Institutional framework and arrangements

7. The Federal Constitution of the Swiss Confederation of April 18, 1999 (FC) establishes a free market economic system in which own property and economic freedom are guaranteed (Arts. 26, 27 and 94 FC). Any governmental restriction of economic freedom is limited by the rule of law which is a basic principle of the Swiss Federal Constitution (Art. 5 FC). All regulation shall be based on and limited by law, be in the public interest, and be proportionate to the ends sought.

8. Articles 95 and 98 of the Federal Constitution lay down the constitutional basis for the regulation of professional activities in the private sector, and the financial sector in particular. The Confederation is empowered to legislate on the banking and stock exchange system, and on private insurance. The Financial Market Supervisory Authority Act of June 22, 2007 (FINMASA), together with two related Ordinances, serves as an umbrella law for sector-specific laws governing financial market regulation and supervision. In addition to setting organizational parameters including its liability for FINMA as an institution that is not part of the ministry of finance and financed by fees received from the supervised, the FINMASA defines principles for the regulation of financial market, as well as a set of harmonized supervisory instruments and sanctions.

9. Seven sector-specific Federal Acts issued by the Federal Parliament (referred to as the “Financial Market Acts”) complement the FINMASA: the Banking Act, the Stock Exchange Act, the Collective Investment Schemes Act (SESTA), the Insurance Supervision Act (ISA), parts of the Insurance Contract Act (ICA), the Anti-Money Laundering Act (AMLA), and the Mortgage Bond Act.

10. The statutory framework for the supervision of private insurance business is provided both by FINMASA and ISA. Whereas FINMASA confers on FINMA the responsibility for insurance supervision in accordance with ISA, and provides FINMA with the necessary supervisory powers and instruments, ISA sets out the regulatory rules on the insurance business. ISA thus defines the insurance-specific regulation, complementing the regulations defined in the FINMASA. Statutory ordinances issued by the Federal Council (executive branch of government) and by FINMA implement the Financial Market Acts on a second level. The ISA also delegates some rule-making powers to FINMA for specific and named subjects, for instance the Ordinance on the Supervision of Private Insurance Companies (FINMA-ISO) and the Insurance Bankruptcy Ordinance (IBO-FINMA). Circulars issued and published by FINMA provide further guidance on FINMA’s interpretation and practical implementation of relevant financial market legislation. They provide substance to the intention of the legislator as conveyed in acts and ordinances. Circulars address, inter alia, solvency, reserves and the investment of tied assets, the governance and risk management of an insurance entity, the position of the responsible actuary, the internal audit function and the external auditors, group supervision, and reporting.

11. FINMA coordinates with the Swiss National Bank (SNB) and Federal Department of Finance (FDF) on financial stability issues. In February 2010, FINMA and SNB updated their bilateral Memoranda of Understanding (MOU) on financial stability issues to provide a clear division between their individual tasks, describe their common areas of interest, and govern their collaboration in these areas. A Steering Committee has been established to set priorities in common areas of interest. In addition, there is a trilateral MOU between the FINMA, FDF and SNB that was signed in January 2011, governing the collaboration between the three agencies, including (a) the exchange of information on financial stability and financial market regulation issues and (b) coordination in the event of a crisis that could threaten the financial system’s stability.

12. FINMA is the consolidated supervisor of the financial markets in Switzerland. Created under FINMASA in 2007, FINMA came into full power on January 1, 2009, superseding the Federal Office of Private Insurance (formerly responsible for supervising private insurance), the Swiss Federal Banking Commission (formerly responsible for supervising banks, securities firms, exchanges and investment funds), and the Money Laundering Control Authority. Thus FINMA supervises banks, insurance companies, stock exchanges and securities dealers as well as other financial intermediaries according to FINMASA. Where necessary, FINMA conducts financial restructuring and bankruptcy proceedings. FINMA is also responsible for preventing money laundering and terrorist financing in the financial sector. In addition, it has supervisory powers with respect to holdings of participations and is the complaint-handling body for decisions of the Takeover Board relating to public takeover bids for listed companies.

13. FINMA’s supervisory ambit excludes social insurance programs under Pillars I and II of Swiss three-pillar social security system. In addition to the social security benefits, compulsory health insurance is provided under the Federal Health Insurance Act through specialist health funds. The Federal Office of Public Health (FOPH) supervises and approves the premium rates for these health funds. Individuals may purchase additional health coverage from private insurers (supervised by FINMA) to supplement the basic level of compulsory health insurance. FINMA supervision also excludes cantonal building insurers writing homeowners’ protection.

14. FINMA is a public law institution. Its official seat is in Bern. It enjoys autonomy and independence accountable to and subject to the overall supervision of the Federal Parliament. It is possible to appeal against rulings issued by FINMA to the Federal Administrative Court. Against the decisions of the Federal Administrative Court appeals are available to the Federal Supreme Court for a number of counts.

Market structure and industry performance

Industry structure and recent trends

15. The Swiss insurance sector and pension fund assets are relevant for the financial sector. The pension and insurance sector including reinsurance and captives are of about the same size in terms of assets and account together for 31 percent of the financial sector assets. The insurance market share has been constant over the years and in 2012 amounts to 100 percent of GDP.

Table 1.

Switzerland: Financial Sector Assets, 2008–2012

(CHF billions, percent for the Share)

Source: Authorities and IMF.

Table 1.

Switzerland: Financial Sector Assets, 2008–2012

(CHF billions, percent for the Share)

Assets	2008	2009	2010	2011	2012
All financial institutions	4,196	3,843	3,914	3,998	4,000
Banks	3,080	2,668	2,715	2,793	2,778
Insurance Companies	578	576	579	580	592
Pension funds	539	599	621	625	629
Share
All financial institutions	100	100	100	100	100
Banks	73	69	69	70	69
Insurance Companies	14	15	15	15	15
Pension funds	13	16	16	16	16
Financial system assets
in percent of GDP	739	693	684	683	677

Source: Authorities and IMF.

View Table

Table 1.

Switzerland: Financial Sector Assets, 2008–2012

(CHF billions, percent for the Share)

Assets	2008	2009	2010	2011	2012
All financial institutions	4,196	3,843	3,914	3,998	4,000
Banks	3,080	2,668	2,715	2,793	2,778
Insurance Companies	578	576	579	580	592
Pension funds	539	599	621	625	629
Share
All financial institutions	100	100	100	100	100
Banks	73	69	69	70	69
Insurance Companies	14	15	15	15	15
Pension funds	13	16	16	16	16
Financial system assets
in percent of GDP	739	693	684	683	677

Source: Authorities and IMF.

16. The direct insurance industry in Switzerland is well developed, with a high penetration and the highest insurance expenditure per capita in the world. The insurance penetration (gross premium as percentage of GDP) is the 4^th highest in Europe¹ and the 9^th highest in the world² well above the EU average penetration of 7.8 percent and the expenditure per capita in insurance is the leading worldwide with over CHF 10 thousand. Total premium in 2012 amounted to CHF 83 billion, of which a forty percent corresponds to life, and a thirty percent each to nonlife and to comprehensive health. Total assets of the sector are CHF 460 billion. Of which two thirds correspond to life.

Table 2.

Switzerland: Insurance Sector Premium and Assets, 2008–2012

(CHF millions, CHF thousand for the density)

^*Measured as total premium as a percentage of GDP

^**Measured as total premium per capita

Source: Authorities.

Table 2.

Switzerland: Insurance Sector Premium and Assets, 2008–2012

(CHF millions, CHF thousand for the density)

		2008	2009	2010	2011	2012
Gross premiums
Life		32,372	32,180	32,651	32,760	33,484
Nonlife		52,537	51,717	51,007	46,712	49,876
	Total	84,909	83,897	83,658	79,472	83,360
	Assets
	Life	280,611	281,706	291,265	299,151	311,237
	Nonlife	153,648	147,891	147,157	148,198	148,581
		434,259	429,597	438,422	447,349	459,818
Penetration*		15.0	15.1	14.6	13.5	14.1
Density**		11,183	10,775	10,630	9,990	10,372

^*Measured as total premium as a percentage of GDP

^**Measured as total premium per capita

Source: Authorities.

View Table

Table 2.

Switzerland: Insurance Sector Premium and Assets, 2008–2012

(CHF millions, CHF thousand for the density)

		2008	2009	2010	2011	2012
Gross premiums
Life		32,372	32,180	32,651	32,760	33,484
Nonlife		52,537	51,717	51,007	46,712	49,876
	Total	84,909	83,897	83,658	79,472	83,360
	Assets
	Life	280,611	281,706	291,265	299,151	311,237
	Nonlife	153,648	147,891	147,157	148,198	148,581
		434,259	429,597	438,422	447,349	459,818
Penetration*		15.0	15.1	14.6	13.5	14.1
Density**		11,183	10,775	10,630	9,990	10,372

^*Measured as total premium as a percentage of GDP

^**Measured as total premium per capita

Source: Authorities.

17. The number of undertakings in the insurance sector is stable except for the captives that showed a reduction of 20 percent since 2008. Currently 207 institutions are licensed to provide insurance in Switzerland, compared with 218 in 2008. The reduction is basically due to the exiting of captives from 42 in 2008 to currently 34. The number of foreign branches has not significantly changed since 2008 with 46 entities. In addition to the 207 institutions, 16 insurers provide comprehensive health insurance and are primarily supervised by FOPH. All major international insurers, reinsurers and brokers are active in the market, and also Swiss insurers are active outside the country with 20 branches operating abroad and 6 active international insurance groups.

Table 3.

Switzerland: Number of Registered Insurance Undertaking and Intermediaries, 2008–2012

Source: Authorities.

Table 3.

Switzerland: Number of Registered Insurance Undertaking and Intermediaries, 2008–2012

Licensed risk carriers
		2008	2009	2010	2011	2012
Insurers
	Life (long-term)	26	25	25	24	23
	Non-life (general)	122	125	126	124	123
	Reinsurance	28	26	27	27	27
	Captive	42	42	35	35	34
		218	218	213	210	207
Supplementary information
Branches of foreign Insurers		47	50	51	47	46
Local Insurers’ branches abroad		34	22	19	20	20
Insurance groups		9	9	8	8	8

Source: Authorities.

View Table

Table 3.

Switzerland: Number of Registered Insurance Undertaking and Intermediaries, 2008–2012

Licensed risk carriers
		2008	2009	2010	2011	2012
Insurers
	Life (long-term)	26	25	25	24	23
	Non-life (general)	122	125	126	124	123
	Reinsurance	28	26	27	27	27
	Captive	42	42	35	35	34
		218	218	213	210	207
Supplementary information
Branches of foreign Insurers		47	50	51	47	46
Local Insurers’ branches abroad		34	22	19	20	20
Insurance groups		9	9	8	8	8

Source: Authorities.

18. The sector is dominated by a few players writing significant international business. The life sector is dominated by two players, responsible for 54 percent of the business and the top 10 life insurers account for 97 percent of the market. The non-life sector is also concentrated but less than the life sector; here the top 10 insurers account for 65 percent of the business. Without taking Swiss Re and Zurich Insurance Group into account, the Swiss insurance groups write on average around 35 percent of the premium outside Switzerland and over 45 percent of their assets are related to foreign business. For Swiss Re and Zurich Insurance Group the domestic premium is only 1.7 percent and 9.8 percent, respectively, of their total premium income.

Table 4.

Switzerland: Market Share of Top 10 Insurers, 2012

Source: Authorities.

Table 4.

Switzerland: Market Share of Top 10 Insurers, 2012

	Life sector (% of total assets)	Non-life sector (% of total premiums)
1	29.2	12.4
2	26.2	10.1
3	9.0	9.1
4	8.9	6.7
5	8.1	5.7
6	5.8	5.0
7	4.3	4.5
8	2.3	4.3
9	2.2	3.9
10	1.3	3.1
Total	97.4	64.7

Source: Authorities.

View Table

Table 4.

Switzerland: Market Share of Top 10 Insurers, 2012

	Life sector (% of total assets)	Non-life sector (% of total premiums)
1	29.2	12.4
2	26.2	10.1
3	9.0	9.1
4	8.9	6.7
5	8.1	5.7
6	5.8	5.0
7	4.3	4.5
8	2.3	4.3
9	2.2	3.9
10	1.3	3.1
Total	97.4	64.7

Source: Authorities.

Table 5.

Switzerland: International Participation of the Insurance Groups, 2012

^*Total assets of regulated Swiss entities

^*Foreign branches of Swiss legal entities not included

Source: Authorities.

Table 5.

Switzerland: International Participation of the Insurance Groups, 2012

Top 10 Insurance Groups in 2012
		Assets			Premiums
	Consolidated	Domestic Operations*	% of Domestic	Consolidated	Domestic Operations*	% of Domestic
Baloise	73,527	32,873	44.7%	6,742	3,827	56.8%
Helvetia	42,497	28,407	66.8%	6,829	3,978	58.3%
Nationale Suisse	6,260	5,098	81.4%	1,512	1,050	69.4%
Mobiliar	15,648	15,648	100.0%	3,299	3,280	99.4%
Swiss Life	163,401	84,894	52.0%	12,351	7,802	63.2%
Swiss Re	197,519	177,120	89.7%	24,661	409	1.7%
Vaudoise	11,627	4,960	42.7%	1,496	978	65.4%
Zurich Insurance Group	374,623	103,913	27.7%	49,408	4,842	9.8%
Total	885,102	452,913	51.2%	106,298	26,166	24.6%

^*Total assets of regulated Swiss entities

^*Foreign branches of Swiss legal entities not included

Source: Authorities.

View Table

Table 5.

Switzerland: International Participation of the Insurance Groups, 2012

Top 10 Insurance Groups in 2012
		Assets			Premiums
	Consolidated	Domestic Operations*	% of Domestic	Consolidated	Domestic Operations*	% of Domestic
Baloise	73,527	32,873	44.7%	6,742	3,827	56.8%
Helvetia	42,497	28,407	66.8%	6,829	3,978	58.3%
Nationale Suisse	6,260	5,098	81.4%	1,512	1,050	69.4%
Mobiliar	15,648	15,648	100.0%	3,299	3,280	99.4%
Swiss Life	163,401	84,894	52.0%	12,351	7,802	63.2%
Swiss Re	197,519	177,120	89.7%	24,661	409	1.7%
Vaudoise	11,627	4,960	42.7%	1,496	978	65.4%
Zurich Insurance Group	374,623	103,913	27.7%	49,408	4,842	9.8%
Total	885,102	452,913	51.2%	106,298	26,166	24.6%

^*Total assets of regulated Swiss entities

^*Foreign branches of Swiss legal entities not included

Source: Authorities.

19. The life sector consists mainly of participating policies that include the occupational pension business; also annuities and unit-linked products are important. Life products with profit sharing or participating policies made up to 90 percent of the life insurance sector. Annuities that are generated by the voluntary third pillar are still small given that the second pillar mandatory annuities are important and 80 percent is insured by the pension funds which are supervised at a cantonal level and since January 2012 under the Occupational Pensions Supervision Commission (OAK BV). Unit-linked products demand of which highly depends on the stock market performance are also offered.

Table 6.

Switzerland: Life Insurance Products (in CHF million)

Source: Authorities.

Table 6.

Switzerland: Life Insurance Products (in CHF million)

		Gross Premiums written
Life		2010	2011	2012
Domestic risks
Participating (or with-profits)		26,215	27,415	27,831
Annuities		871	734	674
Unit-linked		3051	2421	2628
Foreign risks
Participating (or with-profits)		1,579	1,411	1,430
Annuities		636	620	572
Unit-linked		0	0	0
Others - Received Reinsurance		299	159	349
	TOTAL	32,651	32,760	33,484

Source: Authorities.

View Table

Table 6.

Switzerland: Life Insurance Products (in CHF million)

		Gross Premiums written
Life		2010	2011	2012
Domestic risks
Participating (or with-profits)		26,215	27,415	27,831
Annuities		871	734	674
Unit-linked		3051	2421	2628
Foreign risks
Participating (or with-profits)		1,579	1,411	1,430
Annuities		636	620	572
Unit-linked		0	0	0
Others - Received Reinsurance		299	159	349
	TOTAL	32,651	32,760	33,484

Source: Authorities.

20. The nonlife sector is balanced with property and motor insurance as the principal products followed by liability insurance. The nonlife insurance sector is well developed offering all types of protection. Property insurance and motor insurance are the leading products corresponding to 19.6 and 13 percent of the policies respectively. The optional supplementary health insurance (which is supervised by FINMA) is offered by insurers and the mandatory health coverage provided by health insurance funds. This supplementary insurance as well as accident insurance account for a quarter of the nonlife premium. Liability insurance is also important as an independent line of business with five percent of the premium.

Table 7.

Switzerland: Nonlife Insurance Products

Source: Authorities.

Table 7.

Switzerland: Nonlife Insurance Products

		Gross Premiums written
Non-life		2010	2011	2012
Domestic risks
Motor		5,414	5,511	5,652
Property		8,085	7,969	8,261
Liabilities		2,117	1,903	1,916
Accident & health		11,867	12,203	12,446
Others incl. Received Reinsurance		6,310	5,069	6,014
Foreign risks
Motor		962	972	1,010
Property		1,790	1,748	1,829
Liabilities		530	450	503
Accident & health		41	42	65
Others incl. Received Reinsurance		13,891	10,845	12,180
	TOTAL	51,007	46,712	49,876

Source: Authorities.

View Table

Table 7.

Switzerland: Nonlife Insurance Products

		Gross Premiums written
Non-life		2010	2011	2012
Domestic risks
Motor		5,414	5,511	5,652
Property		8,085	7,969	8,261
Liabilities		2,117	1,903	1,916
Accident & health		11,867	12,203	12,446
Others incl. Received Reinsurance		6,310	5,069	6,014
Foreign risks
Motor		962	972	1,010
Property		1,790	1,748	1,829
Liabilities		530	450	503
Accident & health		41	42	65
Others incl. Received Reinsurance		13,891	10,845	12,180
	TOTAL	51,007	46,712	49,876

Source: Authorities.

21. Eighty percent of compulsory fire insurance is provided by the cantonal building insurers. Compulsory fire insurance requirements vary by canton; many cantonal fire offices monopolize the fire coverage on building structure while private insurers write the fire coverage on household contents. In 19 of the total 26 cantons, the elementary damage insurance of buildings is provided by the Kantonale Gebäudeversicherungen – KGV (cantonal building insurance companies). These independent institutions under public canton law insure more than 80 percent of Swiss building constructions; that is 2 million buildings worth a total of approximately CHF 1.5 billion.

22. Related party investments, reinsurance and other receivables are not significant assets in the insurance sector except for reinsurers. The life and nonlife sectors have minimal exposure to intangible assets, receivables and related party investments, accounting for less than two percent and ten percent of assets respectively. The reinsurance sector shows a much higher exposure to intra-group and related party investments, close to 6 percent and 26 percent of assets are reinsurance recoverables. While the reinsurance business has longer times to settle reinsurance exposures (retrocessions) having 33 percent of their assets in the form of illiquid assets could cause liquidity issues, in particular since the tied asset regime does not apply to reinsurers.

Table 8.

Switzerland: Illiquid Assets of the Insurance Sector

(in CHF million)

Source: Authorities.

Table 8.

Switzerland: Illiquid Assets of the Insurance Sector

(in CHF million)

Life			2008	2009	2010	2011	2012
	Total assets		280,611	281,706	291,265	299,151	311,237
		Intangible assets	45	29	33	53	62
		Receivables	3,697	2,296	2,392	2,105	2,307
		Intra-group/related company receivables	1,250	1,579	1,677	1,818	1,351
		Reinsurance recoverables	157	138	154	257	277
Nonlife
	Total assets		153,648	147,891	147,157	148,198	148,581
		Intangible assets	1,118	1,075	834	879	776
		Receivables	8,046	5,167	5,754	5,245	4,705
		Intra-group/related company receivables	836	7,914	7,276	5,576	4,969
		Reinsurance recoverables	5,359	4,657	2,988	2,869	3,127
Reinsurance
	Total assets		141,554	144,522	138,734	130,091	132,926
		Intangible assets	77	66	45	35	41
		Receivables	1,403	1,641	2,026	982	922
		Intra-group/related company receivables	23,502	22,575	13,460	12,509	8,095
		Reinsurance recoverables	40,142	36,785	35,515	31,325	34,472

Source: Authorities.

View Table

Table 8.

Switzerland: Illiquid Assets of the Insurance Sector

(in CHF million)

Life			2008	2009	2010	2011	2012
	Total assets		280,611	281,706	291,265	299,151	311,237
		Intangible assets	45	29	33	53	62
		Receivables	3,697	2,296	2,392	2,105	2,307
		Intra-group/related company receivables	1,250	1,579	1,677	1,818	1,351
		Reinsurance recoverables	157	138	154	257	277
Nonlife
	Total assets		153,648	147,891	147,157	148,198	148,581
		Intangible assets	1,118	1,075	834	879	776
		Receivables	8,046	5,167	5,754	5,245	4,705
		Intra-group/related company receivables	836	7,914	7,276	5,576	4,969
		Reinsurance recoverables	5,359	4,657	2,988	2,869	3,127
Reinsurance
	Total assets		141,554	144,522	138,734	130,091	132,926
		Intangible assets	77	66	45	35	41
		Receivables	1,403	1,641	2,026	982	922
		Intra-group/related company receivables	23,502	22,575	13,460	12,509	8,095
		Reinsurance recoverables	40,142	36,785	35,515	31,325	34,472

Source: Authorities.

23. Asset composition is predominantly in fixed income instruments, in particular in government bonds. Over half of the investments on own account corresponds to fixed income securities, 17 percent to investments in real estate and mortgages and a few percent are invested in equities. At the end of 2012, 89 percent of the investment assets of life insurers and 49 percent of the investments of nonlife insurers correspond to tied assets. 60 percent of the life insurers’ investments are in fixed income of which 46 percent are government securities and 54 corporate securities; 21 percent are invested in real estate and mortgages. This reflects the need to match long term liabilities generated by the participating long term products. Forty percent of the nonlife sector investments correspond to fixed income and a quarter to participations. Exposure to real estate is minimal with less than 5 percent. (Table 9).

Table 9.

Switzerland: Investments of the Insurance Sector

(in CHF million)

Source: Authorities.

¹No distinction between government securities and corporate securities in 2008 available.

Table 9.

Switzerland: Investments of the Insurance Sector

(in CHF million)

Life				2008	2009	2010	2011	2012
	Investments			269,175	271,288	280,662	288,417	301,116
		of which:
			Government securities1	141,253	71,570	75,045	75,359	75,361
			Corporate securities		76,805	75,465	82,440	87,475
			Equities3	12,299	13,241	13,396	11,998	14,083
			Real estate and real-estate related	28,209	28,907	30,562	31,189	32,963
			Cash and bank balances	15,951	12,028	11,265	13,099	14,175
			Investments supporting unit-linked	14,271	16,052	16,104	15,317	16,373
Nonlife
	Investments			136,116	127,177	128,426	131,549	133,001
		of which:
			Government securities1	57,385	22,514	22,418	23,688	22,811
			Corporate securities		30,056	28,243	29,396	30,424
			Equities3	7,958	7,386	8,337	9,518	10,852
			Real estate and real-estate related	6,550	6,341	6,125	6,156	6,399
			Cash and bank balances	15,137	8,790	9,000	9,768	9,018
Reinsurance
	Investments			72,857	80,685	79,896	78,273	84,599
		of which:
			Government securities1	21,819	27,722	22,188	21,196	25,841
			Corporate securities		4,481	5,549	6,494	11,369
			Equities3	6,846	9,159	12,971	12,120	11,774
			Real estate and real-estate related	1,193	1,167	1,180	1,143	1,291
			Cash and bank balances	10,007	8,633	7,729	5,381	4,907

Source: Authorities.

¹No distinction between government securities and corporate securities in 2008 available.

View Table

Table 9.

Switzerland: Investments of the Insurance Sector

(in CHF million)

Life				2008	2009	2010	2011	2012
	Investments			269,175	271,288	280,662	288,417	301,116
		of which:
			Government securities1	141,253	71,570	75,045	75,359	75,361
			Corporate securities		76,805	75,465	82,440	87,475
			Equities3	12,299	13,241	13,396	11,998	14,083
			Real estate and real-estate related	28,209	28,907	30,562	31,189	32,963
			Cash and bank balances	15,951	12,028	11,265	13,099	14,175
			Investments supporting unit-linked	14,271	16,052	16,104	15,317	16,373
Nonlife
	Investments			136,116	127,177	128,426	131,549	133,001
		of which:
			Government securities1	57,385	22,514	22,418	23,688	22,811
			Corporate securities		30,056	28,243	29,396	30,424
			Equities3	7,958	7,386	8,337	9,518	10,852
			Real estate and real-estate related	6,550	6,341	6,125	6,156	6,399
			Cash and bank balances	15,137	8,790	9,000	9,768	9,018
Reinsurance
	Investments			72,857	80,685	79,896	78,273	84,599
		of which:
			Government securities1	21,819	27,722	22,188	21,196	25,841
			Corporate securities		4,481	5,549	6,494	11,369
			Equities3	6,846	9,159	12,971	12,120	11,774
			Real estate and real-estate related	1,193	1,167	1,180	1,143	1,291
			Cash and bank balances	10,007	8,633	7,729	5,381	4,907

Source: Authorities.

¹No distinction between government securities and corporate securities in 2008 available.

24. The reinsurance capacity in Switzerland is large and internationally focused. Sixty one reinsurers and captives are currently licensed in Switzerland. The business model is providing reinsurance capacity globally, with over 95 percent of their premium coming from abroad and a total premium in 2012 of CHF 34 billion. The top three reinsurers have maintained over the years more than 75 percent market share.

25. Under Solvency I requirements, both life and non-life industries have maintained, on average, a solid level of capital. However under the SST the life sector shows a weaker picture. The solvency margins under Solvency I are well above the requirements for 2012 with average ratios between 281 and 603 percent for the industry as a whole. The risk sensitive regime SST on the other hand shows a different picture. The life sector was close to the limit of 100 percent ratio in 2011 and is now 146 percent as companies decided to retain basically all dividends in 2012. For 2013 the introduction of the anti persistent low interest rate environment measures (APLIEM) will help insurers’ solvency position but a comparison with the 2012 numbers might not be straight forward. (Table 10).

Table 10.

Switzerland: Insurers’ Solvency Position (in percent)

Source: Authorities.

Table 10.

Switzerland: Insurers’ Solvency Position (in percent)

	Solvency I Ratios				SST Ratios
	2009	2010	2011	2012	2009	2010	2011	2012
Life (long-term)	222	245	279	281	117	145	105	146
Non-life (general)	377	446	407	420	236	225	188	207
Reinsurance	424	436	349	340	292	246	NA	NA
Captive		637	644	603	NA	NA	NA	NA

Source: Authorities.

View Table

Table 10.

Switzerland: Insurers’ Solvency Position (in percent)

	Solvency I Ratios				SST Ratios
	2009	2010	2011	2012	2009	2010	2011	2012
Life (long-term)	222	245	279	281	117	145	105	146
Non-life (general)	377	446	407	420	236	225	188	207
Reinsurance	424	436	349	340	292	246	NA	NA
Captive		637	644	603	NA	NA	NA	NA

Source: Authorities.

26. The life insurance sector has not been growing in the last years and the return on equity is down to 2008 levels. The life insurance market appears to be saturated with basically unchanged premium income. From 2008 to 2012, the premium has increased by less than one percent. Investment income has been growing since 2008 from the CHF 3.4 billion to CHF 10 billion in 2012; however, offsetting this positive development, during the same period claims have risen from CHF 28 to CHF 40 billion. The return on equity of 5.3 percent in 2008 after having very positive years of double-digit figures is back in 2012 to a single digit with 7.1 percent.

Table 11.

Switzerland: Key Figures of the Life Insurance Sector

(in CHF million, ROE in percent)

Source: Authorities. Note that additional paid in capital is excluded.

Table 11.

Switzerland: Key Figures of the Life Insurance Sector

(in CHF million, ROE in percent)

Life			2008	2009	2010	2011	2012
	Gross premiums		32,372	32,180	32,651	32,760	33,484
	Net premiums		32,063	31,912	32,372	32,506	33,226
	Investment income		3,417	8,183	7,836	9,231	10,035
	Net claims incurred		28,805	36,498	35,139	35,444	40,048
	Expenses		6,262	2,370	3,831	3,897	2,220
	ROE (after tax)		5.30	13.80	12.20	18.35	7.10
	Total assets		280,611	281,706	291,265	299,151	311,237
		Share capital	1,453	1,463	1,479	1,490	1,482
		Accumulated retained earnings	5,086	5,209	6,147	6,042	7,814
		Subordinated loans	4,416	4,034	3,754	5,073	5,818
		Technical provisions	249,441	253,641	256,034	259,928	270,880

Source: Authorities. Note that additional paid in capital is excluded.

View Table

Table 11.

Switzerland: Key Figures of the Life Insurance Sector

(in CHF million, ROE in percent)

Life			2008	2009	2010	2011	2012
	Gross premiums		32,372	32,180	32,651	32,760	33,484
	Net premiums		32,063	31,912	32,372	32,506	33,226
	Investment income		3,417	8,183	7,836	9,231	10,035
	Net claims incurred		28,805	36,498	35,139	35,444	40,048
	Expenses		6,262	2,370	3,831	3,897	2,220
	ROE (after tax)		5.30	13.80	12.20	18.35	7.10
	Total assets		280,611	281,706	291,265	299,151	311,237
		Share capital	1,453	1,463	1,479	1,490	1,482
		Accumulated retained earnings	5,086	5,209	6,147	6,042	7,814
		Subordinated loans	4,416	4,034	3,754	5,073	5,818
		Technical provisions	249,441	253,641	256,034	259,928	270,880

Source: Authorities. Note that additional paid in capital is excluded.

27. The nonlife insurance sector has slightly declined since 2008 but it shows double digit return on equity. The nonlife insurance market has suffered a slight decrease in production down from CHF 52.5 billion in 2008 to CHF 49.8 billion in 2012; during the same period of time claims have decrease from CHF 31.1 billion to CHF 27.5 billion and investment income has been stable around CHF 6 billion. As a result return on equity has been fairly stable around 16 percent in the last two years, well recovered from its slow of 8,7 percent in 2008.

Table 12.

Switzerland: Key Figures of the Nonlife Insurance Sector

(in CHF million, ROE in percent)

Source: Authorities. Note that additional paid in capital is excluded.

Table 12.

Switzerland: Key Figures of the Nonlife Insurance Sector

(in CHF million, ROE in percent)

Non-Life			2008	2009	2010	2011	2012
	Gross premiums		52,537	51,717	51,007	46,712	49,876
	Net premiums		47,752	46,513	45,689	41,282	43,640
	Investment income		2,468	5,079	6,924	6,192	5,461
	Net claims incurred		31,150	30,244	28,280	26,561	27,508
	Expenses		17,006	17,002	17,270	15,593	16,341
	ROE (after tax)		8.7	15.5	21.9	16.2	16.2
	Total assets		153,648	147,891	147,157	148,198	148,581
		Share capital	2,605	2,638	2,616	2,615	2,636
		Accumulated retained earnings	15,839	17,160	11,621	9,597	10,006
		Subordinated loans	10,215	11,044	9,620	7,138	7,590
		Technical provisions	85,414	80,126	75,912	78,211	79,183

Source: Authorities. Note that additional paid in capital is excluded.

View Table

Table 12.

Switzerland: Key Figures of the Nonlife Insurance Sector

(in CHF million, ROE in percent)

Non-Life			2008	2009	2010	2011	2012
	Gross premiums		52,537	51,717	51,007	46,712	49,876
	Net premiums		47,752	46,513	45,689	41,282	43,640
	Investment income		2,468	5,079	6,924	6,192	5,461
	Net claims incurred		31,150	30,244	28,280	26,561	27,508
	Expenses		17,006	17,002	17,270	15,593	16,341
	ROE (after tax)		8.7	15.5	21.9	16.2	16.2
	Total assets		153,648	147,891	147,157	148,198	148,581
		Share capital	2,605	2,638	2,616	2,615	2,636
		Accumulated retained earnings	15,839	17,160	11,621	9,597	10,006
		Subordinated loans	10,215	11,044	9,620	7,138	7,590
		Technical provisions	85,414	80,126	75,912	78,211	79,183

Source: Authorities. Note that additional paid in capital is excluded.

28. Profitability of the reinsurance sector is still severely affected since the 2008 crisis but shows signs of recovery. The profitability of reinsurers appears to be more affected by the 2008 crisis. The average return on equity since 2008 is around 2 percent with two year showing negative returns and never having double digit figures. Some signs of recovery can be seen in the 2012 numbers. Production is back to the 2008 level with a slight reduction of less than 10 percent down from CHF 36,500 million in 2008 to CHF 34,064 million in 2012. Claims have declined stronger during the same period from CHF 25,100 million down to CHF 18,307 million as a result the combined ratio of almost 100 percent in 2008 is down to 96.5 percent in 2012.

Table 13.

Switzerland: Key Figures of the Reinsurance Sector

(in CHF million, ROE in percent)

Source: Authorities. Note that additional paid in capital is excluded.

Table 13.

Switzerland: Key Figures of the Reinsurance Sector

(in CHF million, ROE in percent)

Reinsurance			2008	2009	2010	2011	2012
	Gross premiums		36,566	29,887	27,328	27,515	34,064
	Net premiums		31,096	24,406	22,277	21,254	26,743
	Investment income		−76	829	1,592	−485	3,824
	Net claims incurred		25,180	16,871	17,011	13,920	18,307
	Expenses		5,876	6,185	5,823	6,950	7,506
	ROE (after tax)		−0.10	7.60	3.60	−0.40	0.19
	Total assets		141,554	144,522	138,734	130,091	132,926
		Share capital	2,818	3,200	3,288	2,788	2,782
		Accumulated retained earnings	10,319	10,429	10,990	10,515	2,315
		Subordinated loans	6,006	8,477	8,545	4,885	6,373
		Technical provisions	81,449	76,987	72,067	68,990	72,511

Source: Authorities. Note that additional paid in capital is excluded.

View Table

Table 13.

Switzerland: Key Figures of the Reinsurance Sector

(in CHF million, ROE in percent)

Reinsurance			2008	2009	2010	2011	2012
	Gross premiums		36,566	29,887	27,328	27,515	34,064
	Net premiums		31,096	24,406	22,277	21,254	26,743
	Investment income		−76	829	1,592	−485	3,824
	Net claims incurred		25,180	16,871	17,011	13,920	18,307
	Expenses		5,876	6,185	5,823	6,950	7,506
	ROE (after tax)		−0.10	7.60	3.60	−0.40	0.19
	Total assets		141,554	144,522	138,734	130,091	132,926
		Share capital	2,818	3,200	3,288	2,788	2,782
		Accumulated retained earnings	10,319	10,429	10,990	10,515	2,315
		Subordinated loans	6,006	8,477	8,545	4,885	6,373
		Technical provisions	81,449	76,987	72,067	68,990	72,511

Source: Authorities. Note that additional paid in capital is excluded.

Regulatory and supervisory key findings

29. Focus of supervision is to ensure sufficient liquid assets to meet policy liabilities. There are statutory accounting methods on a prudent basis to determine technical provisions and value of assets for tied asset purposes. Insurers (excluding reinsurers) are required to earmark and ring-fence assets designated as “tied assets” subject to liquidity test to back the technical provisions plus a risk margin. Policyholders have priority claim over the tied assets. In addition, robust solvency requirements ensure there is sufficient capital to safeguard the insurers’ financial soundness under adverse conditions. The triple focus on adequacy of technical provisions, liquidity and safety of tied assets, and adequacy of capital forms the basis of FINMA’s supervision.

30. Supervision is particularly strong in quantitative analysis. FINMA has highly qualified staff. In the Life Supervision Department, 9 out of 12 supervisors are qualified actuaries. Many of the 21 staff in the Quantitative Risk Management Department are actuaries and mathematicians. There are actuaries in other departments as well. The Quantitative Risk Management Department performs detailed analysis of insurers’ SST reports and thus plays an important role in supporting supervisors in the life, non-life, health and reinsurer and group supervision departments.

31. Qualitative assessment of insurers’ operating environment is relatively new. To supplement the general requirements on duties of the board of directors specified in the civil corporate laws, FINMA issued guidance on corporate governance, risk management and internal controls in 2008. The Swiss Qualitative Assessment (SQA) was designed to provide an understanding of insurers’ governance and control environment. The first SQA was carried out in 2008, covering all insurers. The second SQA was carried out in 2012 and was risk-prioritized to cover groups and insurers in the high-risk categories (representing over 80 percent of insurance premium). For the SQA various means are used to gather information and carry out analyses, including a questionnaire answered separately by key functions of the insurer, followed up with onsite visits to discuss findings and set out remedial actions if needed.

32. Increasing the intensity of onsite supervision will strengthen the qualitative assessment. FINMA adopts a risk-based approach to supervision. It has frequent contacts with insurers in high risk categories (mainly by size), particularly the insurance groups, through high-level meetings two times a year, monthly telephone calls with management, ad hoc information requests, and dialogues on routine supervisory matters. As a result FINMA’s onsite inspections tend to be focused in scope and, compared to some jurisdictions, less frequent. In the first eight months of 2013, FINMA commenced eight inspections of solo entities and 12 inspections of insurance groups. (The numbers were 45 and six in 2012, respectively.) The main purpose of a FINMA inspection is either to verify a specific concern identified during offsite analysis, gain understanding of an observed emerging trend, or determine if the insurer has a weakness or is not complying in a specific area. There is a danger that FINMA may not be able to identify weaknesses in the insurer’s operation without direct observation and verification through onsite inspections. FINMA should increase the frequency and scope of inspections to complement its strong offsite analysis.

33. FINMA introduced alleviation in the SST for 2013 to 2015. Consideration should be made if allowing for a lower capital requirement but maintaining the risk free curve as the discount curve would provide the same alleviation of the sector during the extreme low interest rate environment and at the same time maintain the SST framework free from distortions. FINMA should evaluate not relaxing or change the SST trigger points of intervention also while the measures remain in place to maintain supervisory action’s comparability with the original SST framework.

Market key findings

34. The Swiss insurance market having among the highest density and penetration has reached a level of saturation, challenging any further market growth. The insurance market shows a change in premium of two percent in the last five years. The life insurance sector has grown since 2008 by less than one percent and the nonlife market declined by five percent. The domestic business has been complemented with international business that makes up around 20 percent of the production.

35. The 2008 crisis has basically not affected the level of premium of the direct insurance business, but eroded the solvency position of life insurers. The insurance market was able to maintain the same level of premium in the last years, but profitability has declined and depleted the solvency position of the life insurance sector. Life insurance solvency measured under SST has been suffering and reached in 2011 an average level close to trigger intervention of 105 percent. In 2012 the average life SST ratio is up to 145 percent the use of the APLIEM from 2013 for the next three years will additionally increase the stated solvency ratio. However the SST calculated using the APLIEM will not correspond to the original SST methodology and FINMA will have to closely monitor liquidity of the insurers due to the additional created capital and also avoid delaying necessary remedies.

36. The current persistent low interest rate environment requires a change in business strategy and adds strains to risk management in particular of life insurers. Insurers are facing important challenges related to asset liabilities mismatching; negative return spreads; managing the return to a high interest rate environment, in particular if brusque; managing credit deterioration in searching for yield; and containing lapses and low production in the current environment and for the event of a sudden inflationary environment. The strategy to transfer more risk to policyholders is probably not sustainable as it results in loss of attractiveness of the sector and lower demand for life insurance. The depressed goodwill value of the share prices appears to confirm the challenges that the sector is facing with shares trades very close to book value.

Switzerland: 10 Years Government Bonds Yields

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

Source: Bloomberg.

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Switzerland: 10 Years Government Bonds Yields

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

Source: Bloomberg.

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Switzerland: 10 Years Government Bonds Yields

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

Source: Bloomberg.

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37. The prevailing investment environment could be a source of vulnerability as demand for Swiss government debt exceeds by several multiples the existing offering. The long term character of the liabilities of life insurers and pension funds are better matched with the investment in government bonds. Thus, the demand for these instruments created by around CHF one trillion of assets managed by life insurers and pension funds is in disproportion to the CHF 80 billion outstanding federal government bonds. Further detailed analysis indicates that under SST the optimal investment is a risk free investment that matches the liability duration. The average duration of life insurers’ liabilities are in the order of 15 years but the volume Swiss government bonds with that duration is CHF 15 billion. The cost of capital under SST to held equity investments can require high returns; thus leaving real estate as the main alternative for investments with the associated risk of contributing to the creation of a real estate bubble and increasing possibly liquidity issues.

38. The reinsurance market struggles to come to positive returns and increased growth. The highly international business orientation of the reinsurance market in Switzerland (95 percent of premium is generated outside Switzerland) under a depressed global economy appears to be one of the reasons for the lack of growth in the reinsurance sector. The average return on equity over the last five years is low, around 2 percent. The international nature of this business makes it challenging to assess the profitability of the operating company of reinsurers at their place of domicile, given the common market use of intra-group retrocession to reflect profits in different jurisdictions. The analysis is additionally complicated in the case of those reinsurance groups whose major operating company is also a holding company. The share price performance of two major reinsurers, Swiss Re and Munich Re, is plotted in Figure 2. The latter illustrates important challenges in recent years for global reinsurers. It shows a stronger decline of Swiss Re during the financial crisis between 2007 and early 2009 which was due in part to higher non-insurance exposures. It also shows a more favourable situation for the German reinsurer with a strong home presence.

Switzerland: Share Value of The Top Two Reinsurers

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

Source: Bloomberg.

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Switzerland: Share Value of The Top Two Reinsurers

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

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Switzerland: Share Value of The Top Two Reinsurers

Citation: IMF Staff Country Reports 2014, 265; 10.5089/9781498332750.002.A001

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39. Compulsory accident and building insurance is largely provided through monopolistic public or quasi-public entities. Mandatory insurance are present in several lines of business, for instance there are compulsory insurance in health, motor, fire and property, accident and second pillar pensions. Workmen’s compensation is compulsory under the Federal Law on Accident Insurance. Coverage is provided partly by the Swiss Accident Insurance Office (SUVA) and partly by private insurers through group personal accident (PA) policies. Around 80 percent of the Swiss building construction is insured under the compulsory fire insurance by the cantonal building insurance companies. The government is recommended to consider mechanisms to ensure consistent effective supervision for all insurance and pension providers.

Sound and sustainable macroeconomic and financial sector policies

40. Switzerland has a well-established framework of fiscal, monetary and other macroeconomic policies. Federal Constitution requires that Federal expenditures be increased only if its financing is secured by additional receipts or corresponding cost-cutting, and tax reductions must be accompanied by corresponding spending cuts. At the cantonal level, 25 of 26 cantons have a debt break rule embedded in the Cantonal Constitutions that restricts the budgeting process. It publishes a debt issuance strategy and a program for debt issues. Since 2000, the SNB’s monetary policy strategy consists of three elements: a definition of price stability, a medium-term inflation forecast and a target range for a reference interest rate. SNB publishes its monetary policy on a quarterly basis.

41. There is a comprehensive financial sector policy framework. Following the financial crisis, the too big to fail legislative revision for the regulation of systemically important banks has strengthened the stability of financial sector. Switzerland has already incorporated the requirements of the Basel III reform package into national legislation. The corresponding amendments to the Capital Adequacy Ordinance and the Banking Ordinance were passed by the Federal Council, approved by Parliament and entered into force on January 1, 2013.

A well-developed public and private infrastructure

42. The courts system and other legal infrastructure in Switzerland are highly developed and the independence of the judiciary is respected. The Federal Supreme Court is the highest level federal court. Subordinate courts include the Federal Criminal Court and the Federal Administrative Court. Judges to federal courts are elected by the Parliament for six-year terms. Judges are affiliated with political parties and are selected according to linguistic and regional criteria in approximate proportion to the level of party representation in the Parliament. In addition, each of the 26 cantons has its own courts

43. Swiss accounting and auditing standards are in line with international best practices. The Swiss Institute of Certified Accountants and Tax Consultants established in 1980 sets the Swiss accounting and auditing standards. There are seven firm members that include the four major global auditing firms and three local firms. The Swiss GAAP FER applies to companies with limited operations outside Switzerland. Listed companies may use IFRS, U.S. GAAP or Swiss GAAP FER. Private companies have the additional option of reporting according to Article 957 of civil Code of Obligations. The Institute has over 900 member companies and more than 5,000 individual members. There are approximately 40 lead auditors and 250 to 300 registered auditors for insurance and intermediaries work. The institute provides professional training to its members. The oversight responsibility over auditors is being transferred from FINMA to the Federal Audit Oversight Authority.

44. There is a large pool of actuaries available in Switzerland. Founded in 1905, the Swiss Association of Actuaries is the actuarial accreditation body in Switzerland. It uses the local universities to provide actuarial education. It has 1,300 members, 670 of whom are qualified actuaries. FINMA recognizes the actuarial qualification from a number of jurisdictions but the responsible actuary of an insurer must be a member of the Swiss Association of Actuaries. There is no shortage of actuaries in the Swiss market that is supported by actuaries from across Europe. The Association of Actuaries can issue actuarial standards that are not binding on FINMA.

45. A wide range of statistics is available to support insurance business and effective regulation. The Swiss Federal Statistical Office publishes information on the situation and developments in Switzerland in a multitude of fields. FINMA discloses publicly detailed report on the insurance market with electronic tables on individual insurers on a regular basis. FINMA also publishes policy papers on its supervisory philosophy and strategic plans. The insurance association publication complements FINMA’s reporting with additional data on new business, number of employees in the industry as well as with different analysis and reports. The SNB completes the statistical information.

46. FINMA leverages on industry association to supplement its regulatory framework. The Swiss Insurance Association (SIA) is the organization representing the private insurance industry. Membership in SIA is voluntary. It has 72 members, comprising all 23 life insurers, 42 (out of 123) non-life insurers and seven (out of 27) reinsurers. Premium-wise, SIA members account for over 90 percent of private insurance premiums generated in the Swiss market. FINMA has delegated the responsibility of monitoring compliance with anti-money laundering laws of SIA members to SIA. To discharge its self-regulatory responsibility, SIA has set up an independent foundation whose CEO is a director on the board of SIA. The Swiss Insurance Brokers Association (SIBA) represents the largest 60 of the 1,300 corporate brokers in the market. SIBA members are bound by its Code of Conduct.

Mechanisms for consumer protection

47. Dedicated “tied assets” is the basis of assurance that promised payments under insurance policies will be made. Switzerland has a rigorous tied assets regime backing all claims liabilities for all direct insurers. There are stringent ring-fencing and liquidity requirements applied to assets earmarked as tied assets to make sure that they can be liquidated under Swiss law. In case of insolvency or liquidation, policyholders and insured persons have a priority claim against these restricted assets. There is no general policyholder protection fund other than the National Guarantee Fund for motor insurance.

Efficient financial markets

48. Swiss financial markets offer a broad range of instruments but the availability of Swiss government securities is limited to facilitate insurers’ asset-liability management. The SIX Swiss Exchange is one of the largest in Europe in term of market capitalization (US$1,233 billion at end-December 2012, with 268 listed companies). However, insurers’ investment portfolio consists of less than 5 percent of equities. The long term character of the liabilities of life insurers and pension funds are better matched with the investment in government bonds. Thus the demand for these instruments created by around CHF one trillion of assets managed by life insurers and pension funds is in disproportion to the CHF 80 billion outstanding federal government bonds. Switzerland has liquid money and bond markets, with a range of instruments and maturities and active markets in derivatives. Insurers also have access to investments issued outside Switzerland. The payment and securities settlement systems are overseen by the SNB. The operators of these systems are subject to prudential supervision by FINMA.

Table 14.

Switzerland: Summary of Compliance with the ICPs

Table 14.

Switzerland: Summary of Compliance with the ICPs

Insurance Core Principle	Level	Overall Comments
1. Objectives, Powers and Responsibilities of the Supervisor	O	FINMASA designates FINMA as the consolidated financial market supervisor, with clearly defined objectives, responsibilities and powers. Article 7 of FINMASA requires FINAMA to take into account, among other things, cost of compliance and impact on market competitiveness in carrying out its supervisory activities. FINMA staff have consistent understanding that their primary responsibility is to protect consumers with secondary responsibility to ensure the proper functioning of financial markets as provided under Article 5 of the FINMASA. The issuance of the Guideline on Financial Market Regulation, and the articulation of its supervisory strategy and priority in its annual reports are good measures in clarifying FINMA’s supervisory approach. There is a recent Parliamentary initiative to make market competitiveness of equal importance to consumer protection. If the initiative is successful, there could be potential tension between prudential objectives and market competitiveness.
2. Supervisor	O	FINMA is operationally independent, but the Federal Council is the authority on certain policy matters such as definition of insurance, classes of insurance, risk management, professional qualification for insurance practitioners, and disclosure of information to customers by intermediaries. It is recommended that FINMA should have the delegated authority over such matters. FINMA is accountable to the Parliament, by presenting its annual report to the Parliamentary Control Committees every year, addressing supervisory outcomes, issues and concerns. There are legal provisions in place to safeguard confidential information and protect FINMA personnel from civil and criminal liabilities when carrying out their duties in good faith. The internal audit function has been revised a year ago, a comprehensive framework has been since developed and several internal processes have been audited.
3. Information Exchange and Confidentiality Requirements	O	The statutory regulations enable FINMA to engage in comprehensive exchange of information for the purposes of administrative assistance, better supervision and international cooperation with due regard to safeguarding confidentiality. Strict laws in Switzerland protect information received from other supervisors. FINMA has appropriate resources and procedures to be able to provide effective and timely assistance to foreign counterparts.
4. Licensing	LO	Every insurer or reinsurer operating in Switzerland must be licensed by FINMA with the exception of (a) branches of foreign insurers conducting only reinsurance business, and (b) entities providing compulsory insurance under federal or cantonal laws. While it is not uncommon to exclude public entities providing mandatory coverage from supervision, FINMA should engage dialogues with cantonal supervisors to encourage the adoption of similarly prudential standards as for private insurers. FINMA does not have data on the volume of business conducted by unlicensed foreign reinsurers operating in Switzerland. However, it is widely acknowledged that one of such reinsurers has substantial business operation out of Switzerland. To avoid misunderstanding by market participants that such reinsurers are supervised by FINMA, FINMA should require the branches to be incorporated in Switzerland whereby subject to FINMA supervision when its size reaches a pre-determined level. The licensing process and requirements are specified in the ISA. The Insurance Division strives to achieve consistency in licensing decisions through the establishment of an Approval Committee consisting of heads of various departments and functions within the Insurance Division, and sharing of information across banking, markets and insurance divisions. In assessing key individuals, FINMA assess the suitability of members of BOD and senior management. While the internal auditor and the actuary are explicitly mentioned in FINMA’s regulations, “control functions” are not defined in Swiss laws or supervisory procedures. (See ICP 5 for more discussion.)
5. Suitability of Persons	LO	Suitability assessment is generally conducted for members of the board and senior management only, since “control functions” are not specified. Consequently, suitability of heads of risk management, compliance, internal audit and actuarial functions are not assessed unless they are members of the management board. The procedures to ensure continued suitability of key persons subsequent to initial licensing or new appointments of key persons can be improved. FINMA relies on Article 29 of FINMASA, which requires insurers to inform FINMA of any matters that may be of material significance for FINMA’s supervision of the insurer, for continued suitability. In the absence of guidance, however, the industry may not have consistent understanding that Article 29 reporting obligations include changes in circumstances materially adversely affecting the suitability of persons in key positions. FINMA should provide greater clarity to its expectation with regard to continuing suitability of key persons in control functions. Moreover, “control functions” should be defined to ensure consistency across companies.
6. Changes in Control and Portfolio Transfers	O	The ISA sets ownership and control thresholds, both above and below which notification to FINMA is required. FINMA may impose conditions or disallow the acquisition/disposition. In essence, the notification is a de facto approval requirement. Moreover, notification/approval is required of any person who may exert “significant influence” on the business activities of the insurer, regardless of his level of ownership of the insurer.
7. Corporate Governance	O	The CG framework consists of requirements in corporate law, insurance ordinance and FINMA circulars, as well as voluntary code of best practice for listed companies. FINMA monitors compliance and assesses quality of CG as part of its qualitative supervision. FINMA expects insurer’s BOD to provide oversight in respect of the design and implementation of sound RM and ICS functions, basing on: a) the BOD’s non-transferable duty of oversight of management and of the company, including its organization and controls; b) the BOD’s general duty of care; and c) the obligation to provide “Gewähr” - the assurance of proper business conduct. For completeness and avoidance of doubt, it is recommended that Circular 2008/32 be amended to explicitly indicate that BOD has the oversight responsibility over RM and ICS. It is also recommended that Circular 2008/32 be amended to include the requirement for insurers to disclose their CG practices on par with the Swiss code of Best Practice for Corporate Governance (CCG), which is a voluntary code for listed companies.
8. Risk Management and Internal Controls	LO	ISA articulates the principle that insurers should have effective risk management and internal control systems. Circular 2008/32 provides details on the necessary elements of such systems. However, there is no requirement that there should be dedicated risk management and compliance functions. FINMA is currently assessing the need to provide additional clarity and specificity relating to RM and ICS. It is recommended that FINMA require the establishment of risk management and compliance function with exceptions based on size, nature and complexity of operation
9. Supervisory Review and Reporting	LO	FINMA’s risk-based approach includes offsite analysis of financial information and SST reports, and onsite verification of issues identified through offsite review or observed trends in the market. FINMA leverages on external auditors to verify areas where there are clear regulatory requirements such as tied assets and technical provisions. FINMA also relies on external auditors to audit insurers in the low risk categories. FINMA is particularly strong in quantitative analysis. It has a number of actuaries and mathematicians on staff to conduct in-depth analysis of solvency and internal models. Onsite inspections typically focus on one area (such as derivative instruments, data security, adherence to business plan, reserving interest rate, and outsourcing) and are of short durations. At the time of this assessment, FINMA has commenced eight onsite inspections of solo entities, and 12 onsite inspections of the insurance groups in 2013. (The numbers of inspections in 2012 were 45 for solos and six for groups.) With the limited scope and duration of inspections, it is difficult for FINMA to gain a comprehensive view on the effective implementation of insurers’ own policies and procedures and compliance with regulatory requirements. Onsite inspection may provide information that can supplement the analysis from offsite monitoring and provide the opportunity to verify information FINMA has received. Onsite inspection may also help detect problems that may not be apparent through offsite reviews. Important objectives in conducting an onsite inspection include verifying the implementation of the insurer’s risk management processes and compliance with relevant insurance laws and regulations. This will help FINMA in identifying the strengths and weaknesses in the insurer’s policies and procedures. FINMA’s risk-based approach is to devote its resources to those with high market impact. While the failure of a smaller insurer may not have market-wide impact, it will affect policyholders. It is recommended that FINMA adopt a more intrusive approach to onsite supervision by increasing the frequency and scope of onsite inspection to strengthen the qualitative aspect of its supervision. If the recommendation is adopted, FINMA will need to increase its resources, in terms of number of staff and their level of experience. The key account manager concept is a good approach to coordinate the interaction with the supervised entity and to foster a holistic view based on inputs from specialists. To preserve institutional knowledge and to inject fresh perspectives from time to time, FINMA may wish to consider measures to strengthen the approach, for example through a periodic rotation of the key account managers and limiting the division chief role to quality control and assurance of the integrity of the process away from a key account manager function.
10. Preventive and Corrective Measures	O	FINMA, working with the criminal prosecutors, is empowered to take action against a person/entity who conducts insurance activities without the necessary license. FINMA’s supervisory framework supports early intervention to minimize losses to policyholders. FINMA has adequate power to initiate timely and proportionate preventive and corrective measures where insurers do not adequately address supervisory concerns
11. Enforcement	O	Legislations have given FINMA a wide enforcement power, except the power to impose monetary fines. There is an Enforcement Committee that meets weekly to ensure consistent and fair application of enforcement actions. By law, FINMA is obliged to report all criminal offences under the insurance laws to FDF for consideration for criminal proceedings. FINMA does not track the outcome of reported criminal breaches. In practice, FINMA relies on its supervisory power to restore compliance with the law; it rarely takes enforcement action. In 2012, FINMA took enforcement actions against 3 insurers, 2 board members of an insurer, one member of the executive management of an insurer, and 3 insurance intermediaries. For offences that are administrative in nature, such as the infringements listed under Article 86 of the ISA, FINMA should be given the power to impose administrative fines. It is recommended that Article 86 of ISA be amended to de-criminalize the offences and delegate the responsibility of imposing administrative fines to FINMA.
12. Winding-up and Exit from the Market	O	There are extensive provisions in the legislation for FINMA to manage an insurer’s exist from the market in an orderly manner. These also provide for policyholders to rank second only to liquidator. The tied assets regime is a robust tool in ensuring policyholder protection.
13. Reinsurance and Other Forms of Risk Transfer	LO	The supervision of reinsurers is in general in line with the supervision of direct insurers, while considering the specific business models of reinsurers. From the perspective of ceded reinsurance of primary insurers, it is to be noted that Switzerland retains tied assets requirements. These include limited allowances and require the monitoring of reinsurance recoverables. While from the perspective of ceded reinsurance of reinsurers there are no tied assets requirements, there are general investment principles and specific limits of asset categories which apply. These help protect against the weakening of the asset quality of reinsurers. The ability for FINMA to have legal reach to the assets in case of liquidation is particular relevant in its role as home supervisor given the current ability of reinsures to operate in foreign jurisdictions without local capital requirements. Consideration should be made to extend requirements to reinsurers’ assets to further strengthen FINMA’s ability to have access to them in case of liquidation. It is recognized that FINMA has already begun dialogs with the largest groups on recovery and resolutions plans and is using its active involvement at the level of IAIS and FSB in these areas to identify best practices in these areas. All reinsurers established in Switzerland are supervised by FINMA, although branches of companies headquartered outside Switzerland and conducting only reinsurance business are exempted from supervision. The scope of relevant Swiss law on this point (ISA Art. 2 (2)) is transparent and known in the marketplace; in addition, FINMA is in close contact with their home supervisors where needed. However, given the relevance of reinsurance for the stability of the insurers abroad, it may be helpful for FINMA to more actively communicate its approach in regard of the supervision of branches of foreign reinsurers. A more conservative approach would be to include the supervision of that reinsurance activity. The use of side letters affects the integrity and transparency of reinsurance treaties but its use is not regulated. The transparency of the contracts needs to be enhanced by the requirement on the integrity of the contract (banning the use of side letters could be one way to observe this transparency standard). Concentration of reinsurance in a given reinsurer is supervised during the SST for the insurers. In addition, where reinsurance recoverables are recognized in tied-assets, insurers are required to report major reinsurer counterparties individually by their share and with information on their country and rating. Reinsurers for their part have to report their top 20 single retrocessionaires besides the respective lines of business, geographic area and lines of business of ceded reinsurance. All of the above allow FINMA to monitor reinsurance concentrations, including any major exposure to a single reinsurer, and identify any inappropriate practices or trends. Where this is the case FINMA requires the matter to be addressed. For purpose of systemic risk supervision, FINMA is recommended to also monitor market shares in the reinsurance sector by type of reinsurer, like rating and geographic origin; and also monitor exposures to single reinsurer on critical large risks. Regulation requires insurers to analyze the effects of reinsurance on the balance sheet of insurers. With respect to risk transfer, it is the responsibility of the appointed actuary to ensure correct risk-transfer treatment, which is part of the business plan. In the case of major Swiss insurers which are part of a listed company, their reporting uses U.S. GAAP or IFRS. These companies are thus required to apply certain risk-transfer tests. These are applied also in statutory accounting, provided it does not result in any conflict with the statutory accounting rules. However risk transfer definitions vary in accounting systems. Under one system uncertainty in the time of payment would be sufficient to have risk transfer in place. In another accounting system, in addition underwriting risk would also need to be transferred in a contract for it to qualify as a reinsurance contract. U.S.-GAAP and IFRS differ on this perspective for instance. FINMA should consider issuing specific rules on risk transfer to bring certainty as to what constitutes a valid reinsurance transaction. FINMA supervises at time of licensing that reinsurance contracts are in place and that new contracts and major changes to contracts are reported. These are subject to FINMA’s ongoing supervision. In addition, FINMA has the right to review any contract at any time, not only when there are changes. With most reinsurers involved in traditional reinsurance business, the contractual relationships tend to be long-term where FINMA is well acquainted with the material arrangements. To fully observe the standard 13.4 FINMA should explicitly require that parties to reinsurance contracts promptly document the principal economic and coverage terms and conditions agreed upon by the parties and finalize the formal reinsurance contract within a given reasonable period of time
14. Valuation	O	Regulation concerning market-consistent valuation in the SST is independent of international accounting standards. FINMA sets the valuation requirements for assets and liabilities to be applied for solvency purposes. Under the Swiss Solvency Test (SST)) positions are valued on a market consistent basis. The insurers own credit risk cannot be taken into account in the valuation of its liabilities and to provide a full economic picture, the SST includes positions which would be off-balance in accounting standards. The use of models for the valuation of liabilities is subject to strict requirements to warrant the economic valuation. For instance, when stochastic techniques are applied for the valuation of life insurance liabilities, the underlying economic scenarios have to be calibrated market consistently, and a consistent approach in assessing assets and liabilities has to be very carefully considered. Most assets are valued at market and the concept of the discounted best estimate and the market value margin (MVM) applies with regard to liabilities and technical provisions. For discounting liabilities, risk-free yield curves have to be used and FINMA makes counterparty risk-free yield curves available in the most commonly used currencies (CHF, EUR, USD, GBP, JPY) as per 1 January and 1 July of every year. Where other risk-free yield curves are required, the insurer is responsible for calculating them. Some elements distorting the full economic valuation of assets and liabilities are however present in the regulation: FINMA allows for new business stemming from Swiss group life cash flows beyond the contractual obligation, but considers the impact of new business in capital requirements. The valuation of the statutory technical reserves for the purpose of the tied assets coverage requirement (but not for the SST) is currently done using the interest rates produced by the investment portfolios under stress and subject to prudential assumptions of individual companies as the discount rates that are in the order of 4 to 2.5 percent. Given that the tied assets regime is the main protection for policyholders in absence of a guarantee scheme, a conservative approach is recommend defining a forward looking maximum discount interest rate for the valuation of liabilities. As a result of the low interest rate environment affecting the insurance sector FINMA has introduced temporary measures that reduce the solvency requirements for insurers, while these measures have been introduced in line with the ICP requirements and with sufficient safeguards, to maintain the level of protection for policyholder as intended by the SST framework, the temporary measures should be seen as temporary and reverted as planned. The use of an additional margin (MVM) to the best estimate in valuating liabilities is used under SST and the value of the MVM is linked to the cost of regulatory capital, currently set at 6 percent. While it can be argued that there is a relation between the required risk capital and hence of the cost of maintaining such capital and the uncertainty of the future cash flows, such relationship is certainly difficult to determine. The cost of capital approach for the MVM is given as an example in ICP 14.7.5 and ICP 14.9.1. Moreover the cost of maintaining such capital has not been changed since the design of SST. FINMA should consider regular updates of the cost of capital rate of currently 6 percent.
15. Investment	O	The investment activities of insurers are regulated in a manner to properly address the risks faced by insurers. Swiss domiciled (re)insurance companies must submit their investment guidelines for approval. The assessment is also based on the prudent investor rule and considers common practice of modern portfolio management. Specially designated assets are required for backing up the insurance liabilities. These tied assets are subject to limits and rules to provide security, liquidity, diversification and legal access in case of bankruptcy. More complex types of assets are subject to stricter limits, including prohibitions, detailed reporting and full understanding of their inherent risks. Asset-Liability mismatching as well as permissible concentration risk are penalized through capital surcharges. Use of derivatives is restricted for hedging purposes and portfolio optimization; further all positions need to be fully covered.
16. Enterprise Risk Management for Solvency Purposes	O	FINMA has established well documented, detailed, comprehensive and forward looking requirements for enterprise risk management for the supervised entities that address all relevant and material risks that could affect their solvency. These requirements are part of our insurance law and are further defined through circulars and supervisory practice and FINMA monitors their implementation by insurers and insurance groups. The BoD is ultimate responsible for the implementation of these requirements and the use of the systems in the day to day business decisions. While ORSA is not a formal separate requirement, through the annual risk, capital planning, liquidity and the SST, insurers are required to consider current and emerging risks that could affect the ability to meet the SST and the models and scenarios used to determine solvency have to include those risks. In addition, qualitative scenarios are used for better understanding and planning future capital needs. The SQA complement the SST on checking the quality of the risk management systems of the entities. In addition to management and the risk office, also the responsible actuary plays an important role in the documentation process. The responsible actuary report presents the current status as well as possible developments from an actuarial perspective, in particular actuarial developments which may endanger the financial condition of the company. But this report is only available to the supervisory authority on request. FINMA is recommended to require the responsible actuarial report on a regular basis.
17. Capital Adequacy	O	The solvency regime set up by FINMA is risk sensitive, comprehensive having due regard of all risks insurers at the solo and group level are taking and provides appropriate degrees for supervisory intervention. The use and approval of models is well controlled and sophisticated. The capital requirements are transparent, objective and in line with the level of risk run by the institution. The permissible capital resources allow for the absorbance of unforeseen losses, under both, going and gone concern, with the exception when the APLIEMs are used. There, the additional capital resource created by the difference in the discounted liabilities does not have the required loss absorbance property, but is treated as a temporary measure. Consideration should be made if allowing for a lower capital requirement but maintaining the risk free curve as the discount curve would provide the same alleviation of the sector during the extreme low interest rate environment and at the same time maintain the SST framework free from distortions. Under the temporary measures, FINMA allows for relaxing the supervisory intervention ladder and grants the companies longer deadlines to again reach the target threshold values. This approach will reduce the effectiveness of supervision and deviating further the supervisory actions from the original SST framework. While in line with the ICP requirements, FINMA should consider not relaxing or changing the SST trigger points of intervention also while the measures remain in place to maintain supervisory action’s comparability with the original SST framework. The SST does not quantify operational risk and only certain aspects of this risk are directly covered. FINMA is advised to consider incorporating the quantification of operational risk into the SST. The SST standard model for life insurers should be more actively used as a benchmark. The discussions of deviations from a baseline can be a useful tool to check on the effectiveness and of the internal model to replicate the insurers’ risks. FINMA is recommended to enhance its scrutiny of the internal models of life insurers by verifying outcomes with the standard model. The approval of internal modes creates an important legal liability for FINMA. Considerations should be made to allocate the legal approval responsibility of the internal model to the board of the entities subject to FINMA’s objection rights. FINMA should maintain the strong level of supervisory checks on the internal models, but consideration should be made to transfer the legal burden created by an approval to the board the supervised entities. Going forward, concerning the model approval process, further development of the insurance risk sensitivity methodology is encouraged when assessing internal models using portfolio replication methods and onsite verification of the appropriateness of the stochastic scenarios used in internal models is recommended.
18. Intermediaries	PO	Supervision of insurance intermediaries is through the mandatory registration of independent intermediaries and voluntary registration of non-independent intermediaries. Through FDF, FINMA takes action against unregistered intermediaries when it becomes aware of their illegal activities. Since registration by non-independent intermediaries is voluntary (this includes brokers who are deemed not-independent based on the source of income test), the register is only a partial roster of intermediaries practising in Switzerland. However, FINMA observes that increasingly insurers require their tied agents to be registered, and that insurers are reluctant to deal with brokers who are not registered. Registration requirements include professional competence and personal attributes. FINMA relies mainly on registrants’ notification to ensure continuing accuracy of information kept in the register. There are no on-going reporting requirements for intermediaries. Supervision of tied agents is indirectly through insurers. Supervision of brokers is minimal. It is recommended that FINMA consider the following: Require registration of all intermediaries, to eliminate the current gap in the register. For tied agents, make the insurers responsible for ensuring the data is kept up to date. Broaden the on-going supervision of brokers to include offsite review (financial statements and auditor’s opinion where applicable, ownership structure), and onsite inspection (corporate governance and internal controls, basis of placing business, complaint handling). Strengthen indirect supervision of agents by including in the on-going supervisory review of insurers how they control the behaviour of their agents and the disciplinary action against errant agents. Require independent intermediaries to put in place safeguards in handling client monies, and assess these safeguards during onsite inspections. Require disclosure of intermediaries’ financial interest in the transaction where a potential conflict exists. Apply appropriate CG standard to legal entity intermediaries.
19. Conduct of Business	PO	Swiss laws clearly stipulate the intention to protect policyholders and entrust FINMA to intervene on behalf of the policyholders and their beneficiaries. Life insurers have ongoing duties to disclose certain information to policyholders, including investment performance and surrender values. However, other than as indicated, FINMA has yet to articulate additional specific rules on business conduct. Without additional explicit rules, it is difficult to have consistent implementation of the expectation of treating customer fairly. Recognizing the shortcomings, FINMA has taken steps to introduce the FFSA to address the following key areas: documentation of products characteristics; selling practice: implement “Know Your Customer”, review of appropriateness and suitability of products, documentation and accountability, disclosure of third-party remuneration; training of intermediaries who provide advice to ensure they are proficient of knowledge on an continuing basis; and reversing the burden of proof in cases of mis-selling. It is recommended that FINMA press on with the legislative effort to improve policyholder protection, particularly fair treatment of customers, after sales disclosure, avoidance of conflict of interest by intermediaries, and timely payment of claims.
20. Public Disclosure	PO	The information published by the insurers and by FINMA does not provide sufficient details on the insurer’s: policies and processes for managing capital; investment objectives, processes and sensitivity to market variables; technical provisions by appropriate segment, the rationale for the choice of discount rates, and description of the method used to determine technical provisions; information on ERM and ALM; financial performance: earnings analysis, claims statistics including claims development, pricing adequacy, information on returns on investment assets and components of such returns; nature of risk, reinsurance and other risk transfer arrangement, risk concentration; and nature of its business, key products, the external environment in which it operates, and its business objectives and the strategies in place to achieve them. It is noted that FINMA has started a review of the possibility of expanding public disclosure requirements in 2012, taking into account international standards and practices. It is recommended that FINMA completes its review and institute the necessary regulatory changes to be more in line with international standards.
21. Countering Fraud in Insurance	LO	There is an established legal framework enabling criminal authorities to investigate and apply sanctions in cases of insurance frauds. Fraud prevention is included in FINMA’s on-going supervisory process, and the SQA. The recent SQA II has made a number of insightful observations relating to insurers’ fraud (both external and internal) prevention controls. There are no explicit anti-fraud requirements. While FINMA includes fraud prevention in its on-going review of an insurer’s risk management and compliance procedures, the source of information on insurer’s fraud prevention practice appears to be limited to the ad hoc survey and SQA II. The survey is ad hoc and on a sampling basis. SQA is done pursuant to a time cycle and covers groups and the insurers in the highest risk categories. To ensure a consistent standard of fraud prevention in the insurance industry, FINMA should issue anti-fraud guidance to insurers and intermediaries, clearly stating FINMA’s expectation with respect to anti-fraud policy, procedures and controls in place to deter, detect, prevent, report and remedy frauds. FINMA should include insurers’ anti-fraud procedures in its offsite review and require insurers to report fraud cases to FINMA as part of FINMA’s assessment of the effectiveness of insurer’s anti-fraud procedures. It is recommended that FINMA consider the risk of fraud by intermediary in relation to misrepresentation of insurance cover to a customer in its current review of policyholder protection. (See ICP 19).
22. Anti-Money Laundering and Combating the Financing of Terrorism	O	FINMA is the designated competent authority for AML matters relating to financial institutions. MROS is the financial intelligence unit responsible for receiving and analysing suspicious transaction reports. There is a mechanism in place for FINMA to cooperate, coordinate and exchange information with MRO and other relevant law enforcement agencies. FINMA delegates the AML/CFT supervisory responsibility to recognized SRO. AML/CFT rules issued by SROs with approval from FINMA are binding on members. FINMA assesses the effectiveness of SROs on an annual basis
23. Group-wide Supervision	O	FINMA has a clear and transparent approach to identifying entities subject to its group-wide supervision. The scope of the group covers all entities, whether regulated or not, within the group. FINMA’s group supervision is complementary to solo supervision, based on coordinated cooperation with solo supervisors and the involvement of specialist functions (such as SST, SQA).
24. Macroprudential Surveillance and Insurance Supervision	LO	FINMA has established periodic monitoring and analysis of market and financial developments and other environmental factors that may impact insurers and insurance markets. Information capture in the Risikobarometer process is used to assessing the possible impact of the identified risks and to implement measures effective in improving the resilience of the financial sector. The impact analysis is shared with FINMA’s executive board and is an internal document. Also the recently developed tools, the Business Indicators Cockpit and a Group Indicators Cockpit allow monitoring market trends and identifying potential risk and adverse market developments. The Group Indicators Cockpit is analyzed on a semi-annual basis. Reports are used in the preparation of risk rating decisions of insurers, as well as an early warning tool. The historical financial market stress scenarios required under SST are used to assess resilience of the sector to financial crisis; however there are no clear requirements to consider feedback loops and spillover effects. The D-SII designation process in Switzerland has excluded insurers. However FINMA’s highest risk rated insurers are subject to intense supervision. Notwithstanding the absence of a Swiss insurer in the FSB G-SIIs list, the strong participation of FINMA at the FSC IAIS committee continues and, in preparation of a possible G-SII designation of an Swiss insurer or reinsurer, FINMA has implemented a FINMA Insurance Bankruptcy Ordinance (IBO) and is further drafting regulation to comply with the FSB recommendations applicable to G-SIIs. The existing of current tools used by FINMA to identify systemic risk, including shocks, interconnectedness and feedback effects; need to be developed and implemented into a comprehensive surveillance framework that ultimately will reduce the likelihood of systemic risk and mitigate spillover effects within the financial system and into the real economy.
25. Supervisory Cooperation and Coordination	O	FINMA has the authority to enter information and coordination agreements with foreign authorities responsible for financial market supervision. FINMA is signatory to various MoUs that allow for smooth information sharing and coordination in supervisory matters. FINMA has a vast experience in organizing and effectively running colleges. It has created colleges for the relevant Swiss insurance groups and it also participates in several international colleges that are relevant for the Swiss policyholders as the host supervisor. Notwithstanding being the home supervisor it takes the pragmatic approach in the determination of the group supervisor to be the national authority where the decision management of the group is located. To enhance the information exchange, FINMA is recommended to develop for their colleges a secure information exchange platform
26. Cross-border Cooperation and Coordination on Crisis Management	O	For colleges lead by FINMA emergency plans compliant with the standards of this principle have been developed. The emergency plans are regularly tested and improved. Using as a guidance the recovery and resolution plans developed for banks, FINMA has requested and discussed resolution plans for the three largest insurers groups. These plans have already produced concrete actions of the groups toward improving the speed of reaction to serious emergency situations that included dialogue with foreign supervisors applicable during such situations. Going forward, FINMA is recommended to enter agreements with the relevant foreign supervisors with the colleges for the situations that would require resolution of the supervised entity. To enhance the resolution of complex groups, FINMA is recommended to acquire the power to act as the liquidator also of non regulated entities belonging to the insurance group.

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Table 14.

Switzerland: Summary of Compliance with the ICPs

Insurance Core Principle	Level	Overall Comments
1. Objectives, Powers and Responsibilities of the Supervisor	O	FINMASA designates FINMA as the consolidated financial market supervisor, with clearly defined objectives, responsibilities and powers. Article 7 of FINMASA requires FINAMA to take into account, among other things, cost of compliance and impact on market competitiveness in carrying out its supervisory activities. FINMA staff have consistent understanding that their primary responsibility is to protect consumers with secondary responsibility to ensure the proper functioning of financial markets as provided under Article 5 of the FINMASA. The issuance of the Guideline on Financial Market Regulation, and the articulation of its supervisory strategy and priority in its annual reports are good measures in clarifying FINMA’s supervisory approach. There is a recent Parliamentary initiative to make market competitiveness of equal importance to consumer protection. If the initiative is successful, there could be potential tension between prudential objectives and market competitiveness.
2. Supervisor	O	FINMA is operationally independent, but the Federal Council is the authority on certain policy matters such as definition of insurance, classes of insurance, risk management, professional qualification for insurance practitioners, and disclosure of information to customers by intermediaries. It is recommended that FINMA should have the delegated authority over such matters. FINMA is accountable to the Parliament, by presenting its annual report to the Parliamentary Control Committees every year, addressing supervisory outcomes, issues and concerns. There are legal provisions in place to safeguard confidential information and protect FINMA personnel from civil and criminal liabilities when carrying out their duties in good faith. The internal audit function has been revised a year ago, a comprehensive framework has been since developed and several internal processes have been audited.
3. Information Exchange and Confidentiality Requirements	O	The statutory regulations enable FINMA to engage in comprehensive exchange of information for the purposes of administrative assistance, better supervision and international cooperation with due regard to safeguarding confidentiality. Strict laws in Switzerland protect information received from other supervisors. FINMA has appropriate resources and procedures to be able to provide effective and timely assistance to foreign counterparts.
4. Licensing	LO	Every insurer or reinsurer operating in Switzerland must be licensed by FINMA with the exception of (a) branches of foreign insurers conducting only reinsurance business, and (b) entities providing compulsory insurance under federal or cantonal laws. While it is not uncommon to exclude public entities providing mandatory coverage from supervision, FINMA should engage dialogues with cantonal supervisors to encourage the adoption of similarly prudential standards as for private insurers. FINMA does not have data on the volume of business conducted by unlicensed foreign reinsurers operating in Switzerland. However, it is widely acknowledged that one of such reinsurers has substantial business operation out of Switzerland. To avoid misunderstanding by market participants that such reinsurers are supervised by FINMA, FINMA should require the branches to be incorporated in Switzerland whereby subject to FINMA supervision when its size reaches a pre-determined level. The licensing process and requirements are specified in the ISA. The Insurance Division strives to achieve consistency in licensing decisions through the establishment of an Approval Committee consisting of heads of various departments and functions within the Insurance Division, and sharing of information across banking, markets and insurance divisions. In assessing key individuals, FINMA assess the suitability of members of BOD and senior management. While the internal auditor and the actuary are explicitly mentioned in FINMA’s regulations, “control functions” are not defined in Swiss laws or supervisory procedures. (See ICP 5 for more discussion.)
5. Suitability of Persons	LO	Suitability assessment is generally conducted for members of the board and senior management only, since “control functions” are not specified. Consequently, suitability of heads of risk management, compliance, internal audit and actuarial functions are not assessed unless they are members of the management board. The procedures to ensure continued suitability of key persons subsequent to initial licensing or new appointments of key persons can be improved. FINMA relies on Article 29 of FINMASA, which requires insurers to inform FINMA of any matters that may be of material significance for FINMA’s supervision of the insurer, for continued suitability. In the absence of guidance, however, the industry may not have consistent understanding that Article 29 reporting obligations include changes in circumstances materially adversely affecting the suitability of persons in key positions. FINMA should provide greater clarity to its expectation with regard to continuing suitability of key persons in control functions. Moreover, “control functions” should be defined to ensure consistency across companies.
6. Changes in Control and Portfolio Transfers	O	The ISA sets ownership and control thresholds, both above and below which notification to FINMA is required. FINMA may impose conditions or disallow the acquisition/disposition. In essence, the notification is a de facto approval requirement. Moreover, notification/approval is required of any person who may exert “significant influence” on the business activities of the insurer, regardless of his level of ownership of the insurer.
7. Corporate Governance	O	The CG framework consists of requirements in corporate law, insurance ordinance and FINMA circulars, as well as voluntary code of best practice for listed companies. FINMA monitors compliance and assesses quality of CG as part of its qualitative supervision. FINMA expects insurer’s BOD to provide oversight in respect of the design and implementation of sound RM and ICS functions, basing on: a) the BOD’s non-transferable duty of oversight of management and of the company, including its organization and controls; b) the BOD’s general duty of care; and c) the obligation to provide “Gewähr” - the assurance of proper business conduct. For completeness and avoidance of doubt, it is recommended that Circular 2008/32 be amended to explicitly indicate that BOD has the oversight responsibility over RM and ICS. It is also recommended that Circular 2008/32 be amended to include the requirement for insurers to disclose their CG practices on par with the Swiss code of Best Practice for Corporate Governance (CCG), which is a voluntary code for listed companies.
8. Risk Management and Internal Controls	LO	ISA articulates the principle that insurers should have effective risk management and internal control systems. Circular 2008/32 provides details on the necessary elements of such systems. However, there is no requirement that there should be dedicated risk management and compliance functions. FINMA is currently assessing the need to provide additional clarity and specificity relating to RM and ICS. It is recommended that FINMA require the establishment of risk management and compliance function with exceptions based on size, nature and complexity of operation
9. Supervisory Review and Reporting	LO	FINMA’s risk-based approach includes offsite analysis of financial information and SST reports, and onsite verification of issues identified through offsite review or observed trends in the market. FINMA leverages on external auditors to verify areas where there are clear regulatory requirements such as tied assets and technical provisions. FINMA also relies on external auditors to audit insurers in the low risk categories. FINMA is particularly strong in quantitative analysis. It has a number of actuaries and mathematicians on staff to conduct in-depth analysis of solvency and internal models. Onsite inspections typically focus on one area (such as derivative instruments, data security, adherence to business plan, reserving interest rate, and outsourcing) and are of short durations. At the time of this assessment, FINMA has commenced eight onsite inspections of solo entities, and 12 onsite inspections of the insurance groups in 2013. (The numbers of inspections in 2012 were 45 for solos and six for groups.) With the limited scope and duration of inspections, it is difficult for FINMA to gain a comprehensive view on the effective implementation of insurers’ own policies and procedures and compliance with regulatory requirements. Onsite inspection may provide information that can supplement the analysis from offsite monitoring and provide the opportunity to verify information FINMA has received. Onsite inspection may also help detect problems that may not be apparent through offsite reviews. Important objectives in conducting an onsite inspection include verifying the implementation of the insurer’s risk management processes and compliance with relevant insurance laws and regulations. This will help FINMA in identifying the strengths and weaknesses in the insurer’s policies and procedures. FINMA’s risk-based approach is to devote its resources to those with high market impact. While the failure of a smaller insurer may not have market-wide impact, it will affect policyholders. It is recommended that FINMA adopt a more intrusive approach to onsite supervision by increasing the frequency and scope of onsite inspection to strengthen the qualitative aspect of its supervision. If the recommendation is adopted, FINMA will need to increase its resources, in terms of number of staff and their level of experience. The key account manager concept is a good approach to coordinate the interaction with the supervised entity and to foster a holistic view based on inputs from specialists. To preserve institutional knowledge and to inject fresh perspectives from time to time, FINMA may wish to consider measures to strengthen the approach, for example through a periodic rotation of the key account managers and limiting the division chief role to quality control and assurance of the integrity of the process away from a key account manager function.
10. Preventive and Corrective Measures	O	FINMA, working with the criminal prosecutors, is empowered to take action against a person/entity who conducts insurance activities without the necessary license. FINMA’s supervisory framework supports early intervention to minimize losses to policyholders. FINMA has adequate power to initiate timely and proportionate preventive and corrective measures where insurers do not adequately address supervisory concerns
11. Enforcement	O	Legislations have given FINMA a wide enforcement power, except the power to impose monetary fines. There is an Enforcement Committee that meets weekly to ensure consistent and fair application of enforcement actions. By law, FINMA is obliged to report all criminal offences under the insurance laws to FDF for consideration for criminal proceedings. FINMA does not track the outcome of reported criminal breaches. In practice, FINMA relies on its supervisory power to restore compliance with the law; it rarely takes enforcement action. In 2012, FINMA took enforcement actions against 3 insurers, 2 board members of an insurer, one member of the executive management of an insurer, and 3 insurance intermediaries. For offences that are administrative in nature, such as the infringements listed under Article 86 of the ISA, FINMA should be given the power to impose administrative fines. It is recommended that Article 86 of ISA be amended to de-criminalize the offences and delegate the responsibility of imposing administrative fines to FINMA.
12. Winding-up and Exit from the Market	O	There are extensive provisions in the legislation for FINMA to manage an insurer’s exist from the market in an orderly manner. These also provide for policyholders to rank second only to liquidator. The tied assets regime is a robust tool in ensuring policyholder protection.
13. Reinsurance and Other Forms of Risk Transfer	LO	The supervision of reinsurers is in general in line with the supervision of direct insurers, while considering the specific business models of reinsurers. From the perspective of ceded reinsurance of primary insurers, it is to be noted that Switzerland retains tied assets requirements. These include limited allowances and require the monitoring of reinsurance recoverables. While from the perspective of ceded reinsurance of reinsurers there are no tied assets requirements, there are general investment principles and specific limits of asset categories which apply. These help protect against the weakening of the asset quality of reinsurers. The ability for FINMA to have legal reach to the assets in case of liquidation is particular relevant in its role as home supervisor given the current ability of reinsures to operate in foreign jurisdictions without local capital requirements. Consideration should be made to extend requirements to reinsurers’ assets to further strengthen FINMA’s ability to have access to them in case of liquidation. It is recognized that FINMA has already begun dialogs with the largest groups on recovery and resolutions plans and is using its active involvement at the level of IAIS and FSB in these areas to identify best practices in these areas. All reinsurers established in Switzerland are supervised by FINMA, although branches of companies headquartered outside Switzerland and conducting only reinsurance business are exempted from supervision. The scope of relevant Swiss law on this point (ISA Art. 2 (2)) is transparent and known in the marketplace; in addition, FINMA is in close contact with their home supervisors where needed. However, given the relevance of reinsurance for the stability of the insurers abroad, it may be helpful for FINMA to more actively communicate its approach in regard of the supervision of branches of foreign reinsurers. A more conservative approach would be to include the supervision of that reinsurance activity. The use of side letters affects the integrity and transparency of reinsurance treaties but its use is not regulated. The transparency of the contracts needs to be enhanced by the requirement on the integrity of the contract (banning the use of side letters could be one way to observe this transparency standard). Concentration of reinsurance in a given reinsurer is supervised during the SST for the insurers. In addition, where reinsurance recoverables are recognized in tied-assets, insurers are required to report major reinsurer counterparties individually by their share and with information on their country and rating. Reinsurers for their part have to report their top 20 single retrocessionaires besides the respective lines of business, geographic area and lines of business of ceded reinsurance. All of the above allow FINMA to monitor reinsurance concentrations, including any major exposure to a single reinsurer, and identify any inappropriate practices or trends. Where this is the case FINMA requires the matter to be addressed. For purpose of systemic risk supervision, FINMA is recommended to also monitor market shares in the reinsurance sector by type of reinsurer, like rating and geographic origin; and also monitor exposures to single reinsurer on critical large risks. Regulation requires insurers to analyze the effects of reinsurance on the balance sheet of insurers. With respect to risk transfer, it is the responsibility of the appointed actuary to ensure correct risk-transfer treatment, which is part of the business plan. In the case of major Swiss insurers which are part of a listed company, their reporting uses U.S. GAAP or IFRS. These companies are thus required to apply certain risk-transfer tests. These are applied also in statutory accounting, provided it does not result in any conflict with the statutory accounting rules. However risk transfer definitions vary in accounting systems. Under one system uncertainty in the time of payment would be sufficient to have risk transfer in place. In another accounting system, in addition underwriting risk would also need to be transferred in a contract for it to qualify as a reinsurance contract. U.S.-GAAP and IFRS differ on this perspective for instance. FINMA should consider issuing specific rules on risk transfer to bring certainty as to what constitutes a valid reinsurance transaction. FINMA supervises at time of licensing that reinsurance contracts are in place and that new contracts and major changes to contracts are reported. These are subject to FINMA’s ongoing supervision. In addition, FINMA has the right to review any contract at any time, not only when there are changes. With most reinsurers involved in traditional reinsurance business, the contractual relationships tend to be long-term where FINMA is well acquainted with the material arrangements. To fully observe the standard 13.4 FINMA should explicitly require that parties to reinsurance contracts promptly document the principal economic and coverage terms and conditions agreed upon by the parties and finalize the formal reinsurance contract within a given reasonable period of time
14. Valuation	O	Regulation concerning market-consistent valuation in the SST is independent of international accounting standards. FINMA sets the valuation requirements for assets and liabilities to be applied for solvency purposes. Under the Swiss Solvency Test (SST)) positions are valued on a market consistent basis. The insurers own credit risk cannot be taken into account in the valuation of its liabilities and to provide a full economic picture, the SST includes positions which would be off-balance in accounting standards. The use of models for the valuation of liabilities is subject to strict requirements to warrant the economic valuation. For instance, when stochastic techniques are applied for the valuation of life insurance liabilities, the underlying economic scenarios have to be calibrated market consistently, and a consistent approach in assessing assets and liabilities has to be very carefully considered. Most assets are valued at market and the concept of the discounted best estimate and the market value margin (MVM) applies with regard to liabilities and technical provisions. For discounting liabilities, risk-free yield curves have to be used and FINMA makes counterparty risk-free yield curves available in the most commonly used currencies (CHF, EUR, USD, GBP, JPY) as per 1 January and 1 July of every year. Where other risk-free yield curves are required, the insurer is responsible for calculating them. Some elements distorting the full economic valuation of assets and liabilities are however present in the regulation: FINMA allows for new business stemming from Swiss group life cash flows beyond the contractual obligation, but considers the impact of new business in capital requirements. The valuation of the statutory technical reserves for the purpose of the tied assets coverage requirement (but not for the SST) is currently done using the interest rates produced by the investment portfolios under stress and subject to prudential assumptions of individual companies as the discount rates that are in the order of 4 to 2.5 percent. Given that the tied assets regime is the main protection for policyholders in absence of a guarantee scheme, a conservative approach is recommend defining a forward looking maximum discount interest rate for the valuation of liabilities. As a result of the low interest rate environment affecting the insurance sector FINMA has introduced temporary measures that reduce the solvency requirements for insurers, while these measures have been introduced in line with the ICP requirements and with sufficient safeguards, to maintain the level of protection for policyholder as intended by the SST framework, the temporary measures should be seen as temporary and reverted as planned. The use of an additional margin (MVM) to the best estimate in valuating liabilities is used under SST and the value of the MVM is linked to the cost of regulatory capital, currently set at 6 percent. While it can be argued that there is a relation between the required risk capital and hence of the cost of maintaining such capital and the uncertainty of the future cash flows, such relationship is certainly difficult to determine. The cost of capital approach for the MVM is given as an example in ICP 14.7.5 and ICP 14.9.1. Moreover the cost of maintaining such capital has not been changed since the design of SST. FINMA should consider regular updates of the cost of capital rate of currently 6 percent.
15. Investment	O	The investment activities of insurers are regulated in a manner to properly address the risks faced by insurers. Swiss domiciled (re)insurance companies must submit their investment guidelines for approval. The assessment is also based on the prudent investor rule and considers common practice of modern portfolio management. Specially designated assets are required for backing up the insurance liabilities. These tied assets are subject to limits and rules to provide security, liquidity, diversification and legal access in case of bankruptcy. More complex types of assets are subject to stricter limits, including prohibitions, detailed reporting and full understanding of their inherent risks. Asset-Liability mismatching as well as permissible concentration risk are penalized through capital surcharges. Use of derivatives is restricted for hedging purposes and portfolio optimization; further all positions need to be fully covered.
16. Enterprise Risk Management for Solvency Purposes	O	FINMA has established well documented, detailed, comprehensive and forward looking requirements for enterprise risk management for the supervised entities that address all relevant and material risks that could affect their solvency. These requirements are part of our insurance law and are further defined through circulars and supervisory practice and FINMA monitors their implementation by insurers and insurance groups. The BoD is ultimate responsible for the implementation of these requirements and the use of the systems in the day to day business decisions. While ORSA is not a formal separate requirement, through the annual risk, capital planning, liquidity and the SST, insurers are required to consider current and emerging risks that could affect the ability to meet the SST and the models and scenarios used to determine solvency have to include those risks. In addition, qualitative scenarios are used for better understanding and planning future capital needs. The SQA complement the SST on checking the quality of the risk management systems of the entities. In addition to management and the risk office, also the responsible actuary plays an important role in the documentation process. The responsible actuary report presents the current status as well as possible developments from an actuarial perspective, in particular actuarial developments which may endanger the financial condition of the company. But this report is only available to the supervisory authority on request. FINMA is recommended to require the responsible actuarial report on a regular basis.
17. Capital Adequacy	O	The solvency regime set up by FINMA is risk sensitive, comprehensive having due regard of all risks insurers at the solo and group level are taking and provides appropriate degrees for supervisory intervention. The use and approval of models is well controlled and sophisticated. The capital requirements are transparent, objective and in line with the level of risk run by the institution. The permissible capital resources allow for the absorbance of unforeseen losses, under both, going and gone concern, with the exception when the APLIEMs are used. There, the additional capital resource created by the difference in the discounted liabilities does not have the required loss absorbance property, but is treated as a temporary measure. Consideration should be made if allowing for a lower capital requirement but maintaining the risk free curve as the discount curve would provide the same alleviation of the sector during the extreme low interest rate environment and at the same time maintain the SST framework free from distortions. Under the temporary measures, FINMA allows for relaxing the supervisory intervention ladder and grants the companies longer deadlines to again reach the target threshold values. This approach will reduce the effectiveness of supervision and deviating further the supervisory actions from the original SST framework. While in line with the ICP requirements, FINMA should consider not relaxing or changing the SST trigger points of intervention also while the measures remain in place to maintain supervisory action’s comparability with the original SST framework. The SST does not quantify operational risk and only certain aspects of this risk are directly covered. FINMA is advised to consider incorporating the quantification of operational risk into the SST. The SST standard model for life insurers should be more actively used as a benchmark. The discussions of deviations from a baseline can be a useful tool to check on the effectiveness and of the internal model to replicate the insurers’ risks. FINMA is recommended to enhance its scrutiny of the internal models of life insurers by verifying outcomes with the standard model. The approval of internal modes creates an important legal liability for FINMA. Considerations should be made to allocate the legal approval responsibility of the internal model to the board of the entities subject to FINMA’s objection rights. FINMA should maintain the strong level of supervisory checks on the internal models, but consideration should be made to transfer the legal burden created by an approval to the board the supervised entities. Going forward, concerning the model approval process, further development of the insurance risk sensitivity methodology is encouraged when assessing internal models using portfolio replication methods and onsite verification of the appropriateness of the stochastic scenarios used in internal models is recommended.
18. Intermediaries	PO	Supervision of insurance intermediaries is through the mandatory registration of independent intermediaries and voluntary registration of non-independent intermediaries. Through FDF, FINMA takes action against unregistered intermediaries when it becomes aware of their illegal activities. Since registration by non-independent intermediaries is voluntary (this includes brokers who are deemed not-independent based on the source of income test), the register is only a partial roster of intermediaries practising in Switzerland. However, FINMA observes that increasingly insurers require their tied agents to be registered, and that insurers are reluctant to deal with brokers who are not registered. Registration requirements include professional competence and personal attributes. FINMA relies mainly on registrants’ notification to ensure continuing accuracy of information kept in the register. There are no on-going reporting requirements for intermediaries. Supervision of tied agents is indirectly through insurers. Supervision of brokers is minimal. It is recommended that FINMA consider the following: Require registration of all intermediaries, to eliminate the current gap in the register. For tied agents, make the insurers responsible for ensuring the data is kept up to date. Broaden the on-going supervision of brokers to include offsite review (financial statements and auditor’s opinion where applicable, ownership structure), and onsite inspection (corporate governance and internal controls, basis of placing business, complaint handling). Strengthen indirect supervision of agents by including in the on-going supervisory review of insurers how they control the behaviour of their agents and the disciplinary action against errant agents. Require independent intermediaries to put in place safeguards in handling client monies, and assess these safeguards during onsite inspections. Require disclosure of intermediaries’ financial interest in the transaction where a potential conflict exists. Apply appropriate CG standard to legal entity intermediaries.
19. Conduct of Business	PO	Swiss laws clearly stipulate the intention to protect policyholders and entrust FINMA to intervene on behalf of the policyholders and their beneficiaries. Life insurers have ongoing duties to disclose certain information to policyholders, including investment performance and surrender values. However, other than as indicated, FINMA has yet to articulate additional specific rules on business conduct. Without additional explicit rules, it is difficult to have consistent implementation of the expectation of treating customer fairly. Recognizing the shortcomings, FINMA has taken steps to introduce the FFSA to address the following key areas: documentation of products characteristics; selling practice: implement “Know Your Customer”, review of appropriateness and suitability of products, documentation and accountability, disclosure of third-party remuneration; training of intermediaries who provide advice to ensure they are proficient of knowledge on an continuing basis; and reversing the burden of proof in cases of mis-selling. It is recommended that FINMA press on with the legislative effort to improve policyholder protection, particularly fair treatment of customers, after sales disclosure, avoidance of conflict of interest by intermediaries, and timely payment of claims.
20. Public Disclosure	PO	The information published by the insurers and by FINMA does not provide sufficient details on the insurer’s: policies and processes for managing capital; investment objectives, processes and sensitivity to market variables; technical provisions by appropriate segment, the rationale for the choice of discount rates, and description of the method used to determine technical provisions; information on ERM and ALM; financial performance: earnings analysis, claims statistics including claims development, pricing adequacy, information on returns on investment assets and components of such returns; nature of risk, reinsurance and other risk transfer arrangement, risk concentration; and nature of its business, key products, the external environment in which it operates, and its business objectives and the strategies in place to achieve them. It is noted that FINMA has started a review of the possibility of expanding public disclosure requirements in 2012, taking into account international standards and practices. It is recommended that FINMA completes its review and institute the necessary regulatory changes to be more in line with international standards.
21. Countering Fraud in Insurance	LO	There is an established legal framework enabling criminal authorities to investigate and apply sanctions in cases of insurance frauds. Fraud prevention is included in FINMA’s on-going supervisory process, and the SQA. The recent SQA II has made a number of insightful observations relating to insurers’ fraud (both external and internal) prevention controls. There are no explicit anti-fraud requirements. While FINMA includes fraud prevention in its on-going review of an insurer’s risk management and compliance procedures, the source of information on insurer’s fraud prevention practice appears to be limited to the ad hoc survey and SQA II. The survey is ad hoc and on a sampling basis. SQA is done pursuant to a time cycle and covers groups and the insurers in the highest risk categories. To ensure a consistent standard of fraud prevention in the insurance industry, FINMA should issue anti-fraud guidance to insurers and intermediaries, clearly stating FINMA’s expectation with respect to anti-fraud policy, procedures and controls in place to deter, detect, prevent, report and remedy frauds. FINMA should include insurers’ anti-fraud procedures in its offsite review and require insurers to report fraud cases to FINMA as part of FINMA’s assessment of the effectiveness of insurer’s anti-fraud procedures. It is recommended that FINMA consider the risk of fraud by intermediary in relation to misrepresentation of insurance cover to a customer in its current review of policyholder protection. (See ICP 19).
22. Anti-Money Laundering and Combating the Financing of Terrorism	O	FINMA is the designated competent authority for AML matters relating to financial institutions. MROS is the financial intelligence unit responsible for receiving and analysing suspicious transaction reports. There is a mechanism in place for FINMA to cooperate, coordinate and exchange information with MRO and other relevant law enforcement agencies. FINMA delegates the AML/CFT supervisory responsibility to recognized SRO. AML/CFT rules issued by SROs with approval from FINMA are binding on members. FINMA assesses the effectiveness of SROs on an annual basis
23. Group-wide Supervision	O	FINMA has a clear and transparent approach to identifying entities subject to its group-wide supervision. The scope of the group covers all entities, whether regulated or not, within the group. FINMA’s group supervision is complementary to solo supervision, based on coordinated cooperation with solo supervisors and the involvement of specialist functions (such as SST, SQA).
24. Macroprudential Surveillance and Insurance Supervision	LO	FINMA has established periodic monitoring and analysis of market and financial developments and other environmental factors that may impact insurers and insurance markets. Information capture in the Risikobarometer process is used to assessing the possible impact of the identified risks and to implement measures effective in improving the resilience of the financial sector. The impact analysis is shared with FINMA’s executive board and is an internal document. Also the recently developed tools, the Business Indicators Cockpit and a Group Indicators Cockpit allow monitoring market trends and identifying potential risk and adverse market developments. The Group Indicators Cockpit is analyzed on a semi-annual basis. Reports are used in the preparation of risk rating decisions of insurers, as well as an early warning tool. The historical financial market stress scenarios required under SST are used to assess resilience of the sector to financial crisis; however there are no clear requirements to consider feedback loops and spillover effects. The D-SII designation process in Switzerland has excluded insurers. However FINMA’s highest risk rated insurers are subject to intense supervision. Notwithstanding the absence of a Swiss insurer in the FSB G-SIIs list, the strong participation of FINMA at the FSC IAIS committee continues and, in preparation of a possible G-SII designation of an Swiss insurer or reinsurer, FINMA has implemented a FINMA Insurance Bankruptcy Ordinance (IBO) and is further drafting regulation to comply with the FSB recommendations applicable to G-SIIs. The existing of current tools used by FINMA to identify systemic risk, including shocks, interconnectedness and feedback effects; need to be developed and implemented into a comprehensive surveillance framework that ultimately will reduce the likelihood of systemic risk and mitigate spillover effects within the financial system and into the real economy.
25. Supervisory Cooperation and Coordination	O	FINMA has the authority to enter information and coordination agreements with foreign authorities responsible for financial market supervision. FINMA is signatory to various MoUs that allow for smooth information sharing and coordination in supervisory matters. FINMA has a vast experience in organizing and effectively running colleges. It has created colleges for the relevant Swiss insurance groups and it also participates in several international colleges that are relevant for the Swiss policyholders as the host supervisor. Notwithstanding being the home supervisor it takes the pragmatic approach in the determination of the group supervisor to be the national authority where the decision management of the group is located. To enhance the information exchange, FINMA is recommended to develop for their colleges a secure information exchange platform
26. Cross-border Cooperation and Coordination on Crisis Management	O	For colleges lead by FINMA emergency plans compliant with the standards of this principle have been developed. The emergency plans are regularly tested and improved. Using as a guidance the recovery and resolution plans developed for banks, FINMA has requested and discussed resolution plans for the three largest insurers groups. These plans have already produced concrete actions of the groups toward improving the speed of reaction to serious emergency situations that included dialogue with foreign supervisors applicable during such situations. Going forward, FINMA is recommended to enter agreements with the relevant foreign supervisors with the colleges for the situations that would require resolution of the supervised entity. To enhance the resolution of complex groups, FINMA is recommended to acquire the power to act as the liquidator also of non regulated entities belonging to the insurance group.

Table 15.

Switzerland: Summary of Observance Level

Table 15.

Switzerland: Summary of Observance Level

Observed (O)	16
Largely observed (LO)	7
Partly observed (PO)	3
Not observed (NO)	0
Total	26

View Table

Table 15.

Switzerland: Summary of Observance Level

Observed (O)	16
Largely observed (LO)	7
Partly observed (PO)	3
Not observed (NO)	0
Total	26

Table 16.

Switzerland: Recommendations to Improve Observance of the ICPs

Table 16.

Switzerland: Recommendations to Improve Observance of the ICPs

Insurance Core Principle	Recommendations
1. Objectives, Powers and Responsibilities of the Supervisor	None
2. Supervisor	It is recommended that FINMA should have the delegated authority over matters of operational relevance such as definition of insurance, classes of insurance, risk management, professional qualification for insurance practitioners, and disclosure of information to customers by intermediaries. While FINMA continues to integrate the supervision process in among the different financial sectors, the effective use of FINMA staff in insurance supervision should be maintained and the use of external auditors limited to checking compliance with clearly defined guidelines that require minimal or no supervisory judgment.
3. Information Exchange and Confidentiality Requirements	None
4. Licensing	It is recommended that FINMA should require branches to be incorporated in Switzerland and to be subject to FINMA supervision when their size reaches a pre-determined level.
5. Suitability of Persons	FINMA should provide greater clarity as to its requirements with regard to the continuing suitability of key persons in control functions. The control functions should be defined to ensure consistency across companies.
6. Changes in Control and Portfolio Transfers	None
7. Corporate Governance	It is recommended that Circular 2008/32 be amended to indicate explicitly that the BOD has the oversight responsibility over risk management and internal controls for the avoidance of doubt. It is also recommended that Circular 2008/32 be amended to include the requirement for insurers to disclose their CG practices on a par with CCG (the voluntary code for listed companies).
8. Risk Management and Internal Controls	It is recommended that FINMA requires explicitly the establishment of risk management and compliance functions in companies while recognizing exceptions based on the size, nature and complexity of the operations.
9. Supervisory Review and Reporting	It is recommended that FINMA increase the intensity of onsite supervision to strengthen the qualitative aspect of its supervision by raising the frequency and scope of onsite inspection. This will require that FINMA increase its resources, in terms of number of staff and their level of experience. FINMA may wish to consider measures to strengthen the key account manager approach, to preserve institutional knowledge and to inject fresh perspectives from time to time; for example, a periodic rotation of the key account manager and limiting the role of the division chief to quality control and assurance of the integrity of the process.
10. Preventive and Corrective Measures	None
11. Enforcement	For offences that are administrative in nature, such as the infringements listed under Article 86 of the ISA, FINMA should be given the power to impose administrative fines. It is recommended that Article 86 of ISA be amended to de-criminalize the offences and delegate the responsibility of imposing administrative fines to FINMA.
12. Winding-up and Exit from the Market	None
13. Reinsurance and Other Forms of Risk Transfer	Consideration should be given to strengthening further FINMA’s access to reinsurers’ assets in case of liquidation. To enhance the transparency of reinsurance treaties, FINMA may consider introducing a mandatory treaty clause stating the completeness of the reinsurance treaty. FINMA should consider issuing specific rules on risk transfer to bring additional certainty as to what constitutes a valid reinsurance transaction. FINMA should consider additional steps to increase insurers’ retention of adequate documents on the agreed terms and conditions of reinsurance contracts and have them formalized over a reasonable period of time. For systemic risk monitoring purposes, FINMA is recommended to further monitor concentration by type of reinsurer, including rating and geographic origin; and also monitor exposure to single reinsurer on critical single large risks.
14. Valuation	Given that the tied assets regime is the main protection for policyholders in absence of a guarantee scheme, consideration for introducing a conservative approach defining a forward looking maximum discount interest rate for the mathematical reserves is recommended. To maintain the level of protection for policyholder as intended by the SST framework, it is recommended to remove the temporary measures as planned in 2016. FINMA should consider regular updates of the cost of capital rate of currently 6 percent
15. Investment	None
16. Enterprise Risk Management for Solvency Purposes	FINMA is recommended to require the responsible actuarial report on a regular basis.
17. Capital Adequacy	FINMA is recommended to promote the use of the standard model for life insurers and use it to enhance its scrutiny as an additional checking tool of the internal models. FINMA is advised to consider incorporating the quantification of operational risk into the SST. FINMA should maintain the strong level of supervisory checks on the internal models, but consideration should be made to transfer the legal burden created by an approval to the board the supervised entities. Concerning the model approval process, further development of the insurance risk sensitivity methodology is encouraged when assessing internal models using portfolio replication methods and onsite verification of the appropriateness of the stochastic scenarios used in internal models is recommended.
18. Intermediaries	It is recommended that FINMA consider the following: Require registration of all intermediaries, to eliminate the current gap in the register. For tied agents, make the insurers responsible for ensuring the data is kept up to date. Broaden the on-going supervision of brokers to include offsite review (financial statements and auditor’s opinion where applicable, ownership structure), and onsite inspection (corporate governance and internal controls, basis of placing business, complaint handling). Strengthen indirect supervision of agents by including in the on-going supervisory review of insurers how they control the behavior of their agents and the disciplinary action against errant agents. Require independent intermediaries to put in place safeguards in handling client monies, and assess these safeguards during onsite inspections. Require disclosure of intermediaries’ financial interest in the transaction where a potential conflict exists. Apply appropriate CG standard to legal entity intermediaries.
19. Conduct of Business	There is existing legal basis in this area and new legislation is being introduced to address the following key areas: Documentation of products characteristics; Selling practice: implement “Know Your Customer”, review of appropriateness and suitability of products, documentation and accountability, disclosure of third-party remuneration; Training of intermediaries who provide advice to ensure they are proficient of knowledge on an continuing basis; Reversing the burden of proof in cases of mis-selling. It is recommended that FINMA press on with the legislative effort to improve policyholder protection, particularly fair treatment of customers, after sales disclosure, avoidance of conflict of interest by intermediaries, and timely payment of claims. In addition, it is recommended that FINMA issue rules on business conduct.
20. Public Disclosure	It is recommended that FINMA completes its review and institute the necessary regulatory changes to be more in line with international standards and include for instance sufficient details on the insurer’s: policies and processes for managing capital; investment objectives, processes and sensitivity to market variables; technical provisions by appropriate segment, the rationale for the choice of discount rates, and description of the method used to determine technical provisions; information on ERM and ALM; financial performance: earnings analysis, claims statistics including claims development, pricing adequacy, information on returns on investment assets and components of such returns; nature of risk, reinsurance and other risk transfer arrangement, risk concentration; and nature of its business, key products, the external environment in which it operates, and its business objectives and the strategies in place to achieve them.
21. Countering Fraud in Insurance	To ensure a consistent standard of fraud prevention in the insurance industry, FINMA should issue anti-fraud guidance to insurers and intermediaries, clearly stating FINMA’s expectation with respect to anti-fraud policy, procedures and controls in place to deter, detect, prevent, report and remedy frauds. FINMA should include insurers’ anti-fraud procedures in its offsite review and require insurers to report fraud cases to FINMA as part of FINMA’s assessment of the effectiveness of insurer’s anti-fraud procedures. It is recommended that FINMA consider the risk of fraud by intermediary in relation to misrepresentation of insurance cover to a customer in its current review of policyholder protection. (See ICP 19).
22. Anti-Money Laundering and Combating the Financing of Terrorism	None
23. Group-wide Supervision	None
24. Macroprudential Surveillance and Insurance Supervision	For the historical financial market stress scenarios FINMA should introduce feedback loops and spillover effects. The tools currently used by FINMA to identify systemic risk need to be developed and implemented into a comprehensive surveillance framework that ultimately will reduce the likelihood of systemic risk and mitigate spillover effects within the financial system and into the real economy.
25. Supervisory Cooperation and Coordination	To enhance the information exchange, FINMA is recommended to develop for their colleges a secure information exchange platform.
26. Cross-border Cooperation and Coordination on Crisis Management	FINMA is recommended to enter agreements with the relevant foreign supervisors on each party’s obligations in t situations that would require resolution of the supervised entity. To enhance the resolution of complex groups, FINMA is recommended to acquire the power to act as the liquidator also of non regulated entities belonging to the insurance group.

View Table

Table 16.

Switzerland: Recommendations to Improve Observance of the ICPs

Insurance Core Principle	Recommendations
1. Objectives, Powers and Responsibilities of the Supervisor	None
2. Supervisor	It is recommended that FINMA should have the delegated authority over matters of operational relevance such as definition of insurance, classes of insurance, risk management, professional qualification for insurance practitioners, and disclosure of information to customers by intermediaries. While FINMA continues to integrate the supervision process in among the different financial sectors, the effective use of FINMA staff in insurance supervision should be maintained and the use of external auditors limited to checking compliance with clearly defined guidelines that require minimal or no supervisory judgment.
3. Information Exchange and Confidentiality Requirements	None
4. Licensing	It is recommended that FINMA should require branches to be incorporated in Switzerland and to be subject to FINMA supervision when their size reaches a pre-determined level.
5. Suitability of Persons	FINMA should provide greater clarity as to its requirements with regard to the continuing suitability of key persons in control functions. The control functions should be defined to ensure consistency across companies.
6. Changes in Control and Portfolio Transfers	None
7. Corporate Governance	It is recommended that Circular 2008/32 be amended to indicate explicitly that the BOD has the oversight responsibility over risk management and internal controls for the avoidance of doubt. It is also recommended that Circular 2008/32 be amended to include the requirement for insurers to disclose their CG practices on a par with CCG (the voluntary code for listed companies).
8. Risk Management and Internal Controls	It is recommended that FINMA requires explicitly the establishment of risk management and compliance functions in companies while recognizing exceptions based on the size, nature and complexity of the operations.
9. Supervisory Review and Reporting	It is recommended that FINMA increase the intensity of onsite supervision to strengthen the qualitative aspect of its supervision by raising the frequency and scope of onsite inspection. This will require that FINMA increase its resources, in terms of number of staff and their level of experience. FINMA may wish to consider measures to strengthen the key account manager approach, to preserve institutional knowledge and to inject fresh perspectives from time to time; for example, a periodic rotation of the key account manager and limiting the role of the division chief to quality control and assurance of the integrity of the process.
10. Preventive and Corrective Measures	None
11. Enforcement	For offences that are administrative in nature, such as the infringements listed under Article 86 of the ISA, FINMA should be given the power to impose administrative fines. It is recommended that Article 86 of ISA be amended to de-criminalize the offences and delegate the responsibility of imposing administrative fines to FINMA.
12. Winding-up and Exit from the Market	None
13. Reinsurance and Other Forms of Risk Transfer	Consideration should be given to strengthening further FINMA’s access to reinsurers’ assets in case of liquidation. To enhance the transparency of reinsurance treaties, FINMA may consider introducing a mandatory treaty clause stating the completeness of the reinsurance treaty. FINMA should consider issuing specific rules on risk transfer to bring additional certainty as to what constitutes a valid reinsurance transaction. FINMA should consider additional steps to increase insurers’ retention of adequate documents on the agreed terms and conditions of reinsurance contracts and have them formalized over a reasonable period of time. For systemic risk monitoring purposes, FINMA is recommended to further monitor concentration by type of reinsurer, including rating and geographic origin; and also monitor exposure to single reinsurer on critical single large risks.
14. Valuation	Given that the tied assets regime is the main protection for policyholders in absence of a guarantee scheme, consideration for introducing a conservative approach defining a forward looking maximum discount interest rate for the mathematical reserves is recommended. To maintain the level of protection for policyholder as intended by the SST framework, it is recommended to remove the temporary measures as planned in 2016. FINMA should consider regular updates of the cost of capital rate of currently 6 percent
15. Investment	None
16. Enterprise Risk Management for Solvency Purposes	FINMA is recommended to require the responsible actuarial report on a regular basis.
17. Capital Adequacy	FINMA is recommended to promote the use of the standard model for life insurers and use it to enhance its scrutiny as an additional checking tool of the internal models. FINMA is advised to consider incorporating the quantification of operational risk into the SST. FINMA should maintain the strong level of supervisory checks on the internal models, but consideration should be made to transfer the legal burden created by an approval to the board the supervised entities. Concerning the model approval process, further development of the insurance risk sensitivity methodology is encouraged when assessing internal models using portfolio replication methods and onsite verification of the appropriateness of the stochastic scenarios used in internal models is recommended.
18. Intermediaries	It is recommended that FINMA consider the following: Require registration of all intermediaries, to eliminate the current gap in the register. For tied agents, make the insurers responsible for ensuring the data is kept up to date. Broaden the on-going supervision of brokers to include offsite review (financial statements and auditor’s opinion where applicable, ownership structure), and onsite inspection (corporate governance and internal controls, basis of placing business, complaint handling). Strengthen indirect supervision of agents by including in the on-going supervisory review of insurers how they control the behavior of their agents and the disciplinary action against errant agents. Require independent intermediaries to put in place safeguards in handling client monies, and assess these safeguards during onsite inspections. Require disclosure of intermediaries’ financial interest in the transaction where a potential conflict exists. Apply appropriate CG standard to legal entity intermediaries.
19. Conduct of Business	There is existing legal basis in this area and new legislation is being introduced to address the following key areas: Documentation of products characteristics; Selling practice: implement “Know Your Customer”, review of appropriateness and suitability of products, documentation and accountability, disclosure of third-party remuneration; Training of intermediaries who provide advice to ensure they are proficient of knowledge on an continuing basis; Reversing the burden of proof in cases of mis-selling. It is recommended that FINMA press on with the legislative effort to improve policyholder protection, particularly fair treatment of customers, after sales disclosure, avoidance of conflict of interest by intermediaries, and timely payment of claims. In addition, it is recommended that FINMA issue rules on business conduct.
20. Public Disclosure	It is recommended that FINMA completes its review and institute the necessary regulatory changes to be more in line with international standards and include for instance sufficient details on the insurer’s: policies and processes for managing capital; investment objectives, processes and sensitivity to market variables; technical provisions by appropriate segment, the rationale for the choice of discount rates, and description of the method used to determine technical provisions; information on ERM and ALM; financial performance: earnings analysis, claims statistics including claims development, pricing adequacy, information on returns on investment assets and components of such returns; nature of risk, reinsurance and other risk transfer arrangement, risk concentration; and nature of its business, key products, the external environment in which it operates, and its business objectives and the strategies in place to achieve them.
21. Countering Fraud in Insurance	To ensure a consistent standard of fraud prevention in the insurance industry, FINMA should issue anti-fraud guidance to insurers and intermediaries, clearly stating FINMA’s expectation with respect to anti-fraud policy, procedures and controls in place to deter, detect, prevent, report and remedy frauds. FINMA should include insurers’ anti-fraud procedures in its offsite review and require insurers to report fraud cases to FINMA as part of FINMA’s assessment of the effectiveness of insurer’s anti-fraud procedures. It is recommended that FINMA consider the risk of fraud by intermediary in relation to misrepresentation of insurance cover to a customer in its current review of policyholder protection. (See ICP 19).
22. Anti-Money Laundering and Combating the Financing of Terrorism	None
23. Group-wide Supervision	None
24. Macroprudential Surveillance and Insurance Supervision	For the historical financial market stress scenarios FINMA should introduce feedback loops and spillover effects. The tools currently used by FINMA to identify systemic risk need to be developed and implemented into a comprehensive surveillance framework that ultimately will reduce the likelihood of systemic risk and mitigate spillover effects within the financial system and into the real economy.
25. Supervisory Cooperation and Coordination	To enhance the information exchange, FINMA is recommended to develop for their colleges a secure information exchange platform.
26. Cross-border Cooperation and Coordination on Crisis Management	FINMA is recommended to enter agreements with the relevant foreign supervisors on each party’s obligations in t situations that would require resolution of the supervised entity. To enhance the resolution of complex groups, FINMA is recommended to acquire the power to act as the liquidator also of non regulated entities belonging to the insurance group.