The Danish Financial Business Act provides the legislative basis for insurance supervision in Denmark, and is extensively based on the Solvency II Directive (Directive 2009/138/EC). In accordance with the Solvency II Directive, the purpose of regulation and supervision in the field of insurance is stated in section 344(2) of the Danish Financial Business Act, according to which
“The Danish FSA shall organise its routine supervision with a view to promoting financial stability and confidence in financial undertakings and markets, and, for the insurance industry, to protecting the interests of policyholders.”
In the field of insurance, protection of policyholders is an essential part of the purpose of the Danish FSA's supervision. In its supervision, the Danish FSA is therefore required to emphasise that the insurance industry undertakes to protect the interests of policyholders. As part of the ongoing supervision of insurance undertakings and groups, the Danish FSA therefore helps to ensure that the insurance undertakings can fulfil their obligations according to the insurance contracts at all times, in particular that the undertakings are solvent, have adequate technical provisions, invest in suitable assets, comply with the principles regarding generally accepted business practice, and have an appropriate system of governance.
As part of its supervision, the Danish FSA must examine the durability of the business model of the individual financial undertaking. The durability of a business model means that the business model contributes to the insurance undertaking's viability, and that relevant legislation is complied with. This refers to the insurance undertaking's actual business model, which does not necessarily correspond to the business model described in the undertaking's strategic documents or similar. The Danish FSA does not only evaluate any current violations, but also looks at potential future violations or problems. A business model may be judged to be non-durable for many reasons, depending both on the specific insurance undertaking's type, size and business and on the market conditions in general. In regard to non-life insurance, it is possible to state that a business model for non-life insurance undertakings will always include the following elements: arrangement, tariff-setting and claims processing, including provisions and reinsurance. If these elements, either individually or combined, do not have the necessary focus or mutual balance, this may lead to solvency problems in the future just as inadequate management of asset risk does. Examples of non-durable business models for non-life insurance undertakings include situations in which the business is based on an assumption of growth without a well-thought-out tariff, or in which undertakings will get into serious difficulties if reinsurance is not arranged – for example, in the event of big storms, major fires or acceptance of large risk. The examples also include situations in which the non-life insurance undertaking has invested its assets in highly concentrated form – such as only in shares in a single large undertaking, making the insurance undertaking dependent on the survival of this undertaking. In regard to life insurance, it is possible to state that a business model for life insurance undertakings and multi-employer occupational pension funds includes a range of elements that affect the durability of the business model, for example the technical basis on which the policies are arranged, the contracts that are entered into and the risk management. If these elements, either individually or combined, do not have the necessary quality or mutual balance, this may lead to solvency problems in future. A business model may thus be non-durble if the technical basis does not correctly or adequately incorporate biometric risks, or if the undertaking does not measure or manage the market risks well enough.
The Danish FSA's supervision is organised on the basis of considerations of materiality, with supervisory action being proportional to the potential risks or harmful effects, such as the risk of legal violations. Elevated risk may, for example, be due to technically complex regulation, a general experience of violations often occurring regarding the relevant rules, a specific experience of violations in certain undertakings or types of undertakings, or new rules, for which there is often a period of implementation in the undertakings.
The fact that the Danish FSA organises its supervision on the basis of considerations of materiality does not mean that there are areas of financial legislation that the Danish FSA is not required to supervise. In those areas where the potential risks or harmful effects are deemed to be relatively low, the Danish FSA may instead use less effective, but also less resource-intensive supervisory instruments, such as random checks or checks that are performed when the Danish FSA is, for example, investigating areas that are relevant to the matter in the insurance undertakings. Where the risk of harmful effects is deemed to be very low, the Danish FSA may elect not to regularly supervise the area, but to rely on reports and other information sent to the Danish FSA.
Main supervisory functions
The Danish FSA's main supervisory functions are as follows:
Authorisation/approval, e.g. authorisation to carry out insurance activities, approval of the appointment of members to the board of directors and the board of management or as a key function holder, etc.
Controls, e.g. monitoring via off-site supervision or on-site inspection of insurance undertakings' financial and solvency situation, changes in the ownership structure and compliance with regulations.
Disciplining, e.g. taking preventive or corrective measures via supervisory decisions to the insurance undertakings in the form of orders, reprimands, risk information or fines.
Regulation: Setting standards, e.g. by issuing regulations and guidelines.
Information: Publication of statistical data and analytical reports on the insurance sector.
Main areas of ongoing or planned supervisory activity
The goals and results plan of the Danish FSA is available here (only in Danish).
The Danish FSA's annual reports are also available here (only in Danish).