liabilities, including not-yet granted bonuses, were greater than the current market value of assets at the end of the financial crisis. Recovery began in 2003 and by 2004 margins were again over unity. By the end of 2005 asset-liability ratios were in some cases significantly over unity, but nevertheless continued to climb through 2007.

Summing up, taken together, these tables illustrate how Swedish companies manage their portfolios within the framework of the legislation regulating their business.<sup>24</sup> Although the procedure of distributing surpluses is straightforward for insurance specialists, the fact that a certain proportion of bonuses previously given had to be “cancelled” with the dramatic fall in the equity market right after the turn of the century attracted considerable attention in the mass media and led to a questioning of this procedure. To date, however, there is no indication that it will be abandoned. In fact, instead, the system proved itself to be resilient, returning to normalcy within the short period of 3-4 years.

# **_5.4 Risk Management in Private Individual and Occupational Group Insurance_**

The change from a predominantly DB to a predominantly DC environment that has taken place from the mid-1990s has implications for the distribution of the longevity and investment risks between plan participants and insurance providers. Within the framework of risk bearing, the major difference between DC and DB is that, whereas the provider bears both the investment and longevity risks from the point of new entrance of a participant until death in the DB framework, in the DC framework the longevity and investment risks do not come into the picture for the provider until it is time to compute the annuity. Instead, the risks during the accumulation phase are borne by the participant, who manages this risk by making primarily decisions concerning how savings are to be invested, given the degrees of freedom offered within the institutional framework. In the following we consider the longevity and investment risks in the DC environment in more detail.

# _5.4.1 The Investment and Longevity Risks_

Here, we consider the longevity and investment risks for private insurers, beginning with the investment risk. The investment risk is a function of the volatility of the investment portfolio’s composition. We can begin with an example using Tables 15 and 16, which illustrate the investment risk of Swedish insurance companies in the light of the volatile equity market during 2002-2005. Data for the _occupational_ AMF scheme illustrate how dramatically the ratio of assets to pension liabilities can change within a short time span if the insurer’s portfolio has a large equity content. In the fourth quarter of 2002, following the extreme drop in equity prices of around 40 percent on the Swedish stock market, AMF’s ratio of assets to pension liabilities fell below the threshold of unity to 95 percent. The market recovered in the following two years, and by the fourth quarter of 2005 the asset-liability ratio had rebounded to 150. AMF’s asset-liability ratio for private individual insurance also fell to 95 percent, but with a lower rebound to 121 percent, reflecting a different portfolio profile.

More generally, in assessing the investment risk it is important to recall that, in a DB plan, a unit of contributions will be in a pension scheme a long period of time. This time matches the

> 24 Note that even the new NDC system in Sweden follows this adjustment framework, at least in principle, although to date there is no legislation governing the adjustment of surpluses.

42