Denmark is a member of the European Union and has a highly developed insurance market. Further, as a 2007 detailed assessment of insurance supervision by the International Monetary Fund (IMF) attests, the country is highly observant of the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors (IAIS) in 2003 (it observes 18 of the 28 ICPs and largely observes the remaining 10). By way of recommendation, the IMF calls for an increase in the scope of the insurance supervisor's fitness and propriety testing and for the issuance of an executive order requiring all companies to have an internal control/audit function. Other areas of less than full compliance include the supervisory authority, licensing, enforcement and sanctioning powers of the insurance supervisor - the Danish Financial Supervisory Authority; risk assessment; insurance activity; investments; derivatives; and the country's anti-money laundering framework.

General Overview

The insurance market in Denmark is "highly developed" (p. 4), observes the 2007 detailed assessment of Denmark against the Insurance Core Principles (ICPs) conducted by the International Monetary Fund (IMF). All conditions for effective supervision also exist and the legal and regulatory system is well-functioning and transparent. The assessment concludes that Denmark observes 18 ICPs and largely observes the remaining 10 ICPs. Denmark is a member of the European Union (EU) since 1973, and as such has adopted and implemented all EU-level legislation and directives.

The Danish Financial Supervisory Authority (DFSA) is the principal statutory authority supervising insurance companies in the country, the IMF detailed assessment further elaborates. It is an independent authority under the Ministry of Economic and Business Affairs (OEM) and discharges its supervision in accordance with the Financial Business Act and other relevant legislation. The OEM can issue further regulation on the DFSA's supervisory procedures and may give instructions to the DFSA. The DFSA licenses insurers and insurance intermediaries under the terms of the Financial Business Act and has been delegated the authority by the OEM to approve mergers and acquisitions of insurance undertakings. It can also withdraw licenses or impose sanctions on entities for non-compliance with the Financial Business Act or their other regulatory obligations. It has regulatory powers to issue executive orders and guidelines under the Financial Business Act. However, the supreme decision-making bodies are the two financial councils, the Financial Business Council (FBC) and the Danish Securities Council (DSC) and they "decide on matters of principle nature, significant financial consequences for undertakings, and prior to issuing regulation" (p. 18) as spelled out in the Financial Business Act. The DFSA's operating budget is appropriated from the government budget but is sourced from the fees charged by its supervised entities. The assessment finds no evidence of political or juridical interference in the DFSA's supervisory authority. The supervisory staff is well-qualified and the DFSA adopts a risk-based supervisory approach. It engages in supervisory cooperation and information-sharing with other domestic and foreign regulators to achieve effective supervision. The DFSA is listed as a member on the International Association of Insurance Supervisors website.

The IMF's detailed assessment forwards recommendations on insurance supervision in two key areas. First, the DFSA does not conduct fit and proper tests for all key management personnel of insurance entities and limits them to the board of Directors and the Board of Management on the assumption that it is in the best interest of the company/s management to hire well-qualified and suitable staff to their team. Second, smaller insurance companies do not have an internal control or audit function. The assessment calls for an increase in the scope of the DFSA's fitness and propriety testing and for the issuance of an executive order requiring all companies to have an internal control/audit function. The assessment further mentions the improvements to insurance supervision suggested by the country's National Audit Office (NAO). The NAO calls for tightening non-life insurance supervision, more frequent and comprehensive on-site inspections, upgrading the supervision of IT systems, and making follow-up inspections more effective.

The insurance sector is dominated by pension products, notes the IMF assessment, and most (94 percent) have a guaranteed rate of return, often exceeding the risk-free interest rate. Total pension assets grew by almost 17 percent in 2005, the largest growth in five years. The life insurance sector is consolidated, with a relatively small number of groups. The five largest companies account for 60 percent of the market share in terms of gross premium, whereas the top 10 corner 79 percent of the market share. As of 2005, there were 36 (33 in 2007, as a 2008 statistical report by the DFSA updates) life insurance companies and 29 (28 in 2007) general pension funds. Since some are organized as groups, there were effectively 18 life insurance companies/pension funds. In addition, there were 44 (36 in 2007) company pension funds. There are not many cross-border entities in the life insurance or general pension funds market mainly due to the tax legislation that prohibits tax deduction of premiums paid to foreign insurance undertakings. As for the non-life insurance sector, it has also seen consolidation in the previous years, although there is room for further consolidation. As of 2005, there were 124 (118 in 2007) non-life insurers in the Danish market. The top five insurers account for 67 percent of the market share, whereas the top 10 corner 83 percent. Foreign insurers are increasingly competing with Danish insurers to capture the insurance market, although their overall market size remains limited. Reinsurance is provided chiefly by the international reinsurance market, although there are five Danish reinsurers as well. The solvency ratio of most insurance companies have been stable and above the minimum capital requirements. The capital requirement was increased in January 2007 with the coming into effect of the EU Solvency 1 Directive. It is expected to increase further with the EU-level adoption of Solvency II in 2009.

The Principles

ICP 1 Conditions for effective insurance supervision

FC

This principle is observed, notes the 2007 detailed assessment by the IMF, and "conditions for effective supervision exist" (p. 17). The supervisor has adequate and high-quality professional resources available and the market infrastructure also facilitates effective supervision. Insurance entities are also afforded a wide range of operational services to enable them to pay utmost attention to the technical aspects of conducting their activities. Although supervision is essentially principles-based, there is scope for risk-based supervision. The assessment recommends that more specific rule-based requirements should be laid out for all insurance companies.

ICP 2 Supervisory objectives

FC

This principle is observed, notes the 2007 detailed assessment by the IMF as "the objectives of insurance supervision are clearly defined in ensuring that supervised undertakings do comply with the FBA [Financial Business Act]" (p. 17). The mission, vision, and values of the DFSA are clearly articulated and published by the DFSA and help its supervisory staff and the supervised entities get a clear understanding of the objectives and goals of the DFSA. The IMF makes no recommendations in connection with this principle.

ICP 3 Supervisory authority

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The DFSA's annual budget is carved out of the government budget, although the expenses are borne by the entities supervised by it. The DFSA is an independent agency under the OEM and is subject to the annual budget reduction program of the public sector. The assessment calls for a limitation to political or executive interference in the DFSA's resource allocation and overall supervisory activity. The Danish authorities respond by accepting the suggestion of providing a statutory basis to the DFSA's authority and autonomy and of separating its budget from the government budget. However, they do assert that the end should be to make available adequate funds to the DFSA rather than revamp the budgetary procedure. Also, the budget should be more clearly delineated to provide a transparent overview as to how resources for each separate supervisory activity is allocated and used.

ICP 4 Supervisory process

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The DFSA has clearly defined supervisory processes, which are laid out in manuals and followed closely by its staff. The DFSA adopts a risk-based supervisory approach that metes out equal treatment to all supervised entities under the Danish Administrative Law. No recommendations have been made by the IMF with regard to this principle.

ICP 5 Supervisory cooperation and information sharing

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Information sharing is subject to confidentiality requirements and does not require respective agreements or reciprocity provisions. However, the DFSA does have agreements supporting co-operation and information sharing domestically and abroad, both within the EU/EEA and beyond. The IMF makes no recommendations in connection with this principle.

ICP 6 Licensing

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. Although the DFSA "pays specific attention to the licensing process" (p. 22), it does not require that the suitability of the auditors and actuaries be assessed. Also, the DFSA's risk-based approach to supervision mandates it to pay extra close attention to an entity's operations in the first few years of its authorization, and thereafter its monitoring relaxes and the ongoing supervisory process "does not demand the same amount of detailed operating plans" (p. 22) from the entity.

ICP 7 Suitability of persons

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The DFSA consistently applies the fit and proper requirements, although they could be expanded in scope to include more key management personnel. The assessment observes that the DFSA assumes that it is the primary responsibility of the senior management in the insurance entity to assign fit and proper staff for relevant functions in the company rather than the DFSA having to monitor their fitness and propriety. This approach has not created problems in the past, although it could be a function of the limited size of the market being supervised. The Danish authorities respond by pointing out that their fit and proper criteria are compliant with the relevant EU directives. They are, however, open to amending their regulations to ensure that the DFSA has adequate measures under its disposal to deal with situations where fit and proper criteria have not been met or been violated. However, they reiterate that keeping this function in the hands of the management is both cost effective and efficient because it is in the management's best interest to hire personnel that is fit and proper. The DFSA should have the power to take action in instances of violations or non-compliance.

ICP 8 Changes in control and portfolio transfers

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. All acquisitions or mergers of a financial undertaking with another undertaking or its specific business function, either domestic or foreign, require the OEM's approval. The OEM has delegated this authority to the DFSA by an Executive Order. No recommendations have been made by the IMF with regard to this principle.

ICP 9 Corporate governance

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The Danish Public Companies Act, the Financial Business Act, and a DFSA guidance note contain provisions on corporate governance and are binding to all public, non-listed and mutual insurance companies. The IMF makes no recommendations in connection with this principle.

ICP 10 Internal control

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The Financial Business Act has provisions on internal control requirements for insurance companies and Guideline 9680 clarifies the DFSA's requirements in this area. However, as the assessment finds, the guideline is not clear enough in spelling out the DFSA's expectations and also does not cover all aspects of the internal control procedure to be followed by insurers. Further, smaller companies are not obliged to establish internal audit functions. The assessment calls for the issuance of an executive order to clarify the internal control requirements and recommends that they be made compulsory for smaller companies. The Danish authorities respond by informing the IMF that in Danish jurisdiction, internal auditors are not part of the control system of the company and they participate in the financial auditing of the company. Further, smaller companies may find it expensive to have a separate internal audit function. Therefore, the authorities do not find it feasible or necessary to require smaller companies to create an internal audit function. Nevertheless, the authorities do express their intent to make internal control requirements more explicit by issuing executive orders on them.

ICP 11 Market analysis

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. By way of recommendation, however, the assessment mentions that the DFSA "should ideally enlarge its activities on market analysis and obtain information which would enable a forecast of market trends and allow for a projection of potential impacts for the sector" (p. 27).

ICP 12 Reporting to supervisors and off-site monitoring

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. All insurers are required by the Financial Business Act to submit annual accounts and reports, actuarial reports (mandatory only for life insurer), insurance provisions, registered assets, as well as other information to the DFSA, and the latter can request additional information for effective discharge of its responsibilities. The DFSA Executive Order No. 1406 contains detailed regulations on the reporting requirements, which are the same for all insurers. No recommendations have been made by the IMF with regard to this principle.

ICP 13 On-site inspection

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. However, as the IMF finds, risk assessment does not take into account the size of the insurer to fully measure the risk sensitivity and the broader financial impact that it might have on the markets. The assessment, therefore, recommends that larger life insurers be inspected fully on a 4-year cycle.

ICP 14 Preventive and corrective measures

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The DFSA has the power and the capacity to ensure that violations of or non-compliance with rules and regulations are penalized. However, the assessment observes a bias towards strict corrective measures, and a frequent use of the withdrawal of license. The IMF, therefore, calls for a broader range of graduated sanctions to deal with different levels of non-compliance or breaches. Further, corrective actions are not published either on the company or country level.

ICP 15 Enforcement or sanctions

CP

This principle is only largely observed, per the 2007 detailed assessment by the IMF as the DFSA lacks the power to replace or restrict the authority of the controlling owners or managers of a firm. The assessment calls for providing the DFSA with explicit powers to directly address management problems by means of an executive order. To this recommendation, the Danish authorities respond by stating that they "do not see a need for further measures" (p. 44) since the DFSA does have the power to abolish the voting rights of shareholders if a qualified owner works against the safe and sound operation of a company and also to instruct the relevant firm.

ICP 16 Winding-up & exit from the market

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Under the Financial Business Act, which provides the framework for winding up and withdrawal of licenses of financial undertakings, the DFSA may withdraw the license upon request, if the entity repeatedly violates the Act, or if the entity fails to take corrective measures outlined by the DFSA in the restoration plan within the set time frame. No recommendations have been made by the IMF with regard to this principle.

ICP 17 Group-wide supervision

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The DFSA conducts group wide supervision of the three financial conglomerates conducting business in Denmark, and assesses risks undertaken by them in all the countries of their operation simultaneously. This hinders unsupervised transfers of risk. The assessment notes that the memoranda of understanding (MoUs) signed by the DFSA with its Nordic counterparts also ensure a consistent approach to supervision across the borders. The IMF makes no recommendations in connection with this principle.

ICP 18 Risk assessment and management

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The assessment finds that all companies in practice must have a risk assessment framework in place relative to their business to produce internal reports as well as stress test results on assets to be submitted regularly to the DFSA. However, the DFSA should set the requirement of establishing a risk assessment framework by all companies in an executive order. The Danish authorities respond by stating their intent to make the requirements more detailed and issuing the recommended executive order.

ICP 19 Insurance activity

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The assessment recommends an executive order to be issued by the DFSA laying down minimum requirements for insurance activity. The Danish authorities respond by stating their intent to make the requirements more detailed and issuing the recommended executive order.

ICP 20 Liabilities

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Executive Order No. 1406 and its accompanying guidance note stipulate that technical and other provisions have to be valued on the basis of sound accounting and actuarial principles. Both life and non-life companies have to report their liabilities bi-annually to the DFSA, which can question them on insufficient reserves, actuarial principles and their financial situation. No recommendations have been made by the IMF with regard to this principle.

ICP 21 Investments

CP

This principle is largely observed, notes the 2007 detailed assessment by the IMF, "since the investment function is not subject to suitability requirements" (p. 35). The assessment, therefore, advises Denmark to consider promulgating detailed requirements for investments.

ICP 22 Derivatives and similar commitments

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, "since the usage of derivatives is not subject to suitability requirements" (p. 35). The assessment, therefore, advises Denmark to consider promulgating requirements for the derivatives function.

ICP 23 Capital adequacy and solvency

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The Financial Business Act lays down the capital adequacy requirements for insurance undertakings and the eligible forms of capital elements. Technical provisions and liabilities calculated for solvency purposes are valued on the basis of valuation used for accounting purposes. The eligible capital elements are implemented from EU directives, except when they are not considered eligible in Denmark or eligible only with supplementary requirements. The IMF makes no recommendations in connection with this principle.

ICP 24 Intermediaries

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. The DFSA has implemented the EU directive on insurance mediation and licenses all insurance intermediaries, including brokers and agents. Intermediaries also need to pass examinations given by the Insurance Academy established by the Danish Insurance Association. Licenses of intermediaries may be withdrawn by the DFSA if they no longer meet the fit and proper criteria. It is illegal to carry out intermediation without a license. No recommendations have been made by the IMF with regard to this principle.

ICP 25 Consumer protection

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Further, as the Financial Business Act stipulates, "insurers and intermediaries shall be operated in accordance with honest business principles and good practice within the field of activity" (p. 37). The IMF makes no recommendations in connection with this principle.

ICP 26 Information, disclosure & transparency towards the market

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Reporting requirements, including regulations on annual report and audit, are clearly laid out in the Financial Business Act and apply to all financial undertakings and financial holding companies. No recommendations have been made by the IMF with regard to this principle.

ICP 27 Fraud

FC

This principle is observed, notes the 2007 detailed assessment by the IMF. Although the Financial Business Act does not cover insurer fraud, it is addressed in the Danish legislation and the Insurance Contract Law, under which committing insurance fraud is a crime to be prosecuted by the relevant authorities. Further, the DFSA also has the authority and capacity to establish and enforce regulations to prevent insurance fraud and communicate with appropriate enforcement agencies to deter, detect, record and report insurance fraud.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. The 2005 Act on Money Laundering implements the Second EU Money laundering Directive and covers the Financial Action Task Force (FATF) Recommendations 4, 10, 13-15, 21, 29-32 and special IV and V relating to preventive measures in financial institutions, including insurance companies. It also partially observes FATF Recommendation 5. Life insurers and insurance intermediaries are subject to this Act. The 2006 law on money laundering that was proposed by the DFSA and adopted during the IMF FSSA, per the IMF's 2007 detailed assessment, "aims to fully implement the EU 3rd Money Laundering Directive and thus comply with the FATF 40 revised recommendations, including recommendations 6, 8, 9, 11, 22, and 25" (p. 40). To add, the IMF comments that "the new law is expected to contribute to an improved supervisory framework to support activities on AML/CFT [anti-money laundering/combating the financing of terrorism]" (p. 41).