number of motor losses relative to number of vehicles insured) is just over 20 per cent over the course of a year, and fell from 22.7 per cent in 2010 to 22.1 per cent in 2011.

Sharp decrease in car theftThefts of and from cars are accounting for an ever smaller share of total claims due to better car security – for example, all new cars are now fitted with immobilisers. Theft accounted for just 3 per cent of the total payouts of NOK 11.8 billion on motor policies in 2011, compared with 8 per cent a decade ago. Back then 13-14 000 cars were stolen each year, compared with just over 6 500 in 2011, and there has been a similar reduction in thefts from cars, from roughly 20 000 a decade ago to 8 700 in 2011.

Glass claims stagnateWindscreen and other glass claims have been a growing problem, almost doubling over the past decade. Payouts in 2011 came to almost NOK 1.2 billion and 10 per cent of total motor claims, up from 2 per cent a decade ago. Part of the increase in the number of glass claims is due to more cars on the roads and so heavier traffic, with the result that stones thrown up are more likely to hit another vehicle. However, it is also a fact that some cars have had their windscreens repaired or replaced without a true insurance loss. Steps have been taken to deal with this, and there was a slight reduction in the number of glass claims from 2010 to 2011. This joint action by the motor industry

and the insurance industry via Finance Norway is expected to bring further reductions in glass claims going forward. Fewer personal injury claimsThe number of personal injury claims has fallen by around 25 per cent over the past decade, while payouts have increased slightly in inflation-adjusted terms. Growth appears to have stagnated since 2007-08, due partly to newer cars being safer than older ones. There was a relatively large increase in the period 2000-04, due partly to developments in case law and larger payouts for future expenses.

Estimated payouts (NOK million) CPI-adjusted payouts Number of claims

Payouts (NOK million) CPI-adjusted payouts Number of personal injuries

chart 3: Thefts of motor vehicles 2002-11

Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

700

600

500

400

300

200

100

0

- 18 000

- 16 000

- 14 000

- 12 000

- 10 000

- 8 000

- 6 000

- 4 000

- 2 000

- 0Pa

yout

s (N

OK

mill

ion)

chart 4: Personal injury claims on motor policies 2000-11

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

18 000

16 000

14 000

12 000

10 000

8 000

6 000

4 000

2 000

0

- 2 500

- 2 000

- 1 500

- 1 000

- 5 000

- 0

Num

ber

of p

erso

nal i

njur

ies

NON LIFE INSURANCE

18

t

Car Motorcycle House

Home contents Travel Boat Total

Fewer occupational injuriesBoth the number and size of occupational injury claims seem to have fallen somewhat in 2011. Adjusted for increases in the social security multiplier, premiums have fallen over the past five years, due mostly to increased competition but also to payouts not having grown as quickly as in the late 1990s.

Occupational injury claims take a long time to finalise. It can take time for an injury to be reported to the insurer, and it can take time to confirm the cause and assess the level of loss based on how permanent the injury proves to be.

The apparent reduction in occupational injury payouts may be due to a number of long-term factors, such as:

• Fewer workers in high-risk industries• Fewer smokers and so fewer cases of

COPD• Better health and safety initiative/ attempt/effort (EHS) at employers

The authorities have also taken numerous steps to reduce the number of people not working due to incapacity, such as the introduction of time-limited disability benefit in 2004 and the work assessment allowance from 2009.

higher travel claimsThe loss ratio for travel insurance is close to 70 per cent. Operating costs tend to be somewhat higher than for other types of private insurance because considerable support is often required to get the policyholder home.

Figure 5 shows travel claims from 2005 to 2011 adjusted to current prices using the consumer price index. It can be seen that claims due to theft and loss of luggage have fallen since 2008, while claims due to illness have rocketed since 2005. This is due to more elderly people travelling and many people visiting exotic destinations where the risk is higher. Claims due to illness accounted for 25 per cent of total payouts in 2005 and 44 per cent in 2011. Around 12 per cent of policyholders reported a claim in 2011, compared with a peak of around 16 per cent in 2008.

Market developmentsCompetition in non-life insurance remains fierce, and the number of players in the Norwegian market is rising. The four largest companies’ market share fell from 92 per cent in 2005 to 78 per cent in 2011, and the increase in competition pushed down the average premium for consumer

chart 5: Travel insurance claims 2005-11 NoK million (cPi-adjusted to 2011 money)

Year 2005 2006 2007 2008 2009 2010 2011

800

700

600

500

400

300

200

100

0

Travel accident Cancellation Theft/loss of luggage Holiday illness

NON LIFE INSURANCE

19

t

chart 6: average premiums written selected consumer segments

6 000

5 000

4 000

3 000

2 000

1 000

0 -05 -06 -06 -06 -06 -07 -07 -07 -07 -08 -08 -08 -08 -09 -09 -09 -09 -10 -10 -10 -10 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Year

Pric

e-ad

just

ed p

rem

ium

s

policies in real terms during this period. At the same time, premium levels will also be affected by developments in claims and changes in the value of the assets insured.

Figure 6 shows CPI-adjusted premiums for selected consumer

products. House insurance premiums have increased somewhat in recent years as a result of higher fire and water claims, and house prices have outpaced CPI inflation, which is also reflected in average premiums.

t Non-life insurance results

year NoK million 2011* 2010 2009 2008 2007 2006 2005 2004

results

Gross premiums written 61 780 59 407 58 852 57 589 52 955 51 561 49 566 47 760

Net premiums earned 54 863 52 320 50 500 49 348 44 665 43 170 40 145 37 994

Net claims incurred 39 982 37 351 36 816 35 121 32 035 29 453 27 382 25 622

Net investment income 4 003 7 721 8 950 -285 5 484 6 792 7 415 3 674

Net operating costs 11 050 10 867 11 529 11 146 9 708 9 779 9 267 8 655

Operating profit 7 582 10 579 9 671 1 907 4 035 9 035 7 708 2 546

Balance sheet

Premium and loss provisions 91 600 83 940 80 199 77 821 75 110 66 614 65 099 55 813

Contingency reserves 27 864 27 371 26 256 24 813 26 928 24 644 24 274 21 449

Other tax-free provisions **) 12 461 9 315 8 800 8 574 8 196

Equity capital 46 158 50 473 43 618 27 643 30 519 29 876 25 518 22 682

Key figures

Loss ratio, net 72.9 71.4 72.9 71.2 71.7 68.2 68.2 67.4

Cost ratio, net 20.1 20.8 22.8 22.6 21.7 22.7 23.1 22.8

Operating profit margin 13.8 20.2 19.2 3.9 9.0 20.9 19.2 6.7

Solvency margin 134.9 148.8 138.4 131.5 149.5 146.7 145.4 137.7

Provision ratio 167.0 160.4 158.8 157.7 168.2 154.3 162.2 146.9

Total assets 192 710 190 069 180 518 175 497 166 719 142 630 134 445 117 218

** Provisional figures ** Included in equity from 2009

NON LIFE INSURANCE

20

TOPICS

The iNdusTry has MoVed from the production of transactions to self-service and knowledge-intensive processes, from a domestic focus to a global horizon. Technological leadership, flexible employees and a capacity for development have made the financial industry what it is today. Through its central role in society, the industry has made a key contribution to the emergence of modern Norway.

The ultimate role of bankers and insurers is to provide financial security and freedom of action at every level. The industry manages critical infrastructure and so paves the way for the growth and development underlying our common welfare. It is the link between all economic actors in society when it comes to loans and credit, managing savings, executing payments, offloading risk and safe guarding lives and property. It is impossible to conceive of a well-functioning society without a well-functioning financial industry. Almost every one of us will be a bank customer and an insurance policyholder throughout our lives. Most of us would be unable to buy our own home without a bank behind us. Without non-life insurers, it would be hard to deal with the financial consequences of serious accidents. It would also be difficult to protect our income or safeguard our families financially without the help of life insurers. And similar arguments can be made for customer groups other than households. The financial industry is an essential cornerstone for the value added by others, and accounts for around 2 per cent of employment and 6 per cent of mainland GDP by itself. It makes a major contribution to society.

Besides delivering services, financial institutions nationwide contribute to local development through their expertise, involvement in local communities and donations to good causes, both directly and through their foundations. education The industry is more than just its core business. Both independently and through alliances with others, bankers and insurers are engaged in a wide range of social activities. Education is one.

Society has grown more and more complex with time. Our personal finances have become more complicated in the sense that there is much more to keep tabs on than before. The need for information is therefore greater. Modern financial institutions are knowledge organisations offering both basic and advanced products. When it comes to more straightforward services, customers can serve themselves; with more complex services, they need help.

Financial advice and advice on non-life insurance have been a priority for the financial industry in recent years. Standards have been introduced at industry level to ensure that the public benefits from relevant and documented expertise. The goal is customer satisfaction in line with the requirements the industry has set itself. The financial industry set up the AFR authorisation scheme for financial advisers and the approval scheme for sales representatives and advisers in non-life insurance back in 2009. As at 1 March 2012, 5 833 employees had been granted authorisation, and 11 non-life insurers had had their training systems approved. When it comes to the AFR scheme, the public

can see for themselves whether a particular adviser is authorised in the directory at www.autorisasjonsordningen.no.

To reinforce this work, the board of Finance Norway decided recently to coordinate the different schemes in the industry, including the three insurance authorisation programmes predating the AFR and GSR schemes. The idea is to make it easier for the public to navigate the different parts of the industry and under-stand the information provided.

The financial industry also supplies data to the Finansportalen website operated by the Consumer Council of Norway, which enables consumers to compare banking, investment and non-life insurance products and make informed choices.

Information is also being provided in other areas. Many financial institutions work actively with schools to teach children about personal finances and give them a solid foundation on which to build during adult life. Healthy personal finances are one of the keys to a happy life, but it can be difficult to take the first steps as an economically independent individual. The financial industry is therefore using its core expertise at schools, providing information and promoting responsible attitudes to money. Young Enterprise is an important partner for the financial industry in this area. As at 1 January 2012, more than 60 financial institutions stated that they have a formal alliance with one or more schools.

Working with schools is also about contributing to long-term local business development. Around 40 financial institutions are working with schools on enterprise programmes, offering advice and mentoring for pupils’ business initiatives.

The insurance industry, which knows more about accidents, losses and their causes than most, is also keen to share its knowledge. Work on general loss prevention, attitudes, road safety and fire safety is key given the fundamental premise that prevention is better than cure. The insurance industry has close relations with the Norwegian Fire Protection Association, the Norwegian Council for Road Safety, the Water Damage Office at

The financial hub of societyBy Marit Sagen Åstvedt

SOCIAL RESPONSIBILITY

22

Back in the mid-1980s a certain member of Finance Norway’s staff worked at a local savings bank. at that time the big new thing was paying for petrol at the pump using an aTM card. while we may chuckle at what now seems to be the dim and distant past, this example illustrates just how far the financial industry has come over the past quarter of a century.

Finansnæringens samfunnsansvar

Penger forplikter

SINTEF Building and Infrastructure, and the Norwegian Safety Forum. The aim is to ensure that people are insured as effectively as possible against accidents and losses.

Life insurance is a complex field for outsiders, which most of us are. Given that it is in the individual’s interest to be insured against loss of income during retirement or due to disability or the loss of a provider, for example, there is a need for extensive information. Norsk Pensjon is a non-commercial Internet portal which aims to give the public an overview of the individual’s rights under different pension schemes. Since starting up in 2008, the website has had a million visitors, and traffic grew by no less than 56 per cent from 2010 to 2011.

challenges aheadThe financial industry is a key player in society, and so the board of Finance Norway has decided to make social

responsibility an independent strategic focus area for the industry. The starting point for this work is the CSR guide Penger forplikter. Long-term, forward-looking, sustainable business requires active participation in the development of society. For the industry, this means investing in future competitiveness – and for the community, it means helping to overcome society’s challenges.

The financial industry is concerned about climate change and the environment. Work is under way on environmental certification, and some companies offer green products. Non-life insurers will be stepping up work on weather- and climate-related losses in 2012, first and foremost through a pilot project to make use of claims data on sewage back-up and surface water damage due to more intense precipitation. Networks are also being built, and considerable effort is being put into contributions to the Ministry of the

Environment’s work on its parliamentary report on adapting to a changing climate.

Responsible investment is another area being given high priority by many financial institutions. By signing up to international initiatives such as the UN Global Compact, these companies are undertaking to comply with international standards in areas such as the environment, human rights, labour rights and anticorruption.

The financial industry has evolved continuously over the past 25 years in order to fulfil its crucial role in society. Paying for petrol at the pump with a card has developed into one of the world’s most efficient payment systems. As the custodian of critical infrastructure, the industry will continue to be a driver for social development. Technological leadership, knowledge development and change will be key in the future too. n

The FiNaNcial iNdusTry Plays a Key role iN our liVes:

• 3.1millionNorwegiansovertheageof15arenow“theirownbankmanager” thanks to online banking solutions, virtually all of them logging in using their own

electronic ID – BankID.

• Non-lifeinsurershandleanaverageofalmost3500claimsaday.

•Morethan2millioncustomershavesavingsinequityfunds(NorwegianFundandAsset Management Association data for 2010)

• Eightoutof10peoplepaybycardwhentheyshop

• Lifecompaniesprovideoccupationalpensionsfor1.6millionworkers (1.2 million in the private sector and around 435 000 in the public sector)

• Pensionfundsalsosupplyoccupationalpensionstomorethan142000workers (69 000 in the private sector and 73 000 in the public sector)

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solVeNcy ii is a new EU directive which represents a fundamental overhaul of the supervision of the insurance industry. Norwegian pension contracts with long-term obligations and annual allocation of guaranteed returns and profits already present major challenges for insurers, thanks to today’s low interest rates and shortage of investment opportunities capable of providing adequate long-term returns. The introduction of Solvency II must not make it even harder to maintain a robust pension system.

New rules, new challengesOne of the greatest weaknesses of the current rules, Solvency I, is that a number of key risks – such as market risk, credit risk and operational risk – are not adequately captured. The lack of risk sensitivity in the rules means that companies do not have incentives to improve their risk management, and does not promote the optimal allocation of capital.

Solvency II brings a more risk-based, market-consistent approach to insurance supervision. The overall aim is to build a more proportional solvency framework where all risks are identified in such a way that the solvency capital requirements reflect the actual risk to which insurers are exposed. The new rules also bring a number of challenges that need to be addressed:

Tougher capital requirementsThe results of quantitative impact studies and stress tests have shown that capital requirements will be tougher under Solvency II than under the current regime. The Norwegian regulator Financial Supervisory Authority of Norway (Finanstilsynet) sees a particular need for life insurers to strengthen their capital position before Solvency II enters into force.

Tougher reporting requirementsThe introduction of Solvency II entails challenges not only in the form of increased capital requirements but also when it comes to internal processes, supervision and control. There will be extensive requirements for organisation and documentation, oversight and reporting.

The Solvency II rules also require all insurers to perform a regular Own Risk and Solvency Assessment (ORSA) at least annually. The idea is to identify and evaluate all risks to which the company is or may become exposed, and to assess the resultant need for capital. A company’s strategy and decisions are to build on the results of this process.

The need for a robust pension systemOne fundamental principle of the Solvency II rules is that both assets and liabilities are to be carried at market value in the balance sheet. This means that the present value of technical provisions will need to be calculated using the current risk-free interest rate rather than the guaranteed interest rate set by Finanstilsynet as is the case today. The value of technical provisions will therefore fluctuate with changes in market interest rates, and differences in interest rate sensitivity (duration) between the two sides of the balance sheet will trigger a capital requirement for interest rate risk.

For life insurers with long-term pension obligations, a logical adjustment to the capital requirements under Solvency II would be to invest in fixed-income securities with the same maturity as these obligations, so that the value of the latter moves in line with the former.

However, long-term investments of this kind are not compatible with current Norwegian life insurance rules, where the requirement of annual satisfaction of a return guarantee means that companies must invest in low-duration assets to avoid

large fluctuations in annual returns. There is therefore a need to adapt the current product and operating rules to Solvency II to obtain a pension system that is appropriate for all parties.

Finance Norway is working on alternative solutions in the form of changes to the rules on companies’ interest rate guarantees. One possibility is permitting more flexible accumulation and use of buffer capital, or changes to the product rules. For example, the rules could allow products where the annual interest rate guarantee is replaced with a final value guarantee that applies throughout the insurance term.

Long-term investment opportunitiesFor companies to be able to adjust their investments in line with their long-term pension obligations, they must also be able to invest in interest-sensitive assets with a sufficiently long duration. These assets must be denominated in Norwegian kroner to avoid a further capital requirement due to currency risk. Norway has only a small market in fixed-income securities issued by the public sector, so Norwegian insurers have limited scope to close the duration gap by investing in assets with low risk and high duration. Steps need to be taken to correct this imbalance.

Tailored to Norwegian conditionsThe methodology for calculating the risk-free interest rate curve used to value future insurance obligations will be the same for all currencies, but the parameters will vary from currency to currency due to differences in the breadth and depth of bond markets. It is important that the parameters for Norway take as much account as possible of the limitations of the Norwegian market for long-term fixed-income instruments, and Finance Norway has been actively lobbying for this for a number of years. The Ministry of Finance too noted the importance of this in its letter to Finanstilsynet of 21 December 2011.

The challenge of putting solvency ii into practiceBy Martin Carlén and Kari Mørk

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solvency ii has a lot going for it in theory, but its practical implementation may prove problematic.

National flexibility The scope for national adjustments to the rules for contracts entered into under the current life insurance and solvency rules is currently uncertain. Although Solvency II is, in principle, to be fully harmonised, it is important for the Norwegian authorities to explore whether there is still some room for manoeuvre, and to what extent this should be exploited to ease the challenges faced by the country’s insurers.

No ratings One further challenge presented by Solvency II is its potential impact on the supply of funding in the Norwegian capital market. The capital requirement for insurers’ investments in bonds, structured credit products and credit derivatives will depend partly on how the credit rating agencies rate the issuer’s creditworthiness, and unlike elsewhere in Europe most Norwegian savings banks do not have such a rating.

The absence of a rating means that bonds issued by these banks will trigger a higher solvency capital requirement for insurers, making them a less attractive investment. This, in turn, could give Norwegian savings banks problems sourcing funding.

Unrated bonds issued by Norwegian local government authorities are also treated the same as other unrated investments under Solvency II and will similarly trigger a higher solvency capital requirement. Finance Norway believes that one possible solution would be for bonds issued by unrated financial institutions (including Norwegian savings banks) to be assigned a national rating.

Non-life insuranceWhen it comes to non-life insurance, there is still some work to be done before the rules can be considered accept-able from the industry’s viewpoint. This applies particularly to the inclusion of natural perils provisions at the individual company, and the extent to which they can be counted as regulatory capital of the highest or second-highest standard (Tier

1 or Tier 2). Guarantee provisions are another uniquely Norwegian scheme which will qualify as Tier 2 capital, but there is a wish for greater flexibility so that they can be counted as Tier 1 capital in line with Sweden’s security reserves.

The current Norwegian rules for the calculation of security provisions will be abolished and replaced in part by a risk supplement. It would be desirable for these provisions to be allocated to a separate security fund which satisfies the require-ments for Tier 1 capital. In general, there is concern about how extensive and complex the technical calculations will be, especially for small and medium-sized insurers. Work is also under way on using company- specific parameters in the technical calculations in areas such as disaster risk (natural and man-made) and the necessary capital

ProgressInternationallyThe European Commission has been working on proposals for rules to flesh out the Solvency II directive – level 2 implementing measures – since the directive was formally adopted in November 2009. A final decision on these measures is expected in the first half of 2012, although the exact timing is uncertain and will depend on when the Omnibus II Directive is adopted.

Omnibus II was presented by the European Commission in connection with the overhaul of the supervisory structure in the EU at the end of 2011 and aims to harmonise the rules for all supervisory bodies in the financial sector. The directive entails changes to existing directives, including Solvency II, and needs to be adopted before level 2 and 3 measures relating to Solvency II can be introduced. It is expected to be approved during the second quarter of 2012.

In parallel with this work on implementing measures, the European Insurance and Occupational Pensions Authority (EIOPA) has published proposals for supplementary guidelines on the implementing measures (level

3), some of which may become binding technical standards. Most of the guide-lines are expected to be put out for public consultation once the implementing provisions have been approved, which means no earlier than the second quarter of 2012.

The timing of the implementation of Solvency II and possible transition arrangements are being discussed in connection with Omnibus II. Final confirmation will not be available until the Omnibus II Directive has been adopted, but the Solvency II rules are expected to be implemented in national rules by 1 January 2013. General transition arrange-ments will probably be introduced so that the capital requirements and some of the other requirements under Solvency II do not apply until 1 January 2014. It is unclear which requirements will apply to companies from 2013, but Finanstilsynet has indicated that it will require status reports from companies to ensure that they will be in a position to comply with the new rules. Various transition rules beyond 2014 are also being discussed, including a seven-year transition period for the capital requirement for equity risk and the new interest rate curve for discounting insurance obligations.

NationallyThe consultation deadline on Finans-tilsynet’s proposals for the implementation of Solvency II in Norwegian law expired on 6 January 2012. The regulator’s express aim is to produce a draft regulation with detailed rules on the implementation of Solvency II in Norway by the end of the first quarter of 2012, with a view to these being finalised and approved by the end of the year. Finanstilsynet has also stated that it aims to draw up guidelines in the second half of 2012.

The Ministry of Finance plans to implement the Solvency II rules in a new Financial Institutions Act, and the associated legislative process will therefore have consequences for the publication of Finanstilsynet’s proposed regulations. n

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crd iV brings new and more stringent requirements for capital and liquidity at financial institutions. The cost of the reform is increased both by the uncertainty prevailing in international capital markets and as a result of uncertainty about future regulation.

Background to crd iVAfter the last financial crisis, there was international agreement on the need to introduce a harmonised reform programme (Basel III) for the financial sector. CRD IV is part of this reform. In December 2010, the Basel Committee on Banking Supervision published recommendations for new capital and liquidity require-ments for large and internationally active institutions. One key aim is to reduce the probability and consequences of future financial crises, by making financial institutions more robust to new financial and economic shocks etc. On 20 July 2011, the European Commission published proposals for new capital adequacy and liquidity rules, CRD IV, implementing the Basel III recommendations. CRD IV will replace the current Capital Requirements Directives (2006/48/EC and 2006/49/EC), and it is proposed that it takes the form of a regulation and a directive.

Main content of crd iVCRD IV contains provisions on capital requirements, liquidity, large exposures (Pillar 1) and the disclosure of information (Pillar 3), which is intended to be covered by a regulation. The directive also covers general operational rules, the internal risk and capital assessment process (ICAAP in Pillar 2), and official supervision and sanctions. Provisions on the relationship between supervisory authorities in home and host countries and new requirements

The final form of the new capital requirements directive (crd iV) has yet to be decided by the eu, but the Ministry of Finance is already looking at its implementation into Norwegian rules. Pending a decision, the eu has introduced temporary capital requirements with short deadlines for compliance.

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for capital buffers are also part of the directive.

Some of the key proposals are:• Strenghtened requirements on core

capital (including loss-absorbing capacity).

• New requirements for capital buffers, including countercyclical capital buffers.

• New requirements for reporting a non risk based leverage ratio.

• Stricter requirements for rules on deductions from the capital base.

• More stringent requirements for counterparty risk.

• New liquidity requirements. • Extended requirements for risk

assessments and capital requirements (Pillar 2).

• Extended requirements for the disclosure of information (Pillar 3).

The Basel Committee’s recommended requirements on systemically important financial institutions (SIFIs) are also expected to be included in CRD IV. Requirements for national SIFIs are currently being explored by the EU. CRD IV also contains proposals for the continuation of the transitional rule (Basel 1 floor) until the end of 2015. The transition rules are not finalised and proposals will be changed up to final decisions are made.

Although the Basel III recommen-dations are intended to apply to large and internationally active institutions, the European Commission has advised that CRD IV should apply to all credit institutions and investment firms to ensure level competitive playing field. The commission’s regulatory proposals are also intended to prevent regulatory arbitrage within the EU. Stricter national

requirements may only be introduced in connection with the supervisory authorities’ surveillance and evaluation of financial institutions under Pillar 2. Pillar 2 does allow for differing interpretations of the new rules, but the commission has urged member states to minimise departures that affect or erode the principle of maximum harmonisation.

regulatory uncertainty The EU is still working on the text of CRD IV, and until it enters into force the European Banking Authority (EBA) has recommended temporary measures in response to the sovereign debt crisis. The EBA recommended in December 2011 that large banks in the EU should hold a temporary capital buffer of 9 per cent core Tier 1 capital by June 2012. Financial Supervisory Authority of Norway, Finanstilsynet, meanwhile, has announced that all Norwegian financial institutions should meet this requirement by the same date. The Norwegian authorities have previously advocated a Nordic harmoni-sation, but when it comes to the EBA recommen dation the Nordic countries have chosen different calculation rules. Pending final rules from the EU, several countries have already decided to introduce national requirements for large banks, including the UK and Sweden. In addition, several countries have expressed a desire for less stringent requirements to protect the retail segment (households and SMEs) and greater flexibility with regard to size and complexity (proportionality). Authorities in several countries believe that the capital requirement rules should continue as a directive, giving individual countries the option of setting higher standards than the minimum, rather than a regulation where standards are set at a European level.

The EBA recommendation brings a need for new capital even before the CRD IV requirements for equity instruments have been finalised and approved. Differences in the design and introduction of new capital and liquidity requirements results in uncertainty about the implementation in Norway. The Pillar 2 requirements are also

Proposed new capital adequacy rules By Mette Blomberg Wæringsaasen and Per Erik Stokstad

insufficiently detailed in terms of standards and instruments. Pillar 2 was designed as part of the Basel II reform, the idea being that financial institutions should also hold capital for risks not covered by the Pillar 1 requirements. It may seem that Pillar 2 is now also overlapping the new capital buffer requirements in the Basel III reform. The Ministry of Finance has previously stated that a consistent application of the rules is important for financial stability.

introduction in NorwayThe Norwegian authorities have not announced how quickly the CRD IV requirements will be introduced, how stringent they will be, or whether there will be any unilateral Norwegian require-ments. One of the main tasks for the EBA is to take a leading role in the pursuit of a fully harmonised regulatory framework for financial institutions in the EU. This will be no easy task. The debt crisis in the international economy, the rollout of the Basel III reform, the EBA’s requirements for recapitalising European banks, measures in other countries leading to less harmonised capital requirements in the EU and the Nordic region – all are creating uncertainty about the implementation of CRD IV in Norway.

implementation in Norwegian lawThe Norwegian authorities and the Norwegian financial industry have expressed clear support for more stringent and harmonised capital requirements in the EU. The Ministry of Finance has already consulted on proposals for legislative changes to introduce CRD IV in Norway, thus anticipating rules that have yet to be finalised. The Norwegian authorities have assumed that the CRD IV regulation will be incorporated by reference. However, the regulation needs to be translated into Norwegian and published in the EEA Supplement to the Official Journal. It is important for financial institutions to be able to relate to official Norwegian translations for both competitive and legal reasons.

CRD IV requires numerous technical standards relating to key proposals. Draft standards are to be drawn up by the EBA, and adopted by the European Commission. The EBA’s role is to produce guidelines and recommendations. However, to some extent the EBA is also to take decisions, concerning national supervisory authorities or financial institutions. For Norwegian financial institutions, it is important that there is a level playing field, with the Norwegian authorities faithfully following the same supervisory practice and interpretation of the rules as intended by the EU. In Finance Norway’s view, the capital requirement rules should be harmonised, with unilateral national rules only where strictly necessary due to uniquely Norwegian factors.

The EU’s target is to adopt the rules by June 2012. The Ministry of Finance has indicated that proposals for Norwegian regulations will be sent out for consultation during spring 2012. The idea is for CRD IV to enter into force from 1 January 2013 with the same transition provisions as Basel III.

Norwegian challengesFor Norwegian financial institutions the most challenging part of the new regulation is expected to be the new quantitative liquidity requirements. The liquidity coverage ratio (LCR) requires financial institutions to have much larger holdings of Norwegian government securities. As the Norwegian government has large petroleum revenues and thus no need of borrowing to finance govern-ment spending, the market for govern-ment securities is very small. Less than half of the LCR can consist of private securities considered particularly liquid and safe. Furthermore, it is currently uncertain whether any Norwegian private securities will meet the proposed criteria. The net stable financing ratio (NSFR) will especially affect mortgage companies that finance loans by issuing covered bonds, and financial institutions that currently use very short-term market funding. For covered bond issuers, the key issue is

whether covered bonds with less than a year to maturity will qualify as stable funding.

Norwegian financial institutions are financially sound, and the vast majority are expected to meet the new minimum capital requirements without having to raise new equity. However, there may be a need for additional capital due to the requirement for countercyclical capital buffers and supplementary requirements as part of the supervision of individual institutions. There is also a need to clarify that the Equity Certificates issued by Norwegian savings banks still will qualify as Common Equity (CET1).

The financial industry has noted that the supplementary non risk based capital requirement (leverage ratio) will provide incentives for higher risk-taking rather than the use of better and more advanced risk management models. The leverage ratio will be a particular challenge for covered bond issuers and other financial institutions with low-risk operations, such as mortgage lending and lending to public bodies. The European Commission will assess the consequences for low-risk business models before any binding leverage ratio is introduced.

The Norwegian authorities have not presented a comprehensive analysis of the effects of the new capital and liquidity requirements, so it is too early to tell what the overall impact will be for financial institutions in the form of reduced lending capacity, lower returns to shareholders or higher funding costs. The size of these effects for borrowers, and for the Norwegian economy, will depend partly on how stringent the requirements are and partly on whether or not they are introduced suddenly, time-varying or phased in gradually in line with the Basel III recommendations. n

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innovation and technology are giving us more and more ways of paying, with contactless payments and various uses of mobile phones now coming in. But effective payment systems are about much more than new widgets and apps – it is the relationship between the technology and the execution of the actual payment that decides whether an innovative payment solution is a success.

coNVeNieNce aNd coNFideNce are essential for a new payment solution to be a success. Convenience is not just about the user experience. The solution must be available where the customer is shopping, even if buyer and seller are using different suppliers of financial services, and this requires coordination. Confidence requires a payment solution to be safe to use, and to work every time. The customer must feel sure that transactions using the solution are secure.

collaboration on infrastructureA bank that wishes to offer payment services to its customers needs to work together with other banks, because not everyone is a customer of the same bank. The result of this collaboration is a shared infrastructure consisting of rules on how payments are to take place, technical standards and joint operations. In Norway, this infrastructure is managed and developed through Finance Norway. It ensures that banks can always offer payment services that meet the needs of customers and the public sector for usable, secure and rational payment services.

social responsibilityThrough this collaboration on payments, the banking sector has taken on a significant social responsibility. Self- regulation in this area has led to Norway having one of the world’s most efficient and best-coordinated payment systems. Those who have spent long periods abroad will have experienced this at first hand, while the rest of us take it for granted.

Other countries have endured long periods of pronounced dissatisfaction among users of payment services, leading to various actions by the authorities in the form of direct regulation or other kinds of intervention to ensure that consumer needs are met. In Norway, the various user groups appear to be happy with banks’ payment services. We take this as a sign that the banking sector’s self-regulation takes due account of user needs and social responsibility. PricesPricing has been a major factor in customers benefiting from efficient and convenient payment services. The function of prices is to give customers an opportunity to choose between services with different production costs. Customers will tend to choose those that are cheapest and most convenient, encouraging banks to be cost-effective, customer-focused and innovative. The result is more efficient use of society’s resources.

Appropriate pricing is part of our social responsibility. In this respect, it is unfortunate that banks are decreasingly being paid directly for customers’ use of payment services. Banks then have less interest in investing in efficient new services, and customers have less incentive to use new cost-effective services. Mispricing leads to cross-subsidisation and macroeconomic loss.

Changing people’s way of paying is about changing habits, and this takes time. When it is free for customers to use existing payment solutions, it will take longer to get them to switch to new ways of paying.

Transformed by new technology The mobile phone is predicted to have a bright future as a payment instrument, and we concur. We all have one, and we take it everywhere. But there is a long way to go from the launch of an idea to it ending up as a usable payment service for the majority of people. Ten to 15 years ago some people thought that the telecom industry would take over banks’ role in processing payments, but this prophecy has not been fulfilled.

More communication technologyBanks are not suppliers of information and communication technology (ICT), but they are at the forefront of the application of ICT in the production and distribution of their services.

Payment services have many similarities with the telecom business. Both involve the transfer of information between two parties. Like banks, telecom companies work together to make it possible to transfer information between networks.

But there is one fundamental difference. For telecom companies, the content of the information transferred is generally immaterial. For banks, the content of the information received from customers is critical. This information triggers a multitude of processes and controls at the payer’s bank, in the infrastructure and at the payee’s bank with the end-result that a financial claim is transferred from customer to customer. Claims are also transferred between banks and settled through their accounts at the central bank.

Roles in the value chain When it comes to payments, many different players from different sectors need to work together to ensure that new technology really is usable. The first challenge is to clarify who provides what – in other words, who belongs where in the value chain when executing the transaction.

For straightforward services such as mobile banking, the value chain discussion is less relevant, as the phone is simply being used as a means of communication

The consequences of new technologyBy Tor Johan Bjerkedal

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with your own bank. The picture is more complex when the phone is used as a means of paying for purchases of goods in stores in the same way as a payment card. The value chain discussion and the clarification of roles and responsibilities are now crucial. Mobile operators will be keen to ensure that banks are not encroaching on their area, and vice versa.

Linking use and infrastructureThe payment service for which a technology is to be used needs to be linked to the financial infrastructure, otherwise money cannot be transferred from payer to payee. A payment service has to be offered by the player responsible for the money with which the payer is to pay, and this requires a licence.

An understanding of the technology is different to an understanding of the clearing and settlement systems needed by financial institutions to execute a payment. A number of technologically good ideas for new ways of paying have foundered on these points.

Network effects The supply of payment services is all about networks. For the consumer, it is important that a payment service can be used in many different places. For the merchant, it is important that many of its customers can use the service. This leads to a chicken-and-the-egg scenario. One critical success factor for a service is that it meets the needs of both payers and payees. Suppliers collectively must also have a broad interface with both sides of

the market. Actions and investments need to be coordinated to lift both sides of the market simultaneously.

Closed systemsPayPal is an example of a supplier of payment services that has built its own closed (proprietary) payment system. Payments are transferred directly between the payer’s account and the payee’s account internally in the supplier’s own system, and so the supplier does not need to take account of other players when designing its payment services.

The disadvantage is that the payer must first source money from elsewhere to top up his balance in the closed system so that money can be transferred to others with accounts in that system. Customers will have little interest in holding large amounts in accounts in a closed system like this, and so payers will often source money from bank accounts to use in the system. The payee in turn will quickly transfer the money received to his bank account. Closed systems therefore represent a detour – and those who recall the poor coordination between banks and the old postal giro system in Norway will have experienced the drawbacks and additional costs of such detours.

challenges aheadPayment instruments based on new technology are on their way. Both contact-less payments and various ways of using mobile phones as a payment instrument have sprung up, and these are not gimmicks. Many of these new forms of pay - ment will be useful for both payer and payee.

The challenge now is to ensure the necessary coordination of initiatives and solutions without stifling innovation, a balancing act that the banking sector has performed well to date. The complexity of the technology is growing and the range of players wanting in on this value chain is growing, so the balancing act is set to grow ever tougher. Failure to coordinate effectively will lead to fragmentation of the payment system, an unfortunate develop-ment that would not benefit society. n

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cliMaTe chaNge is bringing more extreme weather, more droughts, more cloudbursts, more flooding. Some parts of the world will see a complete absence of rain, resulting in famine and refugees with a reduction in cultivated land and changes in habitation patterns. Here in the north, we have to expect wilder, wetter, damper weather.

In its fifth assessment report in 2013, the Intergovernmental Panel on Climate Change (IPCC) will look at the role of settlements, infrastructure and spatial planning in work on reducing emissions of greenhouse gases. In its fourth assessment report in 2007, the IPCC noted that for the first time in history more than half of the world’s population lives in cities. This share is expected to grow, creating major challenges for the entire infrastructure, especially in cities and areas growing fast due to migration.

In Norway, the number of losses due to natural disasters and water damage is rising, and it is frustrating for insurers and policyholders alike when the same type of loss keeps occurring in the same place because the necessary maintenance or preventive measures have not been introduced. Insurers are beginning to lose patience and are calling for action and clearer responsibilities. The industry wishes to contribute itself by bringing together all non-life insurance data concerning climate-related losses, as statistics of this type can be used by municipalities when planning and prioritising measures locally.

Parliamentary report The media and the political debate in Norway have long highlighted the need for reduced carbon emissions and systems for trading emission allowances, but more recently there has been more interest in the question of how we are to adapt to a

new climate. An inter-ministerial project led by the Ministry of the Environment is due to result in a parliamentary report on climate adaptation in Norway later this year, drawing on report NOU 2010:10 “A changing climate”. The parliamentary report will serve as a guide for future adaptation measures.

The insurance industry is necessarily playing a key role in work on climate change adaptation. Natural disasters and water damage must remain insurable, and we need to share our experience and expertise with other relevant players. Collaboration is essential when addressing the challenges associated with climate change.

2011 – an extreme year?We have already begun to see the consequences of climate change in Norway. Storm Dagmar, storm Berit and two big rounds of flooding in 2011 pushed natural disaster payouts up to around NOK 1.9 billion, their highest since 1992. It was a year when natural disasters were large in both number and scale.

So is this what we have to expect in the future? The events of 2011 have sparked questions and debate about whether homes and other buildings have been built and located appropriately so that they can withstand the next big storm, and whether municipalities are doing enough to prevent damage from natural disasters. It is a problem when municipalities permit development in areas that they should know are susceptible to flooding, rising sea levels and landslides.

Last year brought a new Planning and Building Act, and together with new provisions in the Civil Protection Act this has increased municipalities’ responsibilities. Municipalities must now have an overview of risks and exposures,

which means that particular care needs to be taken in areas liable to flooding and landslides, and municipalities may subsequently be held to account if these considerations are not addressed.

a unique natural perils schemeAll natural disaster losses in Norway are covered by a statutory natural perils scheme unlike any other in Europe or beyond. The Natural Perils Pool equalises all losses between companies and can coordinate adjustment work following major events. One key aspect of such a scheme is that insurers can offload their own risk exposure through the pool by purchasing (re)insurance from international reinsurers for the largest events, making the risks calculable and manageable.

water losses a growing problemThere has been much interest in losses caused by natural disasters, quite simply because they are dramatic and can cause loss of life and the complete destruction of people’s homes. These losses are unpredict-able, and here the natural perils scheme has proved a useful and efficient instrument.

However, the insurance industry faces bigger challenges when it comes to damage caused by surface water and sewage back-up in people’s basements. This is not considered flood damage and is therefore not covered by the natural perils scheme, but is still caused by strong and intensive rainfall.

Finance Norway’s statistics show that over the longer term these losses result in much higher payouts than those defined as natural disaster losses. 2010 was a year with a very high number of water losses, with payouts soaring to NOK 4.3 billion. Frost damage accounted for NOK 1.3 billion of this, and 20-30 per cent of all water losses were due to surface water flooding and sewage backing up.

Maintenance backlogAt the current rate it will take 200 years to renew today’s mains water and sewerage network, according to the aforementioned

adapting to a changing climateBy Mia Ebeltoft

CLIMATE CHANGE

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The insurance industry is necessarily playing a key role in climate change adaptation. Natural disasters and water damage must remain insurable, and we need to share our experience and expertise with other relevant players.

official report NOU 2010:10. The report estimates the replacement cost of the municipal water and sewerage network at more than NOK 500 billion. This includes 35 000 km of sewerage pipes and 17 000 km of surface water pipes.

Section 9.2 of the report sums up the situation as follows: “Climate change will increase the risk of disruptions in the water supply and sewerage services. A disruption in the water supply will quickly affect private households and the business community, and a disruption of sewerage processing can have serious consequences for health and the environment. It is there-fore essential for the entire community that the water supply and sewerage sector adapts to climate change. The water supply and sewerage sector currently has a significant maintenance backlog, creating an adaptation deficiency. Fragmented areas of responsibilities, lack of resources and prioritisation entail that this sector is the infrastructure sector that has been evaluated as most vulnerable to climate change.”

The message is clear. National and local authorities are now well aware that there is a maintenance backlog resulting in sewage back-up problems, contamination of drinking water, and consumer frustration.

Municipalities have neither the means nor the capacity to replace all of the pipes that need renewing. Water and sewerage services are priced on a cost basis, but there is little political will at municipal level to raise charges. Finance Norway believes that municipalities need some form of incentive scheme from central govern-ment. The political signals, however, are that it is municipalities’ own responsi bility to fund local infrastructure for water and sewerage. Finance Norway believes that central government must deploy both the whip and the carrot for anything to

happen. County councils also play an important role and need to exercise their supervisory role over municipalities more actively. Spatial plans and budgets need to take account of the backlog and climate adaptation. Some municipalities are doing a great deal, but most are doing too little.

liability unclear Both the media and the courts have looked at the issue of how far municipalities’ liability extends. The letter of the law is clear: “The owner of the installation is liable regardless of fault for damage caused by a waste water installation due to insufficient capacity or inadequate maintenance” (Pollution Control Act section 24a). The courts, however, have interpreted the rules on maintenance and capacity differently, and in the latter case the customer must demonstrate negligence on the part of the municipality. This is a highly inappropriate solution which results in limited predictability and little financial incentive for the municipality to take action.

Liability in the water and sewerage sector must be made clearer, and this is primarily a political issue rather than a matter for the courts. Norwegian municipalities have long neglected this sector, so now they now face major challenges from a vulnerable infrastructure. The question is what incentives are needed for things to improve. With a changing climate, we will see more and more water losses and frustrated households. It is not just about insurance payouts – it also has major social and economic implications.

Finance Norway would like to see a national surface water authority. There are currently too many parties involved, leading to fragmentation of responsibility and the absence of an overall strategy. Finance Norway supports municipal

knowledge centre Norwegian Water’s calls for sector-specific legislation for the water and sewerage sector. The standards and supply obligations that apply to municipalities need to be set out in greater detail.

how can insurers contribute?

The insurance industry understands that customers get frustrated when their excess goes up with each sewage back-up claim.

The industry possesses statistics and risk expertise that many municipalities believe could provide useful information on hotspots, and the statistics could also be used for long-term planning. NOU 2010:10 has challenged the industry to share its data, and the industry is willing to oblige, but the data need to be quality-assured and handled in a way that takes account of their commercially sensitive nature.

For the data to be useful for municipali-ties, they must also be linked to precipita-tion data and calibrated. This will provide a useful picture of losses further ahead.

The Insurance Bureau of Canada (IBC) is in the process of developing a unique tool which will give the insurance industry a better basis on which to assess the risk of losses in each municipality, and at the same time provide that municipality with information and a better understanding of where it needs to take action.

Finance Norway has had the project presented to it, along with Norwegian authorities and municipalities, and will be working further with IBC. Work on climate adaptation and the search for a solution that can be considered optimal for all parties concerned is a demanding process and will require patience and long-term collaboration between insurers, researchers and motivated municipalities. n

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CLIMATE CHANGE

New threatsBy Stine Neverdall

More and more crime committed in Norway is organised, often with links or bases abroad. This includes fraud, money-laundering, insurance swindles and increased Trojan horse attacks on Norwegian Pcs.

The ThreaT PicTure faced by the financial industry is constantly evolving. It is important for the industry not only to learn from experience nationally and internationally but also to anticipate potential future threats and security challenges.

Over the past year the industry has had a particular focus on employment and recruitment procedures.

Focus on recruitment proceduresThorough reference checks, background checks and, where necessary, extended checks for specific positions need to be performed when recruiting new staff. It is also important to follow up employees when promoted internally or given new duties.

Dual control for large transfers and effective procedures for granting authority and access are essential. Priority should also be given to good internal controls and work on attitudes to prevent cases of dishonesty.

Measures to prevent money-launderingWork on preventing money-laundering will be a priority once again in 2012. Courses and training in the money-laundering rules are being arranged both locally at banks and insurers and through Finance Norway.

An important part of risk mitigation is to analyse products, systems and customer groups to identify areas where there is the greatest risk of money-laundering or financing of terrorism.

Both the National Authority for Investigation and Prosecution of Economic and Environmental Crime and the Director of Public Prosecutions have noted the importance of the financial industry keeping up the pressure and reporting suspicious transactions. These reports are often important pieces of a puzzle that may eventually be put together into a case, and there are numerous examples of major criminal and money-laundering cases where these reports have proved crucial.

Training in document controlIdentity crime is now a well-known problem affecting different sectors of society. Fighting this type of crime is a joint social responsibility in which the industry has a stake.

Identity crime can lead to financial loss for both the industry’s customers and the industry itself in cases of pure fraud. The industry needs to focus on good procedures for verifying the identity of both individuals and businesses. This will help reduce both the risk and potential losses to the industry through fraud and other crimes using false or fictitious identities.

Banks and insurers have been working on this problem for a number of years and taken a variety of steps. These include courses in document control, and some individual players have invested in advanced document verification equipment.

There is extensive contact with the experts at the Norwegian Centre for Information Security (NorSIS), part of the government’s work on information security in Norway. The industry has also worked actively in various ways to get an official database of stolen and lost Norwegian passports in place.

Trojan horse attacks on Norwegian PcsBanks have recently uncovered a number of attempts by criminals to access Norwegian online banking customers’ accounts using malicious programs called Trojan horses on customers’ PCs. This type of crime is familiar from other European countries but has been less common in

Norway. This type of activity tends to come in waves, and there is nothing extraordinary about the current situation. Constant attempts at fraud are part and parcel of banks’ everyday reality, and they monitor these attempted crimes using multiple lines of defence.

It is also important for the general public to keep the software on their PCs up-to-date, especially antivirus programs. People must also follow the general advice not to open attachments from unknown senders, and adhere to their bank’s recommendations on the use of online banking.

In the event of unlawful access to a customer’s online banking account, the bank will cover any loss to the customer due to unauthorised payments provided that the customer has not been negligent.

insurance swindlesEvery year insurers uncover attempted swindles running into the hundreds of millions of kroner.

The vast majority of customers are honest, and there is an expectation that insurers will work actively to catch those who attempt to defraud the majority in this way. Recent years have brought a number of large cases relating to personal injury and disability products, with some fraudulently claiming millions. In terms of the number of cases, motor insurance is still an area where some people try it on. Last winter there were several places in the west of the country where numerous cars were found dumped in the fjords, and some of these cases are probably related to insurance fraud.

As mentioned in the introduction, the criminal world is constantly evolving, and so must the financial industry if it is to combat new crime trends. We believe in working together, including with players outside the industry, and have a fruitful relationship with the police and other players from both the private and public sectors in Norway. We believe that this is essential to tackle the challenges of tomorrow. n

FRAUD

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long-term collaborative processBy Hildegunn Bjerke

loss prevention is a natural part of the insurance industry’s activities. For it to be effective, the industry depends on collaboration with other parties. it has worked for many years on loss prevention, both through joint projects within the industry and with the external players on which it relies.

LOSS PREVENTION

33

More ThaN aNyThiNg, the industry wants to help make policyholders and other people less vulnerable. The challenge is to get information across on preventive measures and change actual behaviour.

initiatives within the industryOne important prevention initiative is the Norwegian Insurance Approval Board (FG), which coordinates insurers’ efforts. FG’s role is to draw up rules and approve safety equipment and firms in order to reduce the risk of fire, water and break-in losses. FG also represents insurers’ interests in dealings with the authorities and relevant industries.

The Valuables Recovery Service (RVR) is an alliance between the country’s fire service and insurers coordinated by Finance Norway, and is a good example of practical collaboration between public and private sectors. Fire brigades are locally situated and can quickly attend sites where losses occur, and RVR has 19 call-out vehicles at fire stations the length and breadth of Norway. Given insurers’ need to attend to both injured parties and their own economic interests, the two sides of the RVR alliance complement each other well.

Broad cooperationThe Norwegian insurance industry’s loss prevention work has its roots in the old fire insurance funds of the 19th century. With well over a million claims handled each year, the industry has a sound knowledge

of the causes and consequences of losses. Collaboration with other players leads to better prevention work.

Among the more important alliances established on the industry’s initiative are:

The Norwegian Fire Protection Association The Norwegian Fire Protection Association works for a safer society. Through information, training and advice, it helps people, businesses and organisations to take responsibility for their own fire safety. Alongside various national fire safety campaigns, the association provides information for nurseries, schools, home-owners, minorities and health institutions.

The Norwegian Council for Road Safety The Norwegian Council for Road Safety ensures that children receive regular and effective education in road safety, encourages motorists to drive safely, and puts road safety on the agenda for all road users. Driver behaviour in terms of speed, intoxication and the use of safety equipment is highly significant for both the number and severity of accidents. The council organises a wide range of road safety campaigns targeting children, teenagers and adults alike.

The Norwegian Safety ForumThe Norwegian Safety Forum is an independent national meeting place and knowledge centre for the development of loss prevention activities in Norway, bringing together players from voluntary

organisations, insurance companies, industry and the public sector to work together for a safer community. Focus areas include preventing drownings, the elderly, children and safe communities.

The Water Damage OfficeThe Water Damage Office is part of SINTEF Building and Infrastructure and provides services and information for consumers, insurers, building contractors and the authorities.

actions get results Fire safety checks in the woodworking industry are an example of the benefits of reducing risks. Regular controls and appropriate risk-mitigating measures have led to a decrease in the number of fires. Equivalent schemes should be introduced in other industries.

In 2012 Finance Norway has started up a joint solution for electrical checks in commercial buildings to help increase the number of checks carried out and correct faults that could cause fires.

long-term perspectiveLoss prevention is about avoiding unwanted situations and events, promoting safety and preventing damage. It requires patience and a long-term perspective. Individual behaviour and interest in avoiding incidents are crucial in reducing the number of accidents and losses. The industry for its part is working actively to achieve this. n

how oFTeN do ThiNgs go wroNg?statistics show that in Norway:• Every10minutesthereisawaterloss• Every20minutesthereisafireloss• EveryhoursomeNOK500000ispaidoutonfireclaims• Everydayfivepeoplelosetheirlivesinaccidents(roadaccidents,drowning,

fire, falls, poisoning)• Everyyearsome500000peoplearetreatedbyadoctorforaninjury,of

whom 36 000 have permanent problems and around half of these are left with some degree of disability

interesting timesBy Stefi Kierulf Prytz

These are interesting times for the Norwegian life insurance industry. while 2011 brought a more flexible retirement pension system with new rules for old-age pensions, key elements of the pension reform have yet to fall into place, and coming eu rules will also need to be implemented in Norwegian pension legislation. The pension reform is therefore far from complete.

iT is Now PossiBle to take an early retirement pension from the state, an AFP private early retirement pension and a private occupational pension while continuing to work, but there are still key elements of the new pension system that need to fall into place. Much of this should be finalised during the course of 2012. Both public and private occupational pension schemes need to undergo further changes of various kinds and through various processes.

The solutions eventually settled on need to ensure a robust and sustainable pension system. It is important for policyholders and life companies alike that the rules promote sound management of long-term investments. The new system must also take account of the main aim of the pension reform, which is to get people to stay in work longer while taking due account of tomorrow’s labour market and tomorrow’s pensioners.

changes during a difficult period 2011 brought low interest rates and turbulent equity and financial markets the world over. Today’s low interest rates are a challenge for the Norwegian life insurance industry due to the annual allocation of guaranteed returns and profits, and long-term obligations under pension contracts. The challenge is particularly acute for defined-benefit occupational pensions, paid-up policies and “old” individual pensions, because the current low interest rate regime means that insurers are unable to cover the annual cost of the interest rate guarantee on these products.

The situation is also demanding because the Norwegian market lacks the investment opportunities needed for adequate

long-term returns on the capital managed by life insurers.

Today’s pension rules were developed in a very different economic climate to today’s. Market interest rates were well above the guaranteed interest rate used to calculate insurance premiums. This rate, set by regulator Financial Supervisory Authority of Norway (Finanstilsynet), is the minimum level of return that companies have undertaken to distribute to pension contracts each year.

The combination of pension reform and low interest rates is making it particularly difficult to gauge how the latest changes will impact. There is no certainty about how the system as a whole or its constituent parts will function. In such a situation it is a challenging – but also exciting – task to find sustainable solutions that put the industry in a better position to meet the tougher new capital requirements under Solvency II.

changes made in 2011Major changes were made to the social security system in 2011. It is now possible to draw a retirement pension flexibly from the age of 62, and a retirement pension can be combined with continued employ-ment and an AFP private early retire-ment pension and a private occupational pension.

Figures from the Norwegian Labour and Welfare Administration (NAV) show that around 36 000 people aged 62-66 chose to claim the state retirement pension in 2011. Most of these (82 per cent) opted for a full pension, which is much higher than the government assumed in its budget for 2011. The model is intended to have a neutral impact on the government’s

economic obligations. The key issue is whether or not those who draw a pension early continue to work. The government has said that it will monitor the situation closely, and that further action will be considered if the reform does not have the intended effect.

The number of people taking private occupational pensions early in 2011 was more modest. Statistics from Finance Norway show that around 9 300 people aged 62-66 did so in 2011.

Rules on a new disability benefit in the social security system were approved in December 2011 and will come into force from 2015. There will be a new way of calculating disability benefit, and it will no longer be based on retirement pensions. The new disability benefit will also be taxed as income from employment. Recipients of the benefit will be transferred to the state retirement pension at the age of 67. Existing disabilities will, however, be partially shielded from the living-age adjustment that will apply to previous capacity for work.

No decision has been taken on what form the disability pension will take when it comes to occupational pension schemes – this work remains to be done. For public sector schemes, the government has invited the parties to discuss adjustments, and the Ministry of Labour is expected to publish a consultation paper during the spring. Changes to disability pensions in the private sector will probably be discussed through the Banking Law Commission, but it is unclear when

Private occupational pensions In 2011 the Banking Law Commission looked into adjustments to the current rules for paid-up policies. If the rules remain unchanged, these policies will result in high capital requirements for life insurers under Solvency II. To address the industry’s challenges, a change in the regulations was introduced in December 2011 giving insurers greater scope to build up supplementary provisions (individu-ally) from 2 per cent to 3.5 per cent for contracts with low or no supplementary

PENSIONS

34

provisions. The commission’s report NOU 2012:3 “Paid-up policies and capital requirements” also proposes additional measures. The proposed changes seem likely to enter into force from 1 January 2013. The commission proposes, for example, that individual portfolio choice be permitted for retirement pension capital in paid-up policies, and simplification of the rules for “small” paid-up policies. The industry largely supports the proposed measures but has also noted that their impact is uncertain and has therefore asked the authorities to consider additional and more stringent measures.

The Banking Law Commission will continue to examine new occupational pension products in 2012. It is important that new products are tailored not only to the newly reformed social security system but also to the tougher new capital requirements under Solvency II.

The commission will also consider new product solutions in the gap between defined-benefit and defined-contribution

occupational pensions, based on the proposals in official report NOU 2009:13 “Broad pension schemes”. Here too the industry is keen to see a regulatory frame-work that takes account of coming EU rules for solvency capital and the activity rules for insurers.

In addition the commission will look into adapting the maximum contribution rates for defined-contribution schemes – which need to be increased – and other adjustments to private occupational pensions to reflect the new social security system.

Public occupational pensionsThe Ministry of Labour is currently reviewing the rules for disability pensions in public schemes, which need to be adapted to the changes to the disability arrangements in the social security system from 2015 approved in December 2011. In particular, the government wants to compensate for the taxation of disability benefit in the social security system as

income from employment. The ministry is expected to produce a consultation paper in spring 2012. It also aims to finalise new rules for public occupational pensions for those born from 1954 onwards during the course of this year.

other changes to the pension rulesThe government has signalled that survivor pensions need to be reviewed. This will probably happen once the other parts of the pension reform fall into place, but no date has yet been set. Adjustments are also needed to a number of minor schemes, and it is possible that the solutions decided on for the public sector will need to be reviewed afresh, such as schemes with special age limits. There is still a need for some changes to private pensions, and this is expected to be dealt with by the Banking Law Commission. All in all, 2012 looks like being an exciting year for work on the pension reform. n

35

PENSIONS

The Norwegian Motor insurers’ Bureau is there for you By Roger Stenseth

The Norwegian Motor insurers’ Bureau (TFF) is there to help if the car that hits you is uninsured, unidentified or foreign. Besides these traditional areas, TFF is evolving in line with society itself and is now also working on much more.

we TaKe a loT For graNTed. When we take our car to another country, we do not worry about what might happen if we have an accident. Fortunately international agreements and collaboration ensure easier settlement of claims from consumers. Complex systems have been developed so that Norwegian and foreign citizens can have their claims settled in their home country as far as possible.

uninsured, unidentified, foreign Losses caused by uninsured vehicles are covered by TFF. The bureau then claims the money back from the owner of the uninsured vehicle. TFF works with the vehicle licensing authorities to identify which vehicles are uninsured. According to the national register, there are 130 000 uninsured motor vehicles in Norway, but

the number of accidents involving uninsured vehicles reported to TFF in 2011 (418) suggests a much lower number.

TFF also covers losses caused by unidentified vehicles. Personal property is not covered, however, nor is hit-and-run parking damage. Payouts nevertheless ran to more than NOK 112 million in 2011, almost three-quarters of this relating to damage to road furniture such as signs and railings.

When it comes to foreign vehicles – both those visiting Norway and Norwegian vehicles abroad – TFF has agreements with 45 other countries through the Green Card system. Each of these countries has an equivalent motor insurers’ bureau.

The Green Card agreements regulate a guarantee of insurance cover and settlement of claims:

• The insurance guarantee allows you to drive into a member state without having to take out new insurance cover when crossing the border. In 32 member states (the EEA countries, Andorra, Croatia and Switzerland), the car’s number plate is taken as evidence of valid insurance. When driving in the other 23, a valid Green Card must be carried.

• The compensation guarantee ensures that an injured party is compensated when a Norwegian vehicle causes an accident abroad or when a foreign car causes an accident in Norway.

Foreign-registered vehicles in NorwayIf a vehicle visiting from a member state causes an accident in Norway, TFF or its designated representative will process and settle the claim on behalf of the foreign insurer that issued the third-party insurance cover for the vehicle. The motor insurers’ bureau in the vehicle’s home country then covers TFF’s costs.

Norwegian-registered vehicles abroadIf a Norwegian-registered vehicle causes an accident in a member state, the local bureau will settle the claim in line with that country’s rules. TFF then covers the bureau’s costs.

Number plate sufficient,Green Card not needed

Green Card needed

MOTOR INSURANCE

36

other servicesUnder the EU’s Fourth and Fifth Motor Insurance Directives, the authorities have given TFF the role of:

• compensation body • information centre • central body

In 2003 a new scheme came in under the Fourth Motor Insurance Directive. One change is that a Norwegian resident visiting another EEA country who is injured by a vehicle can return home to Norway and file his claim with a claims representative in Norwegian. The claims representative is appointed by the insurer of the foreign vehicle.

Under the directive, all insurers in the EEA must appoint a claims representative in the other EEA countries. The claims representative must issue a reasoned reply within three months if the injured party’s claim is rejected.

• Compensation body As a compensation body, TFF steps in

and processes claims when- a foreign insurer’s Norwegian

representative does not fulfil its obligations

- a Norwegian insurer’s representative abroad does not fulfil its obligations

- an accident is caused by an uninsured or unidentified vehicle

TFF iN Figures:

Claims Payouts2011 reported (NOK m)

Uninsured 376 18

Unidentified 8 252 113

Foreign – via TFF 418 14

Foreign – via GC correspondents 3 294 32

• Information centre Those involved in a road accident

can turn to TFF for information on where the vehicle was insured. As an information centre, TFF - collects and distributes information

on the insurance status of foreign vehicles

- keeps a register of the insurance status of Norwegian vehicles

• Central body This is similar to the role of

information centre but covers domestic matters.

• Frontier insurance Through the customs service, TFF

issues frontier insurance for:- foreign vehicles not covered by the

Green Card system - vehicles on Norwegian export or

customs plates

TFF is responsible for accidents caused by such vehicles.

• TFFAuto One of the more important

contributions TFF has made in recent times is the development of the database TFFAuto, where insurers record the status of vehicles in terms of compulsory third-party cover.

Started up in 2007, TFFAuto has around 19 000 users and serves as an electronic communication channel between motor insurers’ various technical systems and the government’s motor vehicle register (Autosys).

TFFAuto is business-critical with up to 84 000 transactions daily and results in considerable savings for the insurance industry through greatly reduced operating costs. n

The Norwegian Motor insurers’ Bureau (TFF) is an independent legal entity established in 1927 and best-known for covering losses caused by three types of vehicle:

•UNiNsured

•uNideNTiFied

•ForeigN

TFF covers losses caused by both foreign vehicles in Norway and Norwegian vehicles abroad. all insurers offering motor insurance in Norway are required by law to be members of TFF. The number of members varies around 30.

MOTOR INSURANCE

37

Financial literacy among the youngBy Hilde E. Johansen and Rolf Mæhle

as a Trade associaTioN, we have a good relationship in these areas with the likes of Junior Achievement -Young Enterprise Norway (UE), the Norwegian Labour and Welfare Administration (NAV) and the Norwegian State Housing Bank, and we want to share our good experience.

Finance Norway is keen to improve young people’s financial literacy:

• The young face numerous financial challenges when they leave home and set up on their own. The transition from youth to adulthood is financially demanding, and it is easy to go wrong without the right knowledge.

• The challenge for young people in the short term is getting to grips with their everyday personal finances. In the longer term it is about obtaining suf-ficient capital to buy their own home.

More and more young people are getting black marks on their credit records after leaving home. For example, 25 per cent of those registered with debt collection agency Lindorff for the collection of unpaid debts are below the age of 25. Of course there can be many reasons why young people end up in financial difficulties. Some have problems resisting peer pressure, and if this is combined with an inability or unwillingness to keep up with payments, it is easy to get into trouble.

In these cases it may be easy to turn to short-term credit in the belief that this will solve the problems. Young people

must therefore learn more about how to manage their everyday finances, prioritise day-to-day expenses and make sensible use of credit.

lack of knowledge Research, both in Norway and abroad, shows that many young people lack the necessary knowhow, and there is little doubt that it can be hard to cope on your own if you do not get the right attitudes and information from your school or parents on how to manage your personal finances. For example, if you are used to spending liberally while still at home, this may quickly become an issue if your income is then not enough to cover a similar level of expenditure.

The problem becomes very clear if we look at the number of young people struggling with credit card debt: 17 500 people aged 20-24 together have debts of NOK 530 million, an average of NOK 30 000 each. Of these, 4 000 have no income but, with combined debts of around NOK 100 million, owe an average of NOK 25 000 each. Credit card debt and consumer loans account for a large part of this debt.

Some of these people should obviously not have been given a credit card. The financial industry must take responsibility for this in its marketing and advice, but young people too must learn that they should not take on a commitment unless they can honour it. And if they are unable to do so, they have a responsibility to contact the bank or credit card company as soon as possible so that the problem can be dealt with quickly.

This means that young people also need to know what happens if they do not pay their bills. Some are not aware of the consequences of a black mark on their credit record, such as the risk of being refused a loan, credit card or mobile phone account.

own home a more distant dreamSoaring house prices and tougher loan-to-value (LTV) rules have made it harder for first-time buyers, most of whom are young

people. House prices have climbed by more than 20 per cent over the past three years, and at least 15 per cent of the purchase price must normally now be paid as a deposit. This has made it harder for young people to get onto the property ladder: they must either save more and for longer, put off buying their own home, or seek help from their parents.

A recent survey by Norstat on behalf of Finance Norway revealed that almost a third of young homeowners had financial help from their parents to help buy their home.1 The proportion receiving this kind of assistance has grown, but not everyone can seek help from well-off parents. It has therefore become even more important to save, and future homebuyers – especially the young – need to understand why it is so important to begin planning at an early stage.

saving more importantBSU is a special savings scheme intended specifically to encourage young people to save towards their own home. It is good to see initiatives that can help the young to appreciate the importance of saving. In the light of rising house prices and tougher LTV requirements, this scheme is now even more important than before.

The government should therefore extend the scheme to bring it more into line with today’s house prices and LTV requirements. A couple of examples illustrate why this is necessary. A 75 square metre apartment currently costs about NOK 2.5 million on average, so the NOK 150 000 limit on savings in the BSU scheme is just 6 per cent of that. Even with a more modest apartment costing NOK 1.75 million, the current upper limit is just 9 per cent of the price.

Starting BSU savings at an early age is important for young people to be able to enter the property market. The scheme also provides an opportunity for those who do not have wealthy parents behind them. Some people begin working young, and the tax advantages of the BSU scheme give them a good incentive to begin saving young too. Banks for their part offer very

FINANCIAL LITERACY

38

The financial industry is very interested in young people and their finances, and puts considerable resources into information and education at schools nationwide. Finance Norway wishes to improve and promote financial institutions’ efforts in this area, and encourages members to work with schools.

favourable interest rates on BSU accounts because these are such long-term savings.

Need for educationAction is needed to help prevent problems and make young people more responsible. Financial literacy is currently overly dependent on what young people learn at home.

However, some parents are more savvy than others, so it is not certain that what they teach their children is correct. There are also big variations in how much families talk about money and finances. When researchers2 asked people where they learned about personal finances, the number one answer is that they taught themselves. This should give cause for concern when so many key financial decisions are taken early in our adult lives – decisions that are too important to be left to trial and error. A lack of knowledge can easily cause young people to make mistakes when it comes to loans and credit

which can affect their personal finances for many years to come.

Key role for schools The aforementioned researchers also found that many are unable to answer relatively straightforward questions, such as choosing the correct definitions of nominal and effective interest rates. This lack of knowledge brings a considerable risk of people making poor and costly financial decisions. To address this and prevent more people from ending up in difficulties, children and teenagers need to be given a thorough grounding in personal finances. This should be viewed as part of their compulsory education.

Schools are an ideal arena for learning about these matters, and personal finances should be part of the curriculum at every level. They could also be an independent subject in secondary schools with the introduction of more elective subjects. Although there is scope within the existing

curriculum to teach young people about personal finances, it is not an explicit learning goal, which makes it somewhat arbitrary which pupils will benefit. Much currently depends on the individual school and what contacts it has with banks.

Lessons in personal finances must be made interesting and relevant, and not just about theory. The best way of preparing young people for an independent life as adult consumers is to teach them to see the financial consequences of different choices. The financial industry has an important role to play here. n

1 In a nationally representative questionnaire survey, 29 per cent of homeowners below the age of 40 said that they received financial assistance from their parents when buying their home. Source: Norstat/Finance Norway, November 2011.

2 “Prosjektet: Finansiell kunnskap i Norge” [Project: Financial Literacy in Norway] by Ellen Katrine Nyhus from the University of Agder and Christian Poppe from the National Institute for Consumer Research (SIFO).

FINANCIAL LITERACY

39

40

donations of NoK 4.1 billion in eight yearsBy Ragnar Falck

charitable donations are an important part of the savings bank sector’s unique ethos. each year the banks donate large sums to a vast range of good causes.

local aNd regioNal cultural activities, sports and all kinds of clubs and societies receive funds. Considerable donations are also made to the health sector, to fund positions at regional colleges and universities, and to promote local and regional commercial development.

Norway’s savings banks have their very roots in social responsibility. The first banks aimed to make life a little easier for the least privileged in society, as clearly expressed in the objects of the country’s very first savings bank, Christiania Sparebank, founded in 1823, which were to promote “industry, economy and morality”.

By saving, people would be in a better position to fend for themselves during hard times, old age and periods of illness. The civil servants behind this first savings bank could see the conditions under which large parts of Oslo’s population were living, and shouldered their social responsibility by giving the public a chance to improve their living standards by encouraging savings and lending money for various necessities.

The surplus generated by the banks was used partly to shore up their reserves, with the remainder donated to good causes in the local community.

charitable donationsHvor stor andel av sparebankens How much of a savings bank’s profits could be earmarked for charitable purposes was long regulated by law, and until 2009 there was a limit of 25 per cent. New rules mean that it is now up to the individual bank to decide for itself – responsibly – how much of its surplus should be distributed to good causes.

The Norwegian Savings Banks Association began annual surveys of how much profit members actually donate back in 2003. The results revealed that more than 6 per cent of earnings were paid to local good causes, making a total of NOK 213 million. Cultural activities received the largest slice of the pie at 34 per cent, closely followed by sports at 32 per cent. Other clubs and societies received 18 per cent, while 8 per cent went towards commercial development and 7 per cent to the health sector.

The annual surveys have shown that banks generally donate money to the same causes, but there has been rapid growth in the total amount paid out in recent years.

The latest survey reveals that the industry donated some NOK 735 million in 2010, making a total of more than NOK 4.2 billion over the eight years the survey has been conducted.

More for large projectsDonations vary in size from NOK 1 000 to NOK 10-15 million. Recent years have seen a growing share of donations going to large projects, with around 80 per cent of donations now larger than NOK 10 000.

Prizes and scholarshipsAlongside these charitable donations, the savings banks fund almost 250 prizes and scholarships each year in the fields of enterprise, culture, sport and education. Around 80 per cent of these are worth more than NOK 10 000, and some more than NOK 100 000. n

Year 2003 2004 2005 2006 2007 2008 2009 2010

800

700

600

500

400

300

200

100

0

charitable donations 2003-10

NO

K m

illio

n

CHARITABLE DONATIONS

FNO

This is Finance Norway

FNO

42

Finance Norway was established January 1st 2010 by the Norwegian Savings Banks Association and the Norwegian Financial Services Association. Almost all professional and administrative staff of the two associations was transferred to the new organization. Finance Norway have a highly competent staff of almost 100 persons, with expertise in all fields of the financial sector, and will – for all practical purposes – represent the total financial sector in Norway.

The reason for establishing Finance Norway is to strengthen the financial sector in Norway. The regulatory environment for financial activities becomes ever more complicated and comprehensive. This requires top competence and a professional and dedicated staff in the trade associations.

Finance Norway represents some 180 financial institutions and financial groups that are active in the Norwegian market. The institutions operate within different sectors of financial activity:

• savings banks• commercial banks• life insurance companies• non-life insurance companies• finance companies• management companies for securities

funds• investment firms• finance groups

Finance Norway’s purpose is to strive for a strengthened Norwegian financial industry. The legal framework is getting ever more complex and comprehensive. Thus, specialist expertise is needed, as well as a solid professional environment within the trade associations.

Finance Norway’s objectivesFinance Norway’s role is to safeguard the interest of the financial services industry in Norway in relation to the authorities, other organisations, the media, the general public and in international forums.

In particular, Finance Norway’s objectives are:

• to ensure that financial institutions are afforded working conditions and opportunities for further development that provide a basis for profitable and sound operation, enabling them to offer their customers the best possible service,

• to ensure equal legal framework for all financial enterprises competing in the same market, independent of size and ownership,

• to ensure that Norwegian based financial enterprises are able to operate on equal terms and conditions with their international competitors, and that these terms and conditions are adjusted to the developments in the EEA area,

• to promote a sound development of the financial industry nationally as well as internationally,

• to promote a high professional and ethical standard in the financial industry and a wide understanding of the importance of the financial industry in society.

Part of a larger european communityThe European financial services industry is undergoing a period of profound and rapid change, both in the market place and in the regulatory framework. Through the EEA Agreement, changes in EU legislation will have exactly the same consequences for Norwegian financial institutions as for institutions located within the EU.

To safeguard the interest of the Norwegian financial sector Finance Norway participates in a larger European community. Finance Norway is a member with the European Savings Banks Group (ESBG), the European Banking Federation (EBF) and the European Insurance and reinsurance federation (CEA).

Finance Norway’s areas of activity• Economic and regulatory framework

for Norwegian-based financial services• International regulatory framework,

with a particular emphasis on EEA rules

• Division of work between the public and private sectors

• Capital adequacy, security and accounting rules for financial institutions

• Capital markets, pensions, savings and asset management

• Finance markets, financial instruments and securities settlements

• Payment systems, clearing and settlement

• Risk management, including actuarial management risk

• Loss prevention• Prevention and detection of insurance

fraud and other financial crimes• Guarantee schemes and guarantee

funds• Statutory insurance• Consumer issues• Holding and use of personal details,

including health details• Structure and competitive conditions in

the financial services industry• Fiscal and monetary policy• Tax• Corporate social responsibility,

including environmental issues• Education – financial illiteracy

common projectsIn the insurance area, Finance Norway is the secretariat for a number of common projects financed by the insurance companies, e.g.:

• Remaining Value Salvage• Pool Office • Motor Assessment• Health Assessment Committee• FG – Insurance Companies’ Approvals

Board• Norwegian Motor Insurers’ Bureau• Norwegian Occupational Injury

Insurers’ Bureau • Fraud Prevention Office• Norwegian Interbank Clearing System• BankAxept, the National Card Scheeme• BankID – eID issued by banks• The Norwegian Covered Bond Council

Finance Norway (FNO) is a trade association for the Norwegian finance industry and represent more than a 180 financial companies and financial corporations that are active in the Norwegian market.

department structure

administrationand iT

AccountCommunal Services

IT

The Management Team

Managing Director arne hyttnes

Director lene Magnussen

Communication Director leif osland

Director Marit sagen Åstvedt

Director stefi Kierulf Prytz

Director Jan digranes

Director geir r. Trulserud

Management

Banking andcapital Markets

Banking and Economics

Financial Markets

Legal

Payments and Infrastructures

communication life insurance and Pension

Policy Life

Statistics

corporate responsibility

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generalinsurance

Fraud Prevention Office

Loss Prevention

Motor AssessmentNon-Life Legal Affairs

Pool Office(Natural Perils Pool)

Statistics

The Norwegian Motor Insurers Bureau/

The Norwegian Injury Insurers Bureau

Management structure

Technical sub-comitees

Accounting

Actuary life

Actuary non-life

BankID Legal affairs

Bodily insurance

Clearing and settlement

Credit

Corporate Social Responsibility (CSR)

Documentary credit

Document (loans and guarantees)

Information

Insurance Fraud and Criminality

Joint Committee for Payment systems

Legal Affairs Payment systems

Life lawyers

Liquidity

Norwegian Bank Security Committee

Solvency

Trade finance

general Meeting

The Board

administration

steering committees

Approval – Hot work

Approval Board – Fire Protection

Approval Board –Theft Protection

Authorisation claims consultant

Authorisation consultants

Authorisation pensions insurance consultant

Fire Safety Projects

Health evaluation

Motor-vehicle insurance claim

Natural Perils Pool

Norwegian Motor Insurers’ Bureau

Norwegian occupational Injury Bureau

Remaining value salvage

Traffic safety projects

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committees

Banking and capital markets

Life and pension

Payments andinfrastructure

Risk and non-life

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tBoards

Legal affairs

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Payments and infrastructureKaj-Martin Georgsen, leader DNBArne Austreid SpareBank 1 SR-BankPål Bergskaug SEBAudun Bø Terra-GruppenJan-Frode Janson Fokus BankStein Klakegg Sparebanken VestAage Elmenhorst Schaanning KLPJohn Sætre Nordea Bank NorgeTiril Haug Villum Pareto BankHans Aasnæs Storebrand

Banking and capital marketsSvein Ivar Førland, leader Sandenes Sparebank Erlend Molde Jensen DNBGeir Bergskaug Sparebanken SørLorang Eriksen Terra-GruppenLeif Gripsgård HandelsbankenGro Elisabeth Lundevik Nordea Bank NorgeBernt Pettersen Fokus BankEldar Skjetne SpareBank 1 GruppenMagnar Øyhovden Skandiabanken

life and pensionGeir Holmgren, leader Storebrand LivsforsikringBjørn Asp Gjensidige PensjonsforsikringRoar Engen (observatør) KLPBjørn Atle Haugen DNB LivsforsikringHanne Fjellheim Handelsbanken LivÅmund Lunde Oslo PensjonsforsikringAud Lysenstøen SpareBank 1 LivsforsikringJan Petter Opedal Danica PensjonJørund Vandvik Livsforsikringsselskapet Nordea Liv NorgeMikkel A. Berg Silver Pensjonsforsikring

deputieson behalf of The Norwegian savings Banks association:1. Hans Kjensjord, Modum Sparebank 2. Hans Kristian Glesne, Nes Prestegjeld Sparebank

on behalf of the Norwegian Financial services association:1. Kirsten Idebøen, SpareBank 1 Gruppen 2. Bjørn Thømt, Frende Skadeforsikring

The composition of the board by March 16 2012

committees and boards

Rune Bjerke (chairperson) DNBStein Hannevik (deputy chairperson) Sparebanken PlussHelge Leiro Baastad GjensidigeJon Håvard Solum Grong SparebankArvid Andenæs Sparebanken Sogn og FjordaneKjerstin Fyllingen Tryg ForsikringFinn Haugan SpareBank 1 SMNLine M. Hestvik If SkadeforsikringIdar Kreutzer StorebrandTrond F. Mellingsæter Fokus BankSverre Thornes KLPDag Tjernsmo HandelsbankenGunn Wærsted Nordea Bank Norge

risk and non-lifeIvar Martinsen, leader If SkadeforsikringHans Martin Hovden KLPLars Fritzøe Jernbanepersonalets ForsikringMartin Danielsen Gjensidige ForsikringTom G. Granquist StorebrandTore Tenold SpareBank 1Truls Holm Olsen Tryg ForsikringSverre Bjerkeli Protector ForsikringBjørn Thømt Frende Skadeforsikring

Principal advisory committee legal affairsThorbjørn Gjerde, leader Fokus BankCamilla Bredrup If Skadeforsikring nufIda Louise Skaurum Mo KLPIvar Sagbakken Nordea Bank Norge ASAJørn Hammer Gjensidige Forsikring ASA Kjell R. Hannevik Terra-Gruppen ASOlav Heldal DNB Bank ASA Tor G. Birkeland SpareBank 1 Gruppen ASGunnar Heiberg Storebrand ASAPål Pedersen Sparebanken VestTorjus Moe HandelsbankenCarine Lindmann Eksportfinans ASAAnne Østberg Vikøren Tryg Forsikring Olav Breck (observer) Sparebankforeningen

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on the board

Members of Finance Norway

FNO

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Andebu SparebankArendal og Omegns SparekasseAskim Sparebank Aurland Sparebank Aurskog SparebankBamble og Langesund Spb.Berg SparebankBien Sparebank AS Birkenes SparebankBjugn SparebankBlaker SparebankBud, Fræna og Hustad SparebankBø SparebankCultura SparebankDNBDrangedal og Tørdal SparebankEidsberg SparebankEtne SparebankEtnedal Sparebank Evje og Hornnes SparebankFana SparebankFlekkefjord SparebankFornebubankenGildeskål SparebankGjerstad Sparebank Grong SparebankGrue SparebankHaltdalen SparebankHarstad SparebankHaugesund SparebankHegra SparebankHelgeland SparebankHjartdal og Gransherad Spb.

Hjelmeland Sparebank Hol SparebankHolla og Lunde SparebankHøland og Setskog Sparebank Hønefoss Sparebank Indre Sogn SparebankJernbanepersonalets SparebankKlepp SparebankKlæbu Sparebank Kragerø Sparebank Kvinesdal SparebankLarvikbanken Brunlanes Spb.Lillesands Sparebank Lillestrøm SparebankLofoten SparebankSpareBank 1 Lom og SkjåkLuster SparebankMarker SparebankMeldal SparebankMelhus SparebankNes Prestegjelds SparebankNesset SparebankOdal Sparebank Ofoten SparebankOpdals SparebankOrkdal SparebankRindal SparebankRørosbanken Røros SparebankSandnes SparebankSelbu SparebankSeljord Sparebank Skudenes & Aakra SparebankSoknedal Sparebank

SpareBank 1 Buskerud-VestfoldSpareBank 1 GudbrandsdalSpareBank 1 HallingdalSpareBank 1 ModumSpareBank 1 Nord-NorgeSpareBank 1 NordVestSpareBank 1 Nøtterøy-TønsbergSpareBank 1 Ringerike HadelandSpareBank 1 SMNSpareBank 1 SR-BankSpareBank 1-Stiftinga Kvinnherad SpareBank 1 Søre SunnmøreSpareBank 1 TelemarkSpareBank 1 Østfold AkershusSparebanken HedmarkSparebanken HemneSparebanken MøreSparebanken NarvikSparebanken PlussSparebanken Sogn og Fjordane Sparebanken Sør Sparebanken Vest Sparebanken ØstSparebankstiftinga Fjaler Sparebankstiftinga Hardanger Sparebankstiftinga Sogn og Fjordane Sparebankstiftelsen DNBSparebankstiftelsen GranSparebankstiftelsen Halden Sparebankstiftelsen HelgelandSparebankstiftelsen Jevnaker Lunner NittedalSparebankstiftelsen Ringerike

Sparebankstiftelsen SaudaSparebankstiftelsen SpareBank 1 Nord-NorgeSparebankstiftelsen SR-Bank Sparebankstiftelsen Tingvoll SpareskillingsbankenSpydeberg SparebankStadsbygd SparebankStrømmen SparebankSunndal Sparebank Surnadal SparebankSøgne og Greipstad SparebankTime SparebankTinn SparebankTolga-Os SparebankTotens Sparebank Trøgstad SparebankTysnes SparebankValle SparebankVang Sparebank Vegårshei Sparebank Vestre Slidre SparebankVik Sparebank Voss Sparebank Ørland Sparebank Ørskog SparebankØystre Slidre SparebankÅfjord SparebankAasen Sparebank

ordinary membersACE European Group Ltd.Acta Holding ASABank 1 Oslo ASBank2 ASABank Norwegian ASBN Bank ASABNP Paribas Oslo Branch Boligbyggelagenes Forsikring ASCardif SkadeforsikringChartis Europe SACitibank International plc, Branch Norway Codan ForsikringDanica Pensjon ASDNB ASAEksportfinans ASAEuro Insurances Ltd.Fokus BankFrende Livsforsikring ASFrende Skadeforsikring AS

Försäkringsaktiebolaget Skandia, filial NorgeGE Money BankGenworth FinancialGIEK Kredittforsikring ASGjensidige Forsikring ASAGouda ReiseforsikringHandelsbanken Handelsbanken LivIf SkadeforsikringIndustriforsikring AS Inter HannoverJernbanepersonalets Forsikring KLP (Kommunal Landspensjonskasse)KNIF Trygghet Forsikring ASLandbruksforsikring ASLandkredittLivforsikringsselskapet Nordea Liv Norge ASMøretrygd Gjensidig Forsikring

NEMI forsikring ASANordea Bank Norge ASANorsk Hussopp-ForsikringOslo Pensjonsforsikring ASPareto Bank ASAProtector Forsikring ASASEB Privatbanken ASASilver Pensjonsforsikring ASSkandiaBanken AB Skandinaviska Enskilda Banken AB SpareBank 1 Gruppen ASStorebrand ASAStorebrand Helseforsikring ASSwedbank NorgeTelenor Forsikring ASATerra-Gruppen ASTryg ForsikringUnison Forsikring ASAVerdibanken ASAVoss Veksel- og Landmandsbank ASAyA Bank AS

Trade organizationmembersFinansieringsselskapenes ForeningVerdipapirfondenes Forening

associated membersKommunekreditt Norge ASLandkreditt Bank ASNordlandsbanken ASANorgeskreditt AS

cross members Aioi Insurance Company of Europe Ltd.Altraplan Luxembourg S.A. avd. Norge RJ Kiln & Co. Ltd.

Members of The Norwegian Savings Banks Association

Members of Norwegian Financial Services Association

Photo: page 3 edyta linek | page 13 Vaidas Bucys | page 20 and 31 regine Mørk | page 37 claudio divizia | portraits Vivian olsen, FNoLayout Plein | Print wittusen & Jensen | Copies 500 | April 2012

Finance Norway

Hansteens gt. 2 • Telephone +47 23 28 42 00 • Telefax +47 23 28 42 01 • P.O.Box 2473 Solli, N-0202 Oslo • Org.no NO 994 970 925 • www.fno.no