The Norwegian Financial Industry 2013

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The Norwegian Financial Industry 2013

  1. 1. 2013The NorwegianFinancial Industry
  2. 2. Portraits CF-Wesenberg/kolonihaven.no | Layout Plein | Print 07 | Copies 500 | April 2013
  3. 3. ContentsWelcome to The Norwegian Financial Industry 2013 4Status 5Further growth in the Norwegian economy 6Norwegian banks stand firm despite European turmoil 8Regulatory changes and pension reform 12Few fires and little bad weather 16Topics 21The pension reform 22Who will finance industry? 24Savings bank foundations – the power to change 26Getting to grips with climate change 27Towards pan-European banking supervision 28Financing infrastructure 30Cybercrime demands vigilance 31Own home a more distant dream for many young people 32Fateful times for the financial industry 33The financial industry and UN sustainability principles 34Government approves BankID 35Solvency II – still challenges to overcome 36Helping young people make better financial decisions 38New compenstation scheme for occupational injuries 39Joint platform for ethics and Advisory Code of Conduct 40Finance Norway 41This is Finance Norway 42Organisation chart as of March 2013 43Management structure 44Board and committees 2013 45Finance Norway’s members 463
  4. 4. Welcome toThe Norwegian FinancialIndustry 2013We are Finance NorwayFinance Norway merged with the­Norwegian Employers’ Association forthe Financial Sector on 1st January 2013to create a combined trade and employerfederation. With 200 member ­companies,we represent practically the entire­Norwegian financial industry, whichemploys some 40-50 000 people. Whilenot as large as in some other countries, itis still an important sector.Financial institutions make a majorcontribution to society, both through­efficiency gains for the benefit of­customers and through sizable tax­revenue for the benefit of the widercommunity. We can be proud of whatwe deliver. Productivity in the industry istwo-and-a-half times the average for themainland economy (excluding oil, gasand shipping), and productivity growthhas been formidable. From 1990 to2011, productivity in financial servicesincreased by 168 percent, comparedwith 45 percent for the mainland­economy as a whole. During the sameperiod, a sharp fall in banks’ interestmargin led to total annual gains for ourcustomers of around NOK 36 billion.This goes to show that this is an industryof huge importance to the Norwegianeconomy.Norwegian industry increasingly­features strong confederations thatserve as both trade and employer­organisations. In the financial ­industry,the first step towards this kind of­integration was taken when the industryunited under Finance Norway as a tradeassociation in 2010, while employer-related matters were handled by theNorwegian Employers’ Association forthe Financial Sector.One bodyThe new, merged organisation is in abetter position to get the best termsfor member companies, helping themto ­remain competitive and profitable.We aim to contribute to the furtherdevelopment of a knowledge-basedindustry. Financial institutions need tooffer ­attractive jobs for talented people,so skills development is paramount.­Norwegian financial institutions have amajor role to play in industry.Major challengesThe Norwegian life insurance industryfaces major challenges. It is essentialthat we find a sustainable solution to thelongevity issue and quickly put in placeappropriate transitional rules tailoredto the pension reform and SolvencyII. We must quickly dispel uncertaintyabout the timetable for key parts of therules, both nationally and at EU level.To ensure appropriate implementationand ­predictability for both employersand their employees, it is important forparliament to deal with the legislativeproposals in the spring 2013 session sothat the new rules can be in place on1st January 2014. This will remove theuncertainty that has dogged the pensionmarket in recent years in anticipationof the adjustment of defined-benefitpensions following the reform of statepensions.We must succeed in optimisingthe ­adaptation and implementationof ­Solvency II for Norwegian life­companies. Pensions are a long-termbusiness, with obligations lasting 40years. Solvency II is about matchingliabilities as far as possible with assets ofa similar duration in order to avoid anincreased solvency capital requirement.Flood of regulatory changesBanks face a flood of regulatory changes,and some have claimed that the ­industryis opposed to all new regulation. Thisis not true. We entirely agree thatbanks’ capital requirements need to be­tightened, but the rules need to be asconsistent as possible from country tocountry. This has also been one of themain aims of the international regulatoryprocess, so as to avoid a shift in activityto the countries with the most relaxedrequirements.Our concern is that the Norwegianauthorities are moving in the ­opposite­direction and will introduce more­stringent requirements and differentmeasurement methods. As the back-bone of the Norwegian economy, wewould not be doing our job if we didnot point out the consequences andcosts of new regulatory requirements. Itwould be a travesty if Norwegian-basedbanks that are in reality more robustthan their ­competitors in neighbouringcountries were to appear less robust onpaper ­simply because the Norwegian­authorities have chosen to use a ­differentmethod to measure their financialstrength.Housing bubble worriesMany are worried about a housingbubble in Norway. While there hasbeen strong growth in mortgage lendingover the past decade, most borrowers’incomes have also grown substantially,enabling them to service higher levels ofdebt than before. Norway has one of theworld’s highest levels of home ownership,which is a clear strength for ­Norwegiansociety. Stiff ­competition ­between banksand good banking ­practices have meantthat most ­borrowers have been able torealise their housing dreams on reason-able financial terms. Even in times ofcrisis, loan losses on mortgages havebeen minimal.Norwegian banks are preparing fortougher capital requirements. Thiswill result in higher borrowing costs ingeneral, and many businesses may findbanks tightening their lending standards.The question is whether regulation thatcould have such an effect is appropriate.We have said it before and we will sayit again: the Norwegian authorities mustnot introduce unilateral rules that put astrong Norwegian financial industry ina weaker position than its competitors.The industry, its customers and the entireNorwegian economy would suffer.Idar KreutzerManaging Director, Finance Norway4
  5. 5. Status
  6. 6. There was healthy growth in the­Norwegian economy in 2012, but thedebt crisis and the gloomy outlook forthe real economy in Europe have ledto uncertainty about future growthin Norway as well. With the oil pricestill at high levels, high activity in the­petroleum sector provides a strongimpulse to the mainland economy,where capacity utilization is estimatedto be somewhat above the normal level.However, 3.5 percent GDP growth, y/y,in 2012 was somewhat below the centralbank forecast and market consensus,mainly due to moderate growth in thefourth quarter, with weak ­developmentsin both private consumption and­traditional exports of goods.The labor market tightened throughthe first three quarters of 2012, withunemployment, measured by StatisticsNorway’s Labor Force Survey (LFS),dropping from 3.3 percent in January2012 to 3.0 percent in October 2012.However, the LFS-rate sharply ­increasedin November and December and­unemployment is currently at 3.6 percent(average of December 2012 – February2013). On the other hand, registeredunemployment at the job centers hasnot shown the same development, andis still at a low level. Wage growth hasbeen solid, and is projected to remain ata level around 4 percent in the years tocome. Private consumption growth hasbeen moderate throughout 2012, andhousehold saving has increased. Houseprices are still growing at an annual rateof approximately 7-8 percent.A split economyNorway is a small and open ­economy.Due to slower growth amongst­Norway’s main trading partners,­traditional exports fell through the­second half of 2012, also ­reflectedin weak growth in ­industrial­manufacturing. This is due to low­international demand and higher wagegrowth in Norway than in competingcountries. However, the economy ismarkedly divided and in other ­industriesprospects are brighter, especiallyamongst suppliers to the petroleumindustry and other related industries.Petroleum investments grew strongly,by above 14 percent in 2012, partlydue to new petroleum discoveries and­persistently high oil prices.Moderate consumption growthThe combination of healthy nominalwage growth and low inflation ledto strong real wage growth in 2012.­Coupled with substantial rise in houseprices, this enables households toincrease their consumption. However,growth in private consumption wasfairly moderate at 2.9 percent in 2012,slightly up on 2011 but weaker thananticipated. The household saving rate– saving as a percentage of disposableincome – has risen in recent years andwas between 8 and 9 percent in 2012.Statistics Norway expects the savingrate to hold in this interval through to2015. Finance Norway’s expectationssurvey for the fourth quarter reveals thathouseholds’ willingness to repay debt ishigh – we have to go back to 1998 tofind similar levels.House prices still growingFollowing substantial growth in houseprices through 2011, the trend ­continuedthrough 2012 and into 2013, with anaverage y/y growth of 7.9 percent. Inaddition to high real income growth,the strong development is fuelledby continuing low interest rates andhigh population growth. There is stillpotential for further growth, perhapsat a slightly more modest pace goingforward. Activity in construction pickedup considerably in 2011, and this trendcontinued in 2012 with more than 30000 housing starts during the year, anincrease of around 2 000 from 2011.Downside risk in the housing­market should be viewed in light of theterms of trade, which is an important­fundamental factor behind incomegrowth. A substantial slide in oil pricesor increasing import prices may leadto falling income growth and housingdemand at home. On the other hand,increasing construction costs in the longrun, due to weak productivity growthin the construction sector and shortageof land, due to increased centralization,may limit the downside risk in the realhouse price level.Stable credit growthAggregate credit growth was fairlystable at around 7 percent y/y in 2012,until falling markedly in Decemberand ­January 2013. Household creditgrowth has shown a stable ­development,currently growing at 7.2 percent y/yas of February 2013. Thus the dropin aggregate growth is due to lowercredit growth to businesses which fell­markedly during the last part of 2012and into 2013.The most important source ofcorporate credit is bank loans andlower growth in corporate debt may beexplained by stricter banking ­regulation.In general corporate loans require morecapital than mortgages, and banks maybe inclined to cut back on credit tobusinesses in order to adjust the riskweighted balance sheet to meet the new,increased capital requirements.Household credit growth is stillhigher than the wage growth. Thusthe households’ debt burden ­continuesto rise, although at a modest pace.The ­aggregate debt burden of thehouseholds is currently just below 200percent, equal to an aggregate house-hold debt two times the size of theaggregate household disposable income.­Authorities have expressed concernwith the high level of household debt.However, a breakdown of the creditFurther growth inthe Norwegian economyPersistently high oil prices and high activity in the petroleum sector isfeeding through to the mainland economy, which is growing at a solidpace. Weak growth in Europe is nevertheless a source of uncertainty forthe Norwegian economy.THE NORWEGIAN ECONOMY6
  7. 7. growth and debt burden in householdsshows that the majority of householdcredit growth since the early 2000sstems from households in age groupsabove 45 years. Furthermore, vulnerablegroups, households with low income anda high debt burden, make up less than4 percent of total households. Growthin house prices over a long period oftime have put Norwegian households ina significant net wealth position. DNBMarkets estimates from August 2012showed that household financial and realassets exceeded NOK 7 000 billion. Atthe same time aggregate household debtconstituted approximately NOK 2 500billion.Persistent uncertainty abroadThe growth outlook deterioratedsomewhat in 2012, especially in Europe.Interest rates abroad are set to remainvery low for a long time to come, whichis restricting Norges Bank’s freedom ofaction. At the beginning of 2012 theEuropean Central Bank (ECB) held asecond round of its LTRO programmeto ease the funding situation for­European banks, and during the summerthe ECB announced plans to purchasegovernment debt from heavily indebted­countries. These measures helped reducerisk premiums in money and capitalmarkets, and in Norway banks andnon-financials experienced increasedaccess to long-term market funding. Inaddition, the Federal Reserve announcedfurther rounds of quantitative easingduring the fall, and there are signs ofimprovement in the US housing market.Strong krone and low inflationThe Norwegian krone strengthened in2012, reflecting a substantial interestrate differential throughout the year.One euro cost 7.34 kroner at the endof 2012, which means that the kronegained around 5 percent during the year.The krone ended the year around 10percent stronger than the average for thepast 20 years.The operational target for ­Norwegianmonetary policy is low and stable­inflation of 2.5 percent over time. Thelow inflation of 2011 persisted through-out 2012, with the annual rise in theconsumer price index adjusted for taxchanges and energy prices (CPI-ATE)ranging between 0.7 and 1.5 percentduring the year. This is well belowthe inflation target, and the ­moderateincrease in consumer prices can beexplained partly by the strong krone andlow inflation abroad. High productivitygrowth in the production of goods andservices in Norway probably also offsetthe price effect of wage growth.Norges Bank delays first hikeAfter the 25 basis points cut in March2012, the central bank has left the keypolicy rate unchanged at 1,5 percentever since. However, at its latest meetingin March 2013 both inflation ­projectionsand growth forecasts among Norway’smain trading partners were reviseddown, resulting in a subsequent loweringof the forward guidance on the key rate,by approximately 20-60 basis pointsin 2013 and 2014. Thus the first hikewas delayed yet again, now signaledto occur sometime during the spring of2014. In addition to slow growth abroadand low inflation, negative effects froma strengthening of the Krone puts a­downward pressure on monetary policy.High petroleum revenue spendingIn 2012 the fiscal policy, measured asthe change in the structural ­non-oilbudget deficit as a share of trendGDP for ­mainland Norway, pro-vided an ­expansionary impulse of 0.8­percent. The 2013-budget predicts an­expansionary impulse of 0.8 percentthis year as well. Large petroleumrevenues give the Norwegian govern-ment ­substantial economic freedom, andthe financial crisis was met by strongfiscal stimulus in 2009. Since then, thestructural non-oil deficit has remained ata high level. n7THE NORWEGIAN ECONOMY
  8. 8. The Norwegian economy is in goodshape, but could still be affected bythe uncertain outlook for the globaleconomy.Financial turmoil abatesThe sovereign debt crisis in Europe easedsomewhat in 2012 as the ­European­Central Bank (ECB) took action to­counter high and rising yields ongovernment debt in heavily indebted­countries. Loan programmes for banksand ­announced plans of sovereigndebt ­purchases helped to reduce risk­premiums in global capital markets. Therecovery in financial markets also hada positive effect on Norwegian banks.Risk premiums on long-term funding fellmarkedly throughout the year, and theavailability of new funding improved.However, banks have not lowered theirlending rates accordingly. There are­several reasons for this. On average,banks’ funding costs are still relativelyhigh. Upcoming new requirements forcapital, funding structure and liquiditywill also lead to higher costs for banks.Increased margins are one of a numberof essential ways in which Norwegianbanks can counter increasing costs­resulting from stricter requirements.Although the outlook for the realeconomy in Europe remains weak,and the US recovery in the wake ofthe ­financial crisis has been somewhatslower than originally assumed, equitymarkets have been more upbeat. Theglobal S&P 1200 index climbed almost17 percent in 2012 after falling by 5percent in 2011, and the Oslo StockExchange benchmark index also gainednearly 15 percent.Capital and liquidity rulesThe European Commission published itsproposals for new capital and ­liquidityrules – CRR/CRD IV – on 20th June2011. These need to be adopted bythe ­European Parliament and ­Councilof Ministers. Political concern aboutnational flexibility and new ­regulatoryproposals have meant that the­decisionmaking process has dragged on.The timing of a decision in the EU hassteadily been postponed, most recentlyto the second quarter of 2013.Norwegian financial institutions arein a good position to satisfy the newrequirements. The Norwegian economyis buoyant, unemployment is low, andthe outlook for the domestic economyis bright. It is important to Norwegianinstitutions that future requirements areharmonised, that the requirements areNorwegian banks stand firmdespite European turmoilBANKS8The European sovereign debt crisis easedsomewhat in 2012, leading to recovery inglobal financial markets, with positive effectsfor Norwegian banks.Photo:NorgesBank
  9. 9. properly justified, and that overlappinginstruments are avoided. The ­Norwegianauthorities must let go of their oldrules and introduce new requirementsbased on the new regulations. This is­important for how the financial strengthand risk for Norwegian institutions andthe Norwegian economy are measuredand assessed.NIBORIt was revealed in 2012 that key inter-national interbank interest rates hadbeen systematically manipulated. Theserates are used as a benchmark for awide range of contracts both within andbeyond the financial sector. The aim waspartly direct financial gain, but also tomake the individual bank appear morecreditworthy. Several big global bankshave been handed heavy fines, and moreare under investigation. The case hascast the spotlight onto the proceduresfor setting interest rates of this kind.Both in the EU and elsewhere, the needfor public regulation and supervision ofinterest rate indicators and other bench-mark indices is now being considered.The Norwegian variant, NIBOR, isa collection of interbank interest rateswith maturities of between one weekand one year calculated as the average ofthe rates that six leading banks say theywould require for unsecured lending toother banks. Finance Norway assumedresponsibility for the NIBOR rules in2011, when they were based on inter­national practice. However, the rules willbe reviewed during 2013 in the light ofthe work now under way ­internationally.This revision will include assessingwhether NIBOR rates adequately reflectactual market interest rate movements.The assessments will be performedpartly by the industry and the authoritiesindividually, and partly in consultationbetween the two.Crisis managementThe European Commission presented adraft crisis management directive in June2012. The proposals can be divided intofour areas:• Preventive measures, including closersupervision, a requirement for all­institutions to draw up a ­recoveryplan, and the preparation of a­resolution plan for all institutions• Rules giving the authorities theright to intervene at an early stage if­problems arise• Powers and tools for ­restructuring,splitting up and winding up­institutions• Financing of a publicly administeredresolution fund through contributionsand potentially loans between thevarious national resolution fundsThe aim of the directive is to stop bankcrises from leading to losses being passedon to governments and ­taxpayers.For example, shareholders and other­investors should take losses before anyother creditors.The draft directive needs to be­adopted under the EU’s co-decision­procedure, which means that the­European Parliament, Council of­Ministers and European Commissionmust all agree on the new rules. Thedraft will be considered by the counciland parliament during the first half ofthis year, and it is expected that thedirective will be adopted fairly shortlyafterwards. It will probably be adoptedin parallel with the delayed guaranteefund directive. Together these directiveswill provide the basis for the BankingLaw Commission’s work on proposalsfor new Norwegian legislation in thisarea.Activity taxThe Financial Crisis Commissionproposed in report NOU 2011:1 thatthe Norwegian authorities explore thebasis and consequences of an activitytax on financial institutions’ profits andpayrolls in order to tax the value addedin the sector. The National Budget for2013 contains a detailed discussion ofthe Ministry of Finance’s work on such atax for the financial sector. Although theministry does not present any concreteproposals in the budget, it notes that thematter may be taken up at a later date.Finance Norway has urged the­Norwegian authorities to wait andsee what happens in the EU before­considering the introduction of an­activity tax. An unilateral activity taxcould undermine Norwegian ­financialinstitutions’ competitiveness and ­abilityto raise equity capital. There are nogrounds to claim that the financial­industry is under-taxed or makes­excessive profits, and a tax of this kindwould be highly complex to implement.In the wake of the financial ­crisis,the European Commission has ­exploredboth an activity tax and a ­transactiontax for the financial sector. The­introduction of an activity tax is notcurrently under consideration in theEU – the commission is working insteadon a concrete model for a financial­transaction tax in 11 member states withthe consent of the remaining memberstates.The Norwegian bond marketThey were very high levels of activ-ity in the Norwegian bond market in2012. Including taps, bond issuance onOslo Stock Exchange and Oslo ABMcame to around NOK 700 billion. Thetotal ­outstanding volume on the two­marketplaces was over NOK 1 350­billion across 345 ­issuers at the end ofthe year.Corporate bonds and high-yieldbonds have attracted particular ­attentionover the past year. The outstandingvolume of non-financial corporate bondslisted on Oslo Stock Exchange grewby 22 percent from 2011, the biggest­increase since 2004, and this sector isnow the largest private issuer behindcovered bond companies.The growing activity in the bondmarket has to be seen in the light ofstricter credit standards at banks inanticipation of tougher capital require-ments (CRD IV), which will limit banks’lending capacity, and this is already­being reflected in slower growth in­lending to non-financial enterprises.Thus the bond market is playing anincreasingly important role in the­supply of credit, including as a source of­financing for Norwegian industry.Covered bondsThe introduction of covered bonds hashad a major impact on banks’ overallfunding costs and has therefore been­important in meeting the demand forcredit in industry in recent years.The market for covered bonds isnow larger than that for governmentbonds, with an outstanding volume ofaround NOK 400 billion or aroundhalf of total covered bond issuance. Themarket for government bonds is worthBANKS9t
  10. 10. around NOK 250 billion. Growth in theoutstanding volume of covered bondsdid slow somewhat in 2012 relative tothe previous four years, but this is onlynatural as the market matures.Contribution to financial stabilityThe introduction of covered bonds hasconsiderably reduced refinancing riskin the banking industry. It has easedaccess to longer-term funding and hastherefore helped to underpin financial­stability. Coming regulatory require-ments for banks and insurers (CRDIV and ­Solvency II) are accentuatingthe need for a well-functioning, largeand liquid national bond market. Theabsence of a significant market forgovernment debt means that coveredbonds play a ­particu­larly importantrole in the ­Norwegian bond market.The development of the bond marketand covered bonds in particular istherefore a priority for the industry andfor Finance Norway. Work is underway on ­strengthening the regulatoryframework and improving ­transparencyand ­liquidity in the market. Finance­Norway is also involved in ­exploringthe ­possibility of establishing a­Norwegian-based rating agency to meetthe ­increased need for ratings as theregulatory changes enter into force.Further growth in card useBankAxept, the Norwegian banks’national system for card payments,is owned and managed by Finance­Norway. The individual banks ­competewith each other both in the card issuingmarket and in the acquiring market.Eight out of ten card payments inNorway use the ­BankAxept system, anda total of 1.2 billion ­transactions weremade through the system in 2012, with atotal value of NOK 414 billion.The use of BankAxept hits newrecord highs every year, partly becauseconsumers are increasingly using cardsfor small purchases. Around a quarterof all BankAxept transactions are foramounts below NOK 100, and almosthalf for amounts below NOK 200,and the average size of a BankAxept­transaction is NOK 352.BankAxept cards can also be usedto withdraw cash in many stores (cashback). As card usage grows, fewer andfewer people are using this facility: thenumber of in-store cash withdrawals hasfallen by a fifth in the past four yearsalone. A similar trend is being seen inATM transactions – while the number ofATMs is relatively stable, consumers areusing them less and less.Meanwhile the number of smart-phone-based payment solutions is­growing, which will further reduce therole of cash in payment for goods andservices. This is good news for society, ascash payments are generally more costlythan electronic payments.Focus on contingency solutionsBankAxept is an efficient payment­system that delivers a large number ofpayments quickly, securely and stablyat low cost. The importance of theBankAxept system for customers andsociety in general necessitates highstandards of stability and effective­contingency solutions, and so consider­able resources are invested in safe­guarding stability and security in thecard system.High levels of attention are ­generallypaid to contingency options in ­electronicpayment systems. A payment ­transactionpasses through several networks, eachof which is critical for its execution.­Telecom, power and bank networksmust all be functioning. If there is a­failure in one place, there are good­backup solutions. It is therefore veryrare for a network failure to have­consequences for the public. The­banking industry constantly assesses theneed for further contingency measures.The focus of this work is on the ­abilityto re-establish electronic payment­systems quickly.Profitability of BankAxept andBankID servicesBanks’ payment services are ­largelycoordinated. The Norwegian ­bankingindustry has a long ­tradition of­working together on IT ­solutionsfor ­processing both payments and­information. ­Extensive shared­operational ­infra­structure has beenbuilt up. The individual banks offerand price their services in the market-place, and ­competition is fierce. Thedevelopment of new user interfacesfor the ­distribution of BankAxept andBankID services requires considerableinvestment, and there must be ­sufficientwillingness to make the necessaryinvestment. In the future it will there-fore be important to concentrate onboth an ­organisation and a commercial­orientation that give the individual bankscope to make a profit on its services.Key role in the digitisationof societyThe digitisation of banks’ serviceshas accelerated. Fully electronic loanapplication ­processes are efficient andreduce processing times to a fraction ofwhat they were. Electronic opening ofaccount increases competition between­financial institutions. New online­banking services have been launched,and banks are ­distributing their servicesvia smartphones, tablets and the like,­increasing their availability to the public.In ­addition, banks will be both suppliersand users in the government’s ongoingwork on digitising public services. Theindustry is keen to contribute to thiswork.In autumn 2012 the financial ­industryconcluded an agreement with the­government on the use of BankID as eIDwhen logging into the public sector’s­ID-porten and Altinn portals. BankIDhas no fewer than 2.8 million users,who are accustomed to using BankIDfor online banking, so the ­thresholdfor ­logging into public services usingBankID is therefore low. BankID boaststhe highest levels of ­security and can alsobe used to sign documents. This shouldmean that there will be ­opportunitiesto offer public administration a broadrange of services through these portals.The government also aims to increasethe use of electronic billing, and sincesummer 2012 government bodies havehad to require their suppliers to issueelectronic invoices. The authorities andthe financial industry are also ­workingtogether on a solution that enables­citizens to opt into e-invoicing from allor selected government bodies with justa few keystrokes.Electronic registrationsBanks are also users of public-sector­digital services, and would have likedelectronic registration of properties,mortgage law and other charges to havebeen given the same priority by theauthorities as invoicing. Fully electronicprocedures for granting loans whichinclude the registration of a chargewould simplify banks’ ­internal processesconsiderably and give ­customers betterand more flexible services. There wouldalso be considerable efficiency gains forthe registration authorities. Pilot projectshave been ­conducted where the bankobtains a physical charge documentfrom the customer and sends this forregistration in parallel with an electronic­document that has not been signed.Banks now believe it is time to introduce“fully electronic” charge documentswhich the customer signs electronically.­Unfortunately clarification is still neededon the legal side concerning the use ofthese documents for debt recovery in theevent of default.Immediate paymentsThe market has a growing ­expectationthat payments should be made ­easierand quicker. Banks are therefore­working on a service where paymentsare executed in such a way that therecipient has access to the funds withinseconds. Banks could then be expectedBANKS10t
  11. 11. Good bank results in 2012Banks’ earnings increased from 2011 to 2012.1Net profit climbed fromNOK 24 billion to NOK 27.8 billion, or from 0.65 to 0.68 percent of averagetotal assets (ATA). A drop in the value of derivatives held to hedge interestand exchange rate risk put a damper on earnings growth. Return on equity­increased by almost one percentage point from 10.5 percent in 2011 to 11.4percent in 2012.Stable net interest incomeNet interest income was NOK 60 billion in 2012, an increase of around NOK4.4 billion from 2011. Due to strong growth in assets in the largest banks,net interest income was nevertheless stable at 1.48 percent of ATA in 2012,against 1.49 percent in 2011. Falling money market rates and reduced riskpremiums for market funding made a positive contribution, but premiumsare still higher than before the financial crisis. Competition for customerdeposits also remains fierce, which puts a pressure on deposit rates. Theoverall interest margin was more or less unchanged over the year.Lower costs and loan lossesOperating costs fell from 1.11 percent of ATA in 2011 to 1.05 percent in 2012.Loan losses also fell, both in absolute terms and relative to ATA (from 0.19 to0.16 percent). The ratio of costs to income has been falling for a number ofyears and decreased further by 3.2 percentage points to 53 percent in 2012.Higher deposit-to-loan ratioCustomer deposits are the banks’ most important source of funding andincreased by 7.4 percent from 2011 to 2012. Lending growth was slightlymore subdued, with gross lending to customers (including banks’ coveredbond vehicles) rising by 4 percent. Lending to domestic business ­customersincreased by just 1.6 percent in 2012, which should be seen in the light ofstricter capital adequacy requirements. The deposit-to-loan ratio rose from53.9 to 55.9 percent (including banks’ covered bond vehicles).Increased financial strengthBanks have retained substantial parts of their profits, and several banksraised new equity in the market during the first half year of 2012. Thus bankshave increased their financial strength. The aggregate Core Tier 1 capitalratio was 11.1 percent at the end of 2012, against 9.9 percent a year earlier,and all banks fulfilled the minimum requirement of 9 percent.Compliance with the requirement for liquidity buffers at Norwegian banksdepends on which assets are included in the calculations. The FinancialSupervisory Authority has calculated that the average Liquidity CoverageRatio (LCR) based on the proposals for CRD IV was 72 percent at the end of2012. However, Norwegian banks have substantial liquidity buffers if assetsapproved as collateral for loans from the central bank are included, and theaverage Liquidity Buffer Indicator (LBI) was 188 percent.1Income statement and balance sheet data for consolidated banking groups.Source: The Financial Supervisory Authority of Norway11to develop ­functionality for such aservice in their applications for mobile­platforms, or take the service a step­further so that a mobile phone ­numbercan be used as an identifier for the­recipient of funds.FinansCERTBanks have worked together for manyyears on sharing information aboutcriminal attacks on their online services.This collaboration is useful, as it leads tomore rapid detection of fraud, and thatmore fraud attempts are blocked. Thenumber of attacks on online ­bankingservices in Norway has increasedsubstantially over the past two years,and banks are putting more and moreresources into ­investigation, analysis,­technical ­solutions and management ofthe ­growing number of incidents.The rise in cybercrime requiresfirmer and clearer anchoring and­organisation of financial institutions’work to ­combat it. Under the auspices ofFinance Norway, banks and life insurershave teamed up to create FinansCERT(Computer Emergency Response Team)with the main aim of promoting effectivemanagement of IT security incidents atbanks and life companies and ensuringcoordination when implementing jointmeasures.More frequent clearingand settlementWhenever a customer uses a card, paysa bill or transfers money to someoneat another bank, money needs to betransferred from one bank account toanother. For money to flow between­customer accounts at different banks,there must first be a settlement betweenthe banks, which takes place throughtheir accounts at the central bank,Norges Bank. Payment transactions arenot normally settled individually butcleared through a clearing house, theNorwegian Interbank Clearing System(NICS). Each bank’s overall net positionto all other banks participating in NICSis calculated, and the results are sentto Norges Bank for settlement betweenthe banks. After settlement, the banksupdate their customer accounts.In October 2012 a new fourthdaily clearing circle was implementedin NICS. Banks’ deadline for delivering­transactions for the new circle is 11 am,with settlement immediately thereafter.The deadlines for the other three circlesare 5.30 am, 1.30 pm and 3.30 pm. Theintroduction of this fourth daily clearinground has further increased the speed ofpayments in Norway. nBANKS
  12. 12. The Solvency II rules are still verymuch under development, especiallywhen it comes to their implementa-tion in Norwegian law. The ­BankingLaw ­Commission has presented­proposals for new rules for definedbenefit ­occupational pensions aimed at­harmonisation with the new state retire-ment pension. There has also been workon transitional rules for the move fromthe current system to the new pensionsystem. The idea is for the new rules toenter into force on 1st January 2014.As part of the upward revision of­assumptions for life expectancy, lifecompanies substantially increased­provisions for group pensions in 2012.These provisions are expected to befunded primarily through investmentincome and underwriting results.Total insurance liabilities underprivate group pensions increased by 11percent from 2011 to a total of NOK386 billion, while those under municipalgroup pensions grew by 12 percent toNOK 377 billion.Regulatory developments in 20122011 brought a reform of the­Norwegian pension system, with ­changesto state pensions and ­revised rules forprivate occupational and early retire-ment pensions. Public ­sector pensionsalso underwent ­alterations, ­althoughmuch of the existing ­calculation modelwas retained.2012 saw a great deal of work ondeveloping new occupational pensionproducts for the private sector and theSolvency II rules. The following are justsome of the consultations on which­Finance Norway worked during theyear:Regulatory changesand pension reformLife insurance12The life insurance industry faces some major changes in thelegal framework, including tougher new capital requirementsunder Solvency II and the introduction of a new occupationalpension product in Norway.n Consultation on the implementation of Solvency II in Norwegian law Finance Norway believes that a broad set of measures are needed to ensurea robust pension system under Solvency II. These must not only deal with therisk associated with a guaranteed annual return, but also cover the increasedneed for investment in long-duration assets as a result of Solvency II.n Consultation on accounting for the new AFP scheme in the private sector Following the introduction of a new AFP early retirement pension schemein the private sector, a working party looked at some of the problems ofaccounting for it. Finance Norway notes and agrees that, for the time being,there is no need to account for the new AFP scheme as a defined-benefitscheme in the employer’s accounts.n Consultation on proposals to limit the tax exemption for shares etc held bylife and pension companies Finance Norway believes that the proposals to abolish the tax exemption forincome from equities in the group and unit-linked portfolio come at a highlyinappropriate time for the industry. Any changes in the exemption will comeon top of a new solvency framework and a low interest-rate regime whichare already presenting major challenges for life and pension companies.n Consultation on the reduction of the maximum guaranteed interest rate forlife policies to 2 percent from 1st January 2013 Finance Norway advises against a reduction in the interest rate until newproduct rules and transitional solutions for existing company pensionschemes are in place.n Consultation on paid-up policies and capital requirements Finance Norway believes that the impact of the measures on the ­capitalrequirement for existing and new paid-up policies will be limited. The­conversion of paid-up policies to unit-linked products will depend partlyon the time to maturity, the guaranteed interest rate, etc. Further workis ­needed to ease life companies’ challenges with paid-up policies underSolvency II. Conversion to unit-linked products will require good ­informationand advice for the customer. Finance Norway is actively promoting­high-quality advice in the industry.n Consultation on the regulations on pensions for elected local governmentrepresentatives Finance Norway has no comments on the proposals.n Consultation on pension legislation and the social security reform – NOU2012:13 Finance Norway backs the main aims of the draft legislation on group­occupational pensions, which build on the same fundamental principles asthe new state retirement pension. A new state retirement pension where aliving-age adjustment provides an incentive to stay in work longer is a keyelement in helping fund retirement benefits for a population that is livinglonger and longer.
  13. 13. Life insurance13tRESULTS BY CLASS OF BUSINESSYear 2012 2011 2010 2009 2008IPS pensions Life insurers 1,600 1,300 900 500 100Banks 700 700 700 700 700Securities funds 2) 500 500 600 500 400IPA pensionsLife insurers 53,000 55,000 57,000 55,000 60,0001) 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 2008.2) Securities fund management companies.Source: Life insurers: Finance Norway’s “Provisional life statistics” for 2012 and 2011 and “Market shares – final figures and accounting statistics” for earlieryears. Banks: Statistics Norway. Securities fund management companies: Norwegian Fund and Asset Management Association. Figures are rounded.Insurance liabilities as at 31st December, IPA and IPS 1)NOK millionIndividual endowmentsThis product is sensitive to ­movementsin interest rates, and investments­generally vary somewhat from yearto year. Risk cover for death, whichmakes up the bulk of this class, saw a3.9 percent increase in policy numbersin 2012, while risk cover for disabilitywas largely unchanged. These covers­account for more than 30 percent ofgross premiums written in this class.Individual pensionsThe option of having individual ­pensionspaid from the age of 62 through anincrease in the payout period was intro-duced in 2011. This means, for example,that payments can be combined withearly unlocking of the state retirementpension, occupational pensions and AFPearly retirement pensions.There was a 30 percent increase inassets in IPS individual pension schemesfrom 2011 to 2012. Around 3 900new IPS pensions were taken out withlife ­insurers in 2012. Gross premiums­written increased by 14 percent to NOK253 million.The relatively low level of ­individualpensions can be seen in the light of­asymmetrical tax rules, low premiumceilings and negative media coverageover a number of years. New rules on thetaxation of pensioners in 2011 have alsoled to limited marketing of this product.As an alternative to individual­pensions, the self-employed can chooseinstead to save under the Defined-contribution Pensions Act with a higherpremium ceiling, and this form of savingis included in the figures for group­pensions.Group pensionsAlmost 1.1 million Norwegians nowhave a defined-contribution pension. Thenumber has grown every year since theMandatory Occupational Pensions Actwas passed in 2006.A total of 12 100 defined-contributionpensions were taken out in 2012, andthese accounted for 97 percent of newprivate occupational pensions during theyear.There is a still a trend in the privateoccupational pension market for defined-benefit schemes to convert to defined-contribution schemes. Around 290 000people still have private defined-benefitpensions under the Company PensionsAct. Figures from Finance Norwayshow that more than 480 defined-benefit schemes converted in 2012,with around 16 800 people switchingto defined ­contributions. This makesa total of around 4 340 schemes thathave ­converted since 2002, not includ-ing schemes not covered by FinanceNorway’s statistics. The conversionprocess often means that employeeswho are already members of a defined-benefit scheme remain in a “closed”defined-benefit scheme, so it is mainlynew recruits who join the new defined-contribution scheme.Most defined-contribution schemesare supplied by life companies, althoughsome are managed and administered bysecurities fund management companiesand banks. However, a large ­proportionof sales are made through banks onbehalf of the life companies responsiblefor the pensions.Statistics from Finance Norway fordefined-contribution schemes at life­companies, banks and ­securities fundsshow that the proportion of schemeswith contributions at the minimum­permitted rate is falling. At the endof 2012, 64 percent of schemes had­contributions at the minimum rate,down from 76 percent in 2008 whenthe ­statistics began. This may bebecause many companies convertingtheir schemes introduce rates above theminimum requirement. The statisticsalso show that more than 8 percentof schemes have contributions at themaximum permitted rate. In terms ofmembers, almost 270 000, or close to25 percent, are on the maximum rate,which indicates that a number of largecompanies have chosen this rate for theirschemes. By way of comparison, only 6percent of policies were at the ­maximumrate in 2008. Around 41 percent of­members have linked disability coverto their defined-contribution pension,and only 5 percent of these qualify for­paid-up benefits.
  14. 14. Life insurance14tYear 2012 2011 2010 2009 2008Defined-benefitLife insurers 317,000 297,000 279,000 261,000 247,000Pension funds n.a. 119,000 120,000 111,000 94,000Defined-contributionLife insurers 70,000 52,000 42,000 30,000 16,000Banks 200 200 200 100 100Securities funds* 1,600 12,500 9,800 1,400 800*Securities fund management companies.Source: Life insurers: Finance Norway’s “Provisional life statistics” for 2012 and 2011 and “Market shares – final figures and accounting statistics” for earlieryears. Banks: Statistics Norway. Securities fund management companies: Norwegian Fund and Asset Management Association. Figures are rounded.Insurance liabilities as at 31st December, private group pensionsNOK millionYear 2012 2011 2010 2009 2008Gross premiums written 82,500 72,300 67,400 62,800 65,900New business 6,700 6,400 6,400 6,400 6,100Benefits paid 45,400 41,600 41,900 35,700 54,500Insurance liabilities 877,000 801,000 760,000 663,000 609,000Source: Finance Norway’s “Benefits”, “Provisional life statistics” for 2012 and 2011 and “Market shares – final figures and accounting statistics” for earlier years.Figures from Finance Norway include only its members. Figures are rounded.Key figures as at 31st December, life insurersNOK millionYear 2012 2011 2010 2009 2008Individual endowments 947,000 961,000 940,000 980,000 990,000Group life (members) 2,300,000 2,400,000 2,500,000 2,600,000 2,600,000Individual pensionsPolicies not in payment 900,000 860,000 860,000 860,000 710,000Policies in payment 240,000 250,000 210,000 210,000 220,000Private group pensionsActive members 1,370,000 1,310,000 1,200,000 1,240,000 1,210,000- of whom defined-benefit 290,000 300,000 310,000 340,000 350,000- of whom defined-contribution 1,080,000 1,000,000 900,000 890,000 860,000Paid-up policies and pension capital certificates 1,780,000 1,620,000 1,380,000 1,100,000 990,000Pensions in payment 1) 290,000 260,000 340,000 310,000 310,000Municipal group pensionsActive members 430,000 440,000 430,000 430,000 390,000Leavers with rights accrued 240,000 230,000 220,000 220,000 180,000Pensions in payment 1) 260,000 250,000 240,000 220,000 190,0001) 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 foreigncompanies and non-life insurers which sell life insurance. Association insurance is included in the figures for individual pensions.Number of policies/members as at 31st DecemberNOK million
  15. 15. Life insurance15Year 2012 2011 2010 2009 2008Individual endowments Gross premiums written 9,200 8,500 8,600 8,800 7,000Gross benefits paid 8,600 7,200 6,500 5,500 21,300Individual pensionsGross premiums written 1,700 1,700 1,900 2,200 2,200- of which IPA pensions 180 150 160 250 650- of which IPS pensions 250 200 250 250 100Gross benefits paid 6,800 7,000 10,300 8,600 12,900Group life Gross premiums written 3,700 3,600 3,500 3,500 3,400Gross benefits paid 2,800 2,800 2,600 2,500 2,400Private group pensions Gross premiums written 29,500 27,000 25,000 24,500 26,200- of which defined-benefit 16,800 16,100 15,400 15,500 18,500- of which defined-contribution 12,700 10,900 9,600 9,000 7,700Gross benefits paid 11,800 10,700 n.a. n.a. n.a.Municipal group pensions Gross premiums written 38,400 31,500 28,400 23,800 27,100Gross benefits paid 15,400 13,900 n.a. n.a. n.a.Source: Finance Norway’s “Benefits”, “Provisional life statistics” for 2012 and 2011 and “Market shares – final figures and accounting statistics” for earlier years.The statistics cover Finance Norway’s members, including branches of foreign companies and non-life insurers which sell life insurance. Figures are rounded.Premiums and benefits as at 31st December, life productsNOK millionYear 2012 2011 2010 2009 2008Death 2,800 2,700 2,700 2,500 2,600Lump-sum disability benefits 1,300 1,300 1,200 1,100 1,100Surrenders 1) 6,200 4,800 9,000 6,600 26,400Insurance term expiry 900 1,000 900 800 1,000Retirement, early retirement and survivor pensions 24,800 22,800 21,000 18,500 17,400Disability pensions, including waiver ofpremium/contribution 7,700 7,400 7,100 6,200 6,000Transferred to premium/contribution funds 1) 900 700 n.a. n.a. n.a.Other 800 900 n.a. n.a. n.a.Total 45,400 41,600 41,900 35,700 54,5001) Prior to 2011, amounts transferred to premium/contribution funds are included in surrenders.Source: “Benefits” from Finance Norway. The statistics cover Finance Norway’s members, including branches of foreign companies and non-life insurers whichsell life insurance. Figures are rounded.Benefits by cause as at 31st DecemberNOK million
  16. 16. The operating margin (operating profitrelative to premium income) increasedin 2012, due mainly to lower claimsand slightly higher investment income.­Although investment income was 5­percent up on 2011, it was still some wayoff the peak year of 2009 when it wasalmost 80 percent higher than in 2012.Profit on ordinary activities was never-theless very good.The solvency margin (equity,­contingency reserves and tax-freeprovisions relative to premium income)climbed from 131.5 percent in 2011 to143.0 percent in 2012, and equity fromaround NOK 43 billion to around NOK51 billion.Premium income rose by 3 percent,while claims expenses fell by 3 percent,resulting in a decrease in the loss ratiofrom 72.4 percent in 2011 to 68.2percent in 2012. The cost ratio (costs­relative to premium income) also fell, sothe combined ratio (loss ratio plus costratio) dropped 4.7 percentage points to87.0 percent. In other words, 87 percentof premiums received in 2012 went outin claims and operating expenses.Chart 1Combined ratio 2002-2012Chart 1 shows developments in the­combined ratio from 2002 to 2012.Lower loss ratioIn 2002, the loss ratio was 78 percentand the cost ratio was close to 25percent. The cost ratio has fallen overthe past decade as a result of companiestaking action to make their ­operationsmore efficient. Costs in non-life ­insuranceare now down to around 19 percentof premiums. Although some of the­components of operating expenses havebeen reclassified as claims expenses­during this period, the vast majority arethe same.By way of illustration, had the costratio in 2012 been just under 25 percentas it was in 2002, operating costs wouldhave been almost NOK 3.2 billionhigher. At the same time, premiums havenot kept up with inflation due to stiffcompetition.Chart 2Non-life premiums by class 2012Premium income by classNon-life insurers derive the largest part(38 percent) of their premium incomefrom motor policies, which cover alltypes of vehicle, including cars, trucks,buses and motorcycles. Insurances ofthe person account for 15 percent ofpremium income and include statutoryoccupational injury cover (5 percent),voluntary workmens compensationcover (3 percent) and personal accidentcover (3 percent).Child health, critical illness andmedical insurance have been a growtharea in recent years. Almost 360 000people were covered against waiting listsfor medical treatment in 2012, up fromaround 34 000 as recently as 2003. Itis primarily employers that take outthis kind of health insurance for their­employees. Previously it covered onlykey persons, whereas now it is commonfor the entire workforce to be included.What does medical insurancecover?The types of injury covered vary­somewhat from insurer to insurer, butthe cost of hospitalisation/surgery andphysiotherapy/chiropractic accountfor the bulk of claims expenses. Thisform of insurance can to some extentbe ­considered to supplement the publichealth service for conditions largelyattributable to “wear and tear”. Manypeople have long periods of sicknessabsence due to problems with their back,neck, shoulders etc. Medical insuranceensures rapid treatment at a privatehospital in Norway or abroad.Few fires andlittle bad weatherProvisional data for Norwegian non-life insurers indicate a combined pre-tax profit ofNOK 15 billion in 2012. This is an increase of around NOK 8 billion on 2011, due mainly tolow loss levels. The latter part of 2011 brought a lot of bad weather, resulting in heavy claims,while 2012 was a far better year with few fires or natural disasters, paving the way forstrong underwriting results.NON-LIFE INSURANCE1620022003200420052006200720082009201020112012e105.0100.095.090.085.080.075.0102.098.790.291.3 90.993.5 93.895.792.2 91.787.0Source: Statistics Norway Source: Finance NorwayMotor 38 %Household20 %Commercialbuildings15 %Other12 %Person15 %Child 1 %Criticalillness 2 %Personalinjury 3 %Occupationalinjury 5 %Protection 3 % Medical 1 %
  17. 17. NON-LIFE INSURANCE17tLow loss ratio onhousehold policiesThe winter of 2010 brought ­substantialpayouts on household policies dueto frost damage, but 2011 and 2012brought fewer water and fire losses. Onlyaround 60 percent of premiums ­collectedin 2012 went out again on claims,compared to 75 percent in 2011 and noless than 90 percent in 2010. The lowloss ratio in 2012 was due partly to fireclaims being almost NOK 500 ­millionlower than in 2011, reducing claimsby 12 percent, while water claims weredown around NOK 360 million on 2011and no less than NOK 750 million on2010.Fewer fires and lower payoutsThe number of household fires in 2012was around 8 percent lower than in 2010and 2011, and fire claims were down 12percent on 2011 and 18 percent on 2010at NOK 2.2 billion.Out of every thousand homes insured,seven to eight will be damaged by fire inany one year, but the degree of ­damagevaries. A large number of lightningstrikes in an area can lead to many smallfires, but the extent and consequences ofthe damage are often fairly limited.Water losses downClaims following water damage to­private residences fell to NOK 2 billionin 2012 from NOK 2.5 billion in 2011and a peak of more than NOK 2.7­billion in 2010, the first year in whichwater claims exceeded fire claims onhousehold policies.There were 15 water losses per­thousand homes in 2012, down from ahigh of 23 in 2010.Chart 5Water payouts on commercial policies by origin (NOK m)Increase in break-ins and burglariesChart 4 shows the loss frequency forbreak-ins and burglaries from 2002 to2012 per thousand household policies(buildings, contents, holiday homes).It has varied over time, reaching aprovisional low in 2011 before risingagain somewhat in 2012. It appearsthat ­burglaries are becoming more­sophisticated, as the value of the itemstaken has increased.Skadeprosent på næringsbyggnormalisertClaims came to around 60 percent ofpremium income from commercialpolicies in 2012, down from 82 percentin 2011. This was due mainly to theabsence of large losses. Out of totalclaims on commercial policies of NOK4.6 billion in 2012, fire claims accountedfor NOK 2.2 billion, down no less thanNOK 1.2 billion on 2011 and NOK 700million on 2010. Water losses, on theother hand, rose by 2.3 percent to NOK1.2 billion in 2012. Despite an almost20 percent decrease in the number ofbreak-ins, burglaries and raids in 2012,claims increased. In other words, moreexpensive items were taken, suggestingmore sophisticated thieves.Where does water damagein commercial buildings start?Chart 5 shows where water damage­originates. The main source of waterlosses in 2012 was metal pipes, whereasin 2011 it was pipe ­connectors anddrains. It is important to note that­commercial buildings include farm­buildings in this context.Chart 4Break-ins and burglaries per thousand household policiesChart 3Payouts on medical insuranceSource: Finance NorwaySurgery 41 %Physiotherapy/chiropractic25 %Specialist/diagnostics21 %Psychologist/psychiatrist 3 %Rehabilitation etc 10 %400350300250200150100500MetalpipePlasticpipe,pipe-in-pipeConcrete/ceramicpipeConnector,joint,drainMains-connectedapplianceHotwaterheaterHeatingsystemSanitarywarePrecipitation,meltwater,groundwaterSplashing,condensationetcSource:FinanceNorwaySource:FinanceNorway2011 20122002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201214.013.012.011.010.09.08.07.06.0Numberoflossesperthousandpolicies
  18. 18. Stable motor resultsDespite high new car sales in 2011 andalmost as many in 2012, motor claimsincreased by 1.7 percent in 2012, withtotal payouts of NOK 12 billion fordamage to 711 000 vehicles. The biggestpercentage increase in claims was forglass damage, which climbed more than10 percent to NOK 1.3 billion in 2012across 225 000 claims. Despite a dropof almost 9 percent in the number of­collision losses, claims rose by 5 percent.The loss frequency (number of motorlosses relative to number of vehiclesinsured) is around 22 percent over thecourse of a year for all types of vehicle.Sharp decrease in car theftThefts of and from cars are accountingfor an ever smaller share of total claims,which is a natural result of better carsecurity – for example, all new cars arenow fitted with immobilisers. Theftaccounted for just 3 percent of totalpayouts of NOK 12 billion on mo-tor policies in 2012, compared with 8percent a decade ago. Back then, 13-14000 cars were stolen each year, comparedwith just under 6 000 in 2012, and therehas been a similar reduction in theftsfrom cars from roughly 20 000 a decadeago to 7 000 reported losses in 2012 (seeChart 6).Fewer personal injury claimsThe number of personal injury claims hasfallen by around 25 percent over the pastdecade, while payouts have increasedslightly in inflation-adjusted terms.Chart 7 shows clearly that the numberof claims has trended ­downwards evenwhen taking account of the number ofvehicles insured. The loss frequency wasrelatively stable in 2007 and 2008, butfollowing a provisional peak in 2009there has been a steady reduction, whichcan be put down to newer cars beingsafer than older ones. The decline in­personal injury claims is also reflectedin the number of fatal road accidents.A total of 154 people were killed in2012, down 14 on 2011. Not since 1950have so few people died on Norwegianroads.What about pedestrians and cyclists?Although the number of personal injuriesin road accidents has fallen steadily inrecent years, there was an increase in thenumber of pedestrians and cyclists runover in 2012. Chart 8 shows the numberof these “soft targets” hit relative to thenumber of vehicles insured. The increasein 2012 is supported by data from theNorwegian Public Roads Administrationand the Institute of Transport ­Economics(TØI), which also show that someNON-LIFE INSURANCE18tSource:FinanceNorwaySource:FinanceNorwaySource:FinanceNorwayChart 7Personal injury claims per thousand vehicles insuredChart 8Accidents involving pedestrians and cyclists per thousand vehicles insuredEstimated payouts (NOK m) CPI-adjusted payoutsNumber of claimsChart 6Thefts of motor vehicles 2002-20122002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012700600500400300200100018,00016,00014,00012,00010,0008,0006,0004,0002,0000Payouts(NOKm)NumberofclaimsperthousandvehiclesNumberofaccidentsNumber2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20126.05.55.04.54.03.53.02.52.02002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20121,8001,7001,6001,5001,4001,3001,2001,1001,000900800
  19. 19. NON-LIFE INSURANCE19tage groups are at particular risk, most­notably elderly pedestrians and cyclistsaged 10-14.Where is it most hazardous to be apedestrian or cyclist?Chart 9 shows in which counties itis most hazardous to be a ­pedestrianor ­cyclist, and where motorists hit­pedestrians and cyclists most often.Naturally enough, it is most ­hazardousto be a pedestrian or cyclist in thecities, ­especially Oslo, although therisk is almost as high in Rogalandand ­Hordaland. There appear to befewer accidents of this kind in Akershus,even though it has to be considered a­relatively heavily built-up and denselypopulated county – perhaps it has betterroad safety measures? Oppland and themost northerly counties also performwell.Fewer occupational injuriesAfter many years of statutory workmenscompensation insurance, it finally seemsthat the trend in occupational injurieshas turned. Workmens compensationclaims take a long time to finalise. It cantake time for an injury to be reportedto the insurer, and it can take time toconfirm the cause and assess the level ofloss based on how permanent the injuryproves to be. This is particularly the casewhen it comes to occupational diseases –at the end of 2012 there were still claimsprovisions outstanding for 1990 and1991!The apparent reduction in workmenscompensation payouts may be due toa number of long-term factors, such asfewer workers in high-risk industries,fewer smokers and so fewer cases ofCOPD, and better health and safetyefforts and follow-up by employers. Theauthorities have also taken various steps,such as the introduction of time-limiteddisability benefit in 2004 and the workassessment allowance from 2009.Premiums for workmens ­compensationhave fallen over the past five years­(allowing for inflation), due toboth ­lower claims levels and stiffer­competition. Chart 10 presents premiumsper FTE in both nominal and inflation-adjusted terms.More travel pushes up travel claimsThe loss ratio for travel insurance isaround 70 percent. Operating coststend to be somewhat higher than forother types of private insurance because­considerable support is often required toget the policyholder home.Chart 11Travel insurance payouts 2005-2012(NOK million, inflation-adjusted to 2012 prices)Payouts(NOKm)PremiumsperFTESource:FinanceNorwaySource:FinanceNorwaySource:FinanceNorway,StatisticsNorway,RoadTrafficInformationCouncilTravel accident Cancellation Theft/loss of luggage Holiday illness2005 2006 2007 2008 2009 2010 2011 20128007006005004003002001000Chart 10Occupational injury premiums per FTE insured(nominal and inflation-adjusted to 2012 prices)Chart 9Accidents involving pedestrians and cyclistsNumber per thousand vehicles registered and per thousand inhabitants0.60.50.40.30.20.10ØstfoldAkershusOsloHedmarkOpplandBuskerudVestfoldTelemarkAust-AgderVest-AgderRogalandHordalandSognogFjordaneMøreogRomsdalSør-TrøndelagNord-TrøndelagNordlandTromsFinnmarkAccidents per thousand vehiclesAccidents per thousand inhabitants (greatest hazard)Inflation-adjusted premiums per FTE (2012 prices) Nominal premiums per FTE2,5002,0001,5001,00050001991199219931994199519961997199819992000200120022003200420052006200720082009201020112012
  20. 20. tNon-life insurance resultsYear NOK million 2012* 2011 2010 2009 2008 2007 2006 2005ResultsGross premiums written 65,196 62,453 59,407 58,852 57,589 52,955 51,561 49,566Net premiums earned 56,305 54,580 52,320 50,500 49,348 44,665 43,170 40,145Net claims incurred 38,416 39,522 37,351 36,816 35,121 32,035 29,453 27,382Net investment income 5,058 4,822 7,721 8,950 -285 5,484 6,792 7,415Net operating costs 10,563 10,519 10,867 11,529 11,146 9,708 9,779 9,267Operating profitt 15,042 6,708 10,579 9,671 1,907 4,035 9,035 7,708Balance sheetPremium and loss provisions 92,037 90,649 83,940 80,199 77,821 75,110 66,614 65,099Contingency reserves 29,341 28,779 27,371 26,256 24,813 26,928 24,644 24,274Other tax-free provisions **) 12,461 9,315 8,800 8,574Equity capital 51,200 42,991 50,473 43,618 27,643 30,519 29,876 25,518Key figuresLoss ratio, net 68.2 72.4 71.4 72.9 71.2 71.7 68.2 68.2Cost ratio, net 18.8 19.3 20.8 22.8 22.6 21.7 22.7 23.1Operating profit margin 26.7 12.3 20.2 19.2 3.9 9.0 20.9 19.2Solvency margin 143.0 131.5 148.8 138.4 131.5 149.5 146.7 145.4Provision ratio 163.5 166.1 160.4 158.8 157.7 168.2 154.3 162.2Total assets 201,604 192,992 190,069 180,518 175,497 166,719 142,630 134,445** Provisional figures** Included in equity from 2009NON-LIFE INSURANCE20Figure 11 shows travel claims from2005 to 2012 adjusted to currentprices using the consumer price index.Claims due to theft/loss of luggage havestabilised since 2008, while claims dueto illness have rocketed, almost treblingsince 2005. This is due to more elderlypeople travelling more, and many peoplevisiting exotic destinations where the riskis higher.Chart 12 shows that the ­number oflosses tends to reflect levels of ­economicactivity. Claims peaked in 2008,­especially for theft/loss of luggage, whilethe number of claims due to illnesslevelled off only slightly in 2009 beforeclimbing again. The number of travel­illness claims reported has now caughtup with the number of claims for theft/loss of luggage. Around 12 percent ofpolicyholders put in a claim in 2012,compared with a provisional peak ofaround 16 percent in 2008.Market developmentsCompetition in non-life insurance­remains fierce, and the number of ­playersin the Norwegian market is rising. Thefour largest companies’ market sharefell from 92 percent in 2005 to 75.5percent in 2012. Chart 13 shows thatthe ­remaining companies together hadalmost as big a slice of the market asIf Skadeforsikring and Gjensidige ataround 25 percent.Chart 13 Market share, four largest insurers and remaining insurers combinedIf Skadeforsikring Gjensidige Tryg SpareBank 1 ForsikringOthers2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201240 %35 %30 %25 %20 %15 %10 %5 %0 %Marketshare,premiumsforonshoreinsuranceSource:FinanceNorwaySource:StatisticsNorwayChart 12 Travel insurance claims 2005-20122005 2006 2007 2008 2009 2010 2011 2012120,000100,00080,00060,00040,00020,0000NumberofclaimsSource:FinanceNorwayTravel accident Cancellation Theft/loss of luggage Holiday illness
  21. 21. Topics
  22. 22. Employers, employees and pensionproviders have long been waiting for newproduct rules and transition rules forexisting company schemes.The commission has attached­importance to businesses still ­beingable to choose insurance-based ­pensionschemes for their employees as analternative to defined-contributionproducts, and schemes suited to theirwage-paying capacity. The introductionof the new schemes will help ensure the­sustainability of pension schemes for theprivate sector, as well as the predicta­bility of future ­pension levels for theindividual ­employee. On the other hand,the rules are fairly complex, especiallyfrom the customer’s perspective, meaningthat life companies and the rest of theindustry will need to put a lot of time andresources into information and advice inthe years ahead.Before parliament in autumn 2013The Banking Law Commission’s ­proposalsfor a new Occupational Pensions Actand transition rules for existing company­pensions are set out in two separate reportsand are due to be submitted to parliamentin a single bill in autumn 2013.Finance Norway assumes that the newoccupational pension rules, transitionrules and proposals for higher maximumcontribution rates for defined-contributionschemes will go through parliament andenter into force together. We consider it­important for a new sustainable pensionsystem to be put into place as soon as­possible and take effect from 1st January2014.Key questions still need to be answeredwhen it comes to adapting the regulatoryframework for the Norwegian life sector toEurope’s Solvency II rules. ­Considerationfor Solvency II and other future EU rulesdid not play a major role in the ­BankingLaw Commission’s latest report on­transition rules. The emphasis is on ­gettingthings moving, even though the EU’s­timetable for implementing Solvency II isstill unclear.Demanding economic climate2012 was another year of low interestrates and uncertainty in global equityand ­financial markets. Today’s company­pension rules were developed in a verydifferent economic climate where marketinterest rates were considerably higherthan the maximum guaranteed ­interestrate. When the Pension Commission,headed by Sigbjørn Johnsen, now financeminister, began its review of the pensionsystem in 2001, market rates were up at7-8 percent (three-month NIBOR) and themaximum guaranteed interest rate set byregulator ­Finanstilsynet was 3 percent fornew ­business and just under 4 percent onaverage for existing contracts. By way ofcomparison, market rates were down at2-3 percent in 2012, while the ­maximum­guaranteed rate was 2.5 percent for newbusiness and around 3.5 percent on ­averagefor existing contracts. Market rates havebeen below the maximum guaranteedrate for life insurance since 2009, and thisnaturally presents a major challenge for theindustry.In June 2012 the Banking Law­Commission proposed new (hybrid)­insurance-based occupational pensionproducts for the private sector. Theseare intended as an alternative to defined-contribution products and a replacementfor existing defined-benefit products inthe private sector. Proposals for transitionrules from the old company pension systemto the new Occupational Pensions Act­followed in January 2013.The new rules will have major­consequences for the product range and thestructure of the pension market in the yearsahead. It is still hard to gauge the impactof the proposals, given the ­prevailing­uncertainty about the new solvency­regulations. Finance Norway’s experienceis that there are similar levels of uncertaintyin a number of other European countries.However, the proposed new product rulesreduce life expectancy risk and financialrisk for the life sector and largely addressthe challenges of tougher capital require-ments under Solvency II.Adjustments to individual countries’product rules are needed in response tonew pan-European regulation of the life­insurance market. The aim of Solvency IIis to replace the wide diversity of nationalrules in Europe in this area with a ­commonEuropean regulatory framework. Theoverall objective of this framework is tosafeguard employees’ pension rights.Finance Norway is keen to stress theimportance of the solutions we end up withnationally in Norway together creating asrobust and sustainable a pension system aspossible.To ensure a stable Norwegian pensionsystem, a sustainable pension frameworkmust feature:• A robust and balanced answer to risinglife expectancy• A guarantee structure that protects­accrued rights and ensures good growthin the value of future pensions whileensuring that the capital requirementsunder Solvency II are manageable• Appropriate adaptation to new Europeancapital requirements under Solvency II• Efficient transition from the old to thenew systemFurther answers are expected in 2013, andthe contours of the new pension systemare becoming ever clearer. ­However,both ­public-sector and private-sector­occupational pensions need to be ­modifiedfurther in various ways and through­various processes to achieve these aims.The pension reformPENSION22The Banking Law Commission has published proposals for a newOccupational Pensions Act and transition rules for existing ­companypensions. These represent an important step forward for the­pension reform and are due to go before parliament together inautumn 2013.Stefi Kierulf Prytz
  23. 23. New products and transition rulesAround 11 400 businesses and 302 500active employees have company pensionssupplied by a life company (2011 figures).These businesses need to ascertain assoon as possible which type of pensionscheme best meets their needs. They needto decide, for example, whether to retaintheir ­existing company pension schemefor up to three years, have higher ­pensionaccrual for older employees in a new­occupational ­pension product, choose thenew ­occupational pension product or havedefined-­contribution pensions for other orall staff.The draft transition rules do not proposethe dismantling of existing company­pension schemes. It is proposed that theseschemes be allowed to continue for up tothree years after the law enters into force.However, it is important for all companiesto review their pension arrangements in thecoming years.Further work in 2013It is crucial that work on adapting toSolvency II continues with undiminishedvigour both internationally and nationally.It is also important to keep working onthe processes needed to ensure sustainableproduct rules. Adjustments due to changesin state disability pensions will play a keyrole in this spring’s phase of the ­BankingLaw Commission’s work on privateoccupational pensions. It has also beenannounced that transfer rules will be onthe agenda. Finance Norway looks forwardto this process and will contribute activelyto ensure a more sustainable system for allinvolved.Public occupational pensionsPublic-sector pension schemes, which covermore than 800 000 employees, are alsoan important element of a complete andsustainable pension system.Draft legislation for public-sector­disability pensions and a consultation­document with proposals for the remainingrules for public-sector retirement pensions(for those born after 1953) were due to bepresented in 2012. However, the Ministryof Labour is still working on these rules,and both may possibly fall into place­during the course of 2013.New state disability pensionIt has been decided that a new state­disability pension will come in from 2015.New private disability schemes will needto be adjusted in line with this, Solvency IIand a new product range.It is expected that the change will befunded by taxing the new state disabilitypension in the same way as wages. Thegovernment has invited the unions todiscuss solutions for this. The ministry willpresumably also consider other changes andupdates to the disability scheme in its work.When it comes to the remaining rules onretirement pensions, these will build on theagreements from the 2009 pay settlement.Other possible changesThe Norwegian Confederation of TradeUnions (LO) has announced that it wishesto make pensions, including the issue ofnegotiated levels, a topic for the 2014 paysettlement.The government has previously signalledthat the state survivor pension will bereviewed at a later date, but has not saidanything about when. A number of minorschemes also still need adjustment. Therehave been signals from various quartersthat there will eventually be a need to lookagain at the solutions chosen for the publicsector.Public-sector schemes are also due to beevaluated in 2017. Schemes with special agelimits may eventually need to be reviewed.Finance Norway looks forward toparliament’s consideration of the new­Occupational Pensions Act, transition rulesand changes to the Defined-contributionPensions Act scheduled for autumn 2013.These are important changes for the privateoccupational pension market, and FinanceNorway considers it both desirable andnecessary for them to be made as quickly aspossible. npensION23
  24. 24. Businesses finance their activitiesthrough a mixture of equity and loan­capital. Norwegian businesses obtainloan capital mainly from banks, althoughbonds and commercial papers are alsoan ­important source. Bank financing has­traditionally been the most importantsource of credit for industry in many­European countries.Banks in the euro area are now cuttingback on lending to businesses, while theamount of capital companies are raisingin the bond market is rising rapidly. Thismay be because many European banks’lending capacity has been weakened bythe ­financial crisis, with heavy write-downs and loan losses. However, tighterregulatory ­requirements are also having asignificant effect on banks’ credit standards.­Norwegian banks had low levels of loanlosses during this period, but businesses’bond financing is growing here too, whilebank financing is lowered.Regulatory requirementsNew requirements for banks’ capital,­liquidity and funding structure will­probably be passed in the EU during thecourse of 2013. These will also affectNorway via the EEA Agreement. The new,stricter requirements will result in highercosts for banks and higher prices for theircustomers. The proposals may necessitatestructural changes at Norwegian banks,and many banks will probably take a­variety of different actions in order to meetthe requirements. For example, toughercapital adequacy requirements will reducebanks’ lending capacity.The capital adequacy ratio is a fraction,where the numerator is a bank’s equityand the denominator is its risk-weightedassets. This ratio can be increased in fourmain ways: banks can (i) increase theirequity by retaining all or part of their­earnings, (ii) raise new capital, (iii) cutdown on lending in general or sell offassets in order to ­reduce their unweightedbalance sheet, or (iv) alter the compositionof their assets to bring risk-weighted assetsdown while the unweighted balance sheetremains ­unchanged or increases. Bankswill ­probably opt for a combination of theabove.Norwegian banks have based their­capital planning on internationalrecommen­dations, but the decision-making­process in the EU is not yet complete,and the Norwegian authorities have also­signalled an interest in early adoption andstricter requirements. There is thereforegreat uncertainty about both the timing andlevel of the requirements, and so whetherbanks’ future earnings will be sufficient tomeet coming capital requirements.At the same time, raising new capital isnormally an expensive form of financing,and if many banks need to raise capitalat the same time, the cost could be even­higher. It is therefore likely that manybanks will need to adjust their balancesheets. If banks opt to maintain their over-all lending capacity so that their earningsare not substantially reduced, one alterna-tive is to tighten their lending standardson loans that bind most capital. In otherwords, in order to reduce risk-weightedassets, credit standards are tightened forbusiness customers, while the proportion ofresidential mortgages in the loan portfolioincreases. Thus a shift in the supply ofcredit to different borrower groups is beingdriven by changes in capital adequacy rules.Chart 1 presents changes in banks’ creditstandards for non-financial enterprises andthe contribution from capital requirementsto changes in these standards1. Adaptationto capital requirements has been a veryWho willfinance industry?FINANCING INDUSTRY24A more developed bond market in Norway would have many­benefits, but it is not expedient for economic activity that growthin this market is fuelled by regulatory requirements that greatlyrestrict businesses’ access to bank credit. Finance Norway supportsa variety of proposals to make the financial industry more robust,but regulation must not undermine the role of banks as a financialintermediary for industry.Chart 1 Percentage change in credit standards and contribution to change fromcapital requirements1Change in credit standards and contribution to credit standards taken from Norges Bank’s Survey of BankLending. The net percentage balances in the chart are calculated by weighting the responses to the surveyand will vary between +100 and -100 percent.40200-20-40-60-80Creditgrowth(%)Total change in credit standards Contribution to credit standards from capital requirements2007M122008M022008M042008M062008M082008M102008M122009M022009M042009M062009M082009M102009M122010M022010M042010M062010M082010M102010M122011M022011M042011M062011M082011M102011M122012M022012M042012M062012M082012M10Source:NorgesBankdag henning jacobsen
  25. 25. FINANCING INDUSTRY25­important explanatory factor for tightercredit standards for business customerssince the fourth quarter of 2011.Risk weights for mortgagesIn December 2012 the Ministry of Financeasked the financial regulator Finanstilsynetto draw up proposals for risk weightsfor mortgages of at least 35 percent,which ­entails a substantial increase inrisk-weighted assets for banks using theirown models to calculate capital require-ments. ­Corporate risk weights will remainhigher than those for loans secured ondwellings. Some banks will probably haveto reduce their lending capacity in thebusiness ­market in order to bring downrisk-­weighted assets in the light of tougher­capital ­requirements (option iv above).Hence, if risk weights for mortgages­increase, an even larger share of ­lendingwill be moved into mortgages so thatbanks can achieve the same target levelfor risk-weighted assets. Another possibleeffect is a general tightening of banks’lending practices if the cost of a ­regulatoryincrease in mortgage risk weights is­distributed between different borrowergroups. Higher risk weights for mortgagescould, in other words, further decreasebanks’ business lending capacity.Banks’ special roleBanks are defined by offering depositsto the public and have a particularlyimportant function in the payment system.They also play a key role in the economyby transforming deposits and other savingsinto long-term loans. However, there arealso other financial intermediaries, andmany non-financial companies can borrowin Norwegian and international securitiesmarkets.One unique feature of banks is that theyspecialise in processing large quantitiesof information and invest in technologythat enables them efficiently to assess loanapplications and monitor the projectsfor which they have granted credit. Thisability to obtain and organise informationmeans that banks are better than others atdealing with the challenge of borrowershaving more information about their own­behaviour and project quality than lenders.The Bundesbank in Germany ­publisheda research study in 2007 looking atbanks’ lending to businesses (relationship­lending). The analysis was based on a verylarge dataset covering German businessesand banks over a number of years. Theresearchers found that the younger, smallerand/or more R&D-intensive a firm is,the greater the chances that it would befinanced primarily through bank loans. Inother words, where the information gapbetween borrower and lender is widest,the use of bank financing is greatest. Theanalysis also found that these businesses 2An enterprise is a legal entity that may consist of more than one business.Chart 2Norwegian small and medium-sized (fewer than 100 employees) and large(100 or more employees) enterprises 2010500,000400,000300,000200,000100,0000Number of enterprises99,5 %0,5 %Small andmedium-sizedenterprisesSmall andmedium-sizedenterprisesSmall andmedium-sizedenterprisesLargeenter-prisesLargeenter-prisesLargeenter-prises1,200,000900,000600,000300,0000Number of employees61 %39 %3,0002,5002,0001,5001,0005000Revenue (NOK bn)54 %46 %Source:StatisticsNorwaywere not less creditworthy than others; infact the probability of default was lower. Inother words, banks helped channel savingsinto projects that generally proved viable.Norwegian SMEs also face a significantinformation barrier, and often they willnot have access to any form of credit otherthan that offered by banks. By acquiringinformation, not least through a close­relationship with the borrower, typicallybuilt up over a long period, banks canovercome these informational asymmetries.This activity creates a very clear distinctionbetween the role of banks in the ­provisionof capital and the role of securities­markets.Implications for the economyThe consequences of banks sharply­tightening their credit standards for­businesses can be considerable for­businesses that depend on bank ­financing.Many projects that could have beenrealised will be cancelled. If the changein credit standards means that society’ssavings will be allocated to alternativeinvestments with lower returns, economicgrowth will be impaired.In Norway, 97 percent of enterpriseshave fewer than 20 employees, and99.5 percent have fewer than 100 (2010figures), see Chart 22. If we define smalland medium-sized enterprises (SMEs) asthose with fewer than 100 employees,this means that SMEs account for 54percent of annual sales and 61 percentof total ­employment in enterprises. Sincea ­substantial proportion of SMEs aredependent on bank loans to fund ­projects,the necessary adjustments to comingregulatory capital requirements may have anegative effect on economic activity. Largecompanies will also be affected by tightercredit standards, but are better able tosource capital in the bond market.Supervisory responsibilitiesIn the aftermath of the financial crisis,great attention has been paid to risk factors­associated with financial intermediationand the costs of financial instability. Manynew regulations are in the pipeline whichaim to reduce the likelihood of furtherfinancial crises.Finance Norway supports many ofthese proposals, provided a level playingfield ­between countries. A level playingfield in the Nordic countries is an absoluteminimum. The authorities need to balancedifferent effects in the concrete design ofnew rules. New regulations may result ina smaller chance of a financial crisis, butcould also hamper the economy’s growthcapacity. The proposals for higher riskweights for mortgages could both put adamper on growth and have an unintendednegative effect on the outlook for financialstability.The legislation establishing the new­macro-prudential authority in the UK,the Bank of England’s Financial Policy­Committee, gives it responsibility for­making the financial system robust, butalso specifies that its recommendationsand ­decisions must not have “a ­significant­adverse effect on the capacity of the­financial sector to contribute to the growthof the UK economy”.Finance Norway supports a variety ofproposed regulations to make banks morerobust, but the Norwegian authoritiesmust also consider the economy’s growth­capacity when designing and applying newrules. n
  26. 26. Savings bank foundations– the power to changeRecent years have seen theemergence of a new forcein ­society. Savings bank­foundations are local, capital-rich and influential playerscharged with owning savingsbanks, managing assets for thecommunity and channellingprofits into good causes. Theyhave the potential to make a keycontribution to ­strengtheningcivil society, modernising­philanthropy in Norway andbringing about a change in­attitudes in society.The very first savings bank foundationsaw the light of day in 1975 when Vest-landsbanken acquired Oslo Nye Sparebankand the purchase price was the startingcapital for a charitable foundation. Thenext, Sparebankstiftelsen DNB NOR, cameabout in 2001 as a result of the formationof Gjensidige NOR, but it was not until thechanges in the savings bank legislation in2009 that the door was properly openedto savings bank foundations as part of thesolution to structural change in the savingsbank industry.More and more new foundationsThe changes in the law led to a rise in thenumber of banks merging, and with thisan increase in the number of foundations.A further 19 have been started up since2009, taking the total to 21, and togetherthey manage assets of more than NOK 20billion.Even without the benefits of a crystalball, it is safe to assume that this trendwill continue. Even now, when one in fiveinstitutions in the savings bank sector is afoundation, this is changing the very natureof the industry.Giving back to the local communityLocal communities now have a new­benefactor alongside their bank. This hasgreat potential if used properly, but alsopresents some challenges. The savingsbanks’ most important contribution to­society is to provide good and efficientbanking services. The return of a shareof their profits to the community is a­distinguishing feature of the savings banksector, but not its most important output.If the savings bank foundations are towork well as social benefactors, this mustbe in coordination with the new bank.If successful, this will result in both anactive bank that meets the needs of thelocal ­community and businesses, and asolid owner, manager and investor in the­foundation. The foundations have greaterscope to play the role of high-profile socialenterprise and help safeguard the key valuesand reputation of the savings bank move-ment.With a foundation behind it, the bankis assured of clear local/regional owner-ship. The foundation can help when capitalis needed, and boost trading and interestin equity certificates. The bank and the­foundation benefit from greater controland predictability when it comes to thedistri­bution of profits, thus increasing thechances of strengthening the ­community’scapital base. This must, of course, be­reconciled with the local community’s­expectations for the contributions of thebank and ­foundation to good causes etc.ChallengesThe biggest challenge for the founda-tion model is balancing the community’sexpectations of the foundation with itsrole as owner and manager of the bank.Good long-term governance is crucial forstrengthening and developing the savingsbanks’ role locally and regionally. Conflictsmay arise between the foundation andthe bank. If the bank’s expectations of thefoundation in terms of meeting its capitalneeds exceed the foundation’s capacity andinclination, this could create challenges.There could also be disagreement overdividend policies and the bank’s future.Shortcomings in the foundation’s manage-ment that erode the community’s capitalbase must be avoided. The pressure ofexpectation from local communities couldalso impinge on the foundations’ ownershiprole. Balancing expectations and ­realitieswill be a key success criterion for the­foundations.Commitment to good causes – uniqueto savings banksSavings banks are committed to ­donatinga substantial share of their profits togood causes. These span everything fromaid work and social welfare through­cultural, ecclesiastical and sports facilitiesto ­thousands of small donations to localclubs and societies. A growing and well-run­savings bank sector has contributed tostrong growth in charitable donations inrecent years. More than NOK 5 billion hasbeen distributed over the past decade, andannual donations are now up at NOK 700-800 million. The foundations will handlemore of this task in the future, whichshould lead to greater professionalism andbetter “quality control” in the allocationof funding. This will benefit the entireindustry.Creating opportunitiesIn time, a growing number of foundationsand the merger of more and more savingsbanks may lead to the savings banks’ socialdevelopment role changing and being toneddown. This would be a challenge for thebanks, as they compete on delivering morethan just profits.The authorities in post-war Norway havesought to make philanthropy and ­charitabletraditions redundant. The savings bankfoundations should have the ­revitalisationof aspects of Norwegian civil society astheir ambition. This will contribute togreater diversity and less ­concentrationof power. With visions such as ­“Creatingvalue together” and ­“Unleashing the powerof good”, the savings bank ­foundationsare shaping and redefining modern­philanthropy, where the emphasis is oncreating opportunities and realising dreams.The foundation model has excitingpotential to take the savings bank sector ina positive direction. What is good for thebank is good for the foundation and goodfor the community. However, the new kidon the block will need to play its role well ifthis relationship is to be a success. nSAVINGS BANK FOUNDATIONS26OLE MORTEN GEVING

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