Swedish practice on life insurance

After the Second World War, there were political discussions where the left wing parties, who were in power, suggested that all banks and insurance companies should be state owned.

As a compromise, a fairness principle was introduced in the Swedish Insurance Company Act in 1948. The fairness principle stated that premiums paid by policyholders shall be fair compared to the benefits received by these policyholders. For life insurance business, this was interpreted to mean that all profits made on premiums should be returned as bonus to the policyholders, present or future.

The shareholders of the companies were only allowed a fair return on the share capital, which in most companies was very small.

This was in line with how some life insurers already operated, but was a major change for some others.

During the 1960’s and 1970’s, a practice emerged of paying no dividends at all to shareholders, and this was formalised when the Swedish Parliament in 1982 passed a bill that prohibited the distribution of profits to shareholders of a life insurance company.

This is what makes special the mutual model for non-profit distributing life insurance companies in Sweden: as in a true mutual life insurance company, no profit is distributed to shareholders but the company is still formally a shareholder-owned company. An important aspect of this is that the shareholders retain the right to make important business decisions for the company, without requiring permission from the policyholders or any of their representatives.

Around 1990, unit link life insurance was allowed in Sweden, and unit link companies were allowed to distribute profits to its shareholders through dividends. Sweden became a member of the European Union in 1996, and a change to the Swedish Insurance Company Act in 2000 again opened up for distribution of profits to shareholders in traditional life insurance companies.

However, a process has been established to transform an existing life insurance company to a
profit distributing company, where a transformation for example depends on the approval of the policyholders.

Since then, only a few existing life insurance companies have changed into profit distributing
companies following the change of the company act. In these cases all existing capital of the company has been distributed to the policyholders while the shareholders have injected new risk capital in the form of equity into the company.