The lives and activities of people – individuals, families and businesses alike – always involve various uncertainties and hazards, referred to as risks. For a risk to be insurable, it must meet the following conditions:
- Multiple insured entities (persons, objects or assets) must be exposed to the same risk, and the probability and frequency of the risk must be assessable.
- The damage must be sudden and unforeseeable; it cannot be, for example, normal wear and tear.
- The damage must be quantifiable in monetary terms.
Finnish society provides its members with extensive social security and a safety net of social insurance schemes. However, these statutory protection systems are not all-encompassing. Insurance companies play an important role in maintaining and developing Finnish social security, and a substantial part of Finnish social security is in fact managed through statutory insurance. The need for and importance of voluntary insurance cover that complements statutory protection is continuously growing.
Insurance is based on a statistical principle known as the “law of large numbers”: sharing a risk across a large group of policyholders ensures it does not jeopardise anyone’s ability to pay. All policyholders pay insurance premiums, and the accumulated funds can be used to compensate for losses. Risk pooling makes it possible to keep the price of premiums reasonable for policyholders and ensures the insurer will have sufficient resources to pay claims.
Insurance secures business operations
For a business, insurance is a way to replace the uncertain and potentially large costs of unforeseeable loss events with a predictable, consistent annual expense (annual insurance premium) that can be taken into account in budgeting. Insurance cover enables companies to operate in high-risk sectors and ensures uninterrupted operations in various risk situations.
Insurance market structure and participants
Like its peers in the other Nordic countries, the Finnish insurance market is concentrated. There are several separate companies operating in the market, as law prohibits the provision of non-life insurance and life and pension insurance within the same company. In practice, however, the companies often operate in groupings, in addition to which voluntary non-life insurance is provided by local mutual insurance associations. A characteristic feature of the Finnish insurance market structure is the large share of statutory insurance in the sector’s total premium income.
Insurance companies are either mutuals or limited liability companies. A single group may include both mutuals and limited liability companies. In pension insurance, mutuality is the dominant company form. In non-life and life insurance, limited liability companies account for more than 50% of the market.
Mutual company
A mutual company is a form of insurance company in which policyholders are also owners and therefore exercise decision-making power. The principle is similar to that of cooperatives, where members decide on company matters. Additional equity capital may also be paid into the company in the form of guarantee capital, and those who provide it also exercise ownership rights.
Why do people take out insurance?
- To have protection and peace of mind for themselves and their loved ones
- To safeguard their standard of living
- To compensate for potential financial losses
- To secure their livelihood
- To make life easier in uncertain times, such as in the event of unemployment or retirement
- To access better healthcare and facilitate access to medical services
- To save for a better financial future – their own or their children’s
- To fulfil statutory obligations.
Insurance as an economic activity and insurance distribution
In insurance activity, the order of main income and expenses differs from other businesses. Income (premium income) is received first, and expenses (claims) arise later. Operations also generate wages and other operating costs that must be taken into account. The price of products must be determined in advance, and random fluctuations in claims cannot be predicted. This leads to an accrual issue: premiums and claims must be allocated to the correct years, while company results are revealed with a delay. As a solution, insurance companies set aside technical provisions on their balance sheet.
Insurers invest their assets productively
In insurance operations, the funds accumulated in provisions are invested as productively and securely as possible to ensure the payment of future pensions and claims. Investment income plays an important role in the formation of insurers’ results. Investment assets and solvency serve as buffers, for example against economic fluctuations.
Insurance can also be used as a means of investment. Savings and investment policies include unit-linked insurance and life insurance savings policies and are meant for long-term saving and investing. Pension insurance policies add supplementary security for retirement. Insurance investment also includes capital redemption policies, although they do not involve an insured person.
Insurance distribution and relevant legislation
Insurance is distributed through various channels:
- Full-time or part-time sales agents (for one company or group)
- Agents representing several insurance companies (e.g. car dealerships, travel agencies)
- Banks acting as insurance agents
- Branch offices (especially for household insurance)
- Insurance brokers (especially for corporate and personal insurance)
Insurance can also be sold in connection with another purchase (e.g. eyeglass insurance), but the purchase must be optional. So-called “bundled sales” are prohibited in consumer sales. The customer must be able to purchase insurance, a service, or a product separately, without other parts being attached to the contract.
Legislation on the distribution of insurance is based on the EU Insurance Distribution Directive (EU) 2016/97. The directive harmonised the regulation of insurance and reinsurance distribution in EU member states. It applies to all types of actors offering insurance. In Finland, the directive was transposed into national law with the Act on Insurance Distribution and the Act Amending the Insurance Contracts Act, which both entered into force on 1 October 2018.
The legislation on insurance distribution and insurance contracts contains provisions on the registration of agents and brokers and professional competence and expertise requirements for all persons involved in offering insurance. It also covers other sales-related matters and procedures, such as conflict of interest management, specific requirements for the offering of investment insurance, sales targets and remuneration arrangements, product management processes during the development and lifecycle of insurance products, and supervision of actors. The legislation sets out disclosure obligations and requirements concerning standardised key information documents for non-life insurance products.
Although one of the main objectives of the directive was to promote consumer protection by raising the level of minimum regulation, much of it also applies to corporate insurance.
Private insurance and social insurance
Private insurance is based on an agreement between the insurer and the policyholder, and its content is not regulated by law. The insurance company assesses the risk it is willing to bear. The policyholder can usually choose the desired level of cover. Private insurance is provided by private insurance institutions.
Social insurance forms a significant part of social security in Finland. It can be defined as insurance arranged by the public sector to protect against social risks. Social risks refer to personal risks such as old age, illness or disability, unemployment, and death. The aim of social insurance is to secure the livelihood of individuals when these risks materialise. Social insurance is characterised by its statutory nature. This distinguishes it from private insurance, which may also cover some of the same risks.
The insurance-based forms of social security include earnings-related pension, occupational accidents and diseases insurance (also known as workers’ compensation insurance), health insurance, unemployment security, and guarantee and national pensions. Motor liability insurance and patient insurance are also mandatory and have their own specific acts.