Switzerland
Detailed Assessment of Observance-Insurance Core Principles

This Detailed Assessment of Observance on the Insurance Core Principles on Switzerland analyzes that the insurance industry in Switzerland is well developed having among the highest insurance penetration and expenditure per capita in the world. 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 industry has weathered the 2008 crisis well; however, the current low interest rate environment is affecting the sector. The lack of availability of Swiss government bonds to match long term liabilities of life insurers and pension funds could be a source of vulnerability. The long-term nature of the liabilities of life insurers and pension funds could in principle be matched by investment in Swiss government securities. Supervision focuses on ensuring sufficiency of liquid assets to meet policy liabilities. Policyholders have priority claims over the tied assets. In addition, robust solvency requirements ensure there is enough capital to safeguard the insurers’ financial soundness under adverse conditions.

Abstract

This Detailed Assessment of Observance on the Insurance Core Principles on Switzerland analyzes that the insurance industry in Switzerland is well developed having among the highest insurance penetration and expenditure per capita in the world. 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 industry has weathered the 2008 crisis well; however, the current low interest rate environment is affecting the sector. The lack of availability of Swiss government bonds to match long term liabilities of life insurers and pension funds could be a source of vulnerability. The long-term nature of the liabilities of life insurers and pension funds could in principle be matched by investment in Swiss government securities. Supervision focuses on ensuring sufficiency of liquid assets to meet policy liabilities. Policyholders have priority claims over the tied assets. In addition, robust solvency requirements ensure there is enough capital to safeguard the insurers’ financial soundness under adverse conditions.

Assessment of Insurance Core Principles (ICPS)

A. Introduction and Scope

1. This report is a detailed assessment of Switzerland’s compliance with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS), as adopted in October 2011 and revised in October 2012. The review was carried out as part of the 2013 Financial Sector Assessment Program (FSAP) assessment of Switzerland, and was based on the regulatory framework in place, the supervisory practices employed, and other conditions as they existed in September 2013. The assessment was carried out by Dr. Rodolfo Wehrhahn, Technical Assistance Advisor in the Financial Supervision and Regulation Division, a part of the Monetary and Capital Markets Department, IMF and Ms. Mimi Ho, Consultant.

2. Switzerland has taken steps to address shortcomings identified in the last FSAP from 2005–2006. The insurance supervisor has enhanced inspection powers and supervisory processes, with increased emphasis on risk-based supervision, onsite inspections, reinsurance activities, enhanced corporate governance and risk management requirements and public disclosure.

B. Information and Methodology Used for Assessment

3. Supervision of the private insurance industry in Switzerland is the responsibility of the Swiss Financial Market Supervisory Authority (FINMA). FINMA is the supervisory authority of the insurance sector that includes insurers, reinsurers, intermediaries as well as entities and organizations which, in any form, perform functions partly included in the operational cycle of insurance or reinsurance undertakings.

4. The assessment is based solely on the laws, regulations and other supervisory requirements and practices that are in place at the time of the assessment in September 2013. Ongoing regulatory initiatives are noted by way of additional comments. The assessors had access to a complete self-assessment on the ICPs and responses to a detailed questionnaire FINMA provided prior to the commencement of the exercise. Anonymized examples of actual supervisory practices and assessments provided by the authorities enhanced the robustness of the assessment. Technical discussions with and briefings by officials from FINMA also enriched this report, as did discussions with industry participants.

5. The assessment has been informed by discussions with regulators and market participants. The assessors met with staff from FINMA, insurers, industry associations, professional bodies and audit firms. The assessors are grateful for the full cooperation extended by all.

6. The level of observance for each ICP reflects the assessment of the various standards there under. Each ICP is rated in terms of the level of observance as follows:

  • Observed—whenever all the standards are considered to be observed or when all the standards are observed except for a number that are considered not applicable.

  • Largely observed—where only minor shortcomings exist, which do not raise any concerns about the authorities’ ability to achieve full observance.

  • Partly observed—where, despite progress, the shortcomings are sufficient to raise doubts about the authorities’ ability to achieve observance.

  • Not observed—where no substantive progress toward observance has been achieved.

  • Not applicable—when the ICP is considered to be not applicable.

C. Overview—Institutional and Macroprudential Setting

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)

article image
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 4th highest in Europe1 and the 9th 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)

article image

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

article image
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

article image
Source: Authorities.
Table 5.

Switzerland: International Participation of the Insurance Groups, 2012

article image

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)

article image
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

article image
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)

article image
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)

article image
Source: Authorities.

No 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)

article image
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)

article image
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)

article image
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)

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

D. Key Risks and Vulnerabilities

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.

Figure 1.
Figure 1.

Switzerland: 10 Years Government Bonds Yields

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

Source: Bloomberg.

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.

Figure 2.
Figure 2.

Switzerland: Share Value of The Top Two Reinsurers

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

Source: Bloomberg.

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.

E. Preconditions for Effective Insurance Supervision

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

article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
Table 15.

Switzerland: Summary of Observance Level

article image
Table 16.

Switzerland: Recommendations to Improve Observance of the ICPs

article image
article image
article image
article image
article image

F. Authorities’ Responses to the Assessment

49. The Swiss authorities would like to thank the IMF for the thorough and professional assessment of Switzerland’s observance of the Insurance Core Principles of the International Association of Insurance Supervisors.

50. We are very pleased that the assessment recognizes the considerable work and progress Switzerland has made in these areas. While we appreciate the recognition on the regulatory side, we believe our efforts have been as strong on the supervisory side.

51. We were also pleased to see that in the most critical areas the assessment shows Switzerland in observance, and that our practices in the solvency area are recognized as market leading.

52. We acknowledge there are areas requiring further improvement. In some of these areas we had already begun actions prior to the assessment. In others we will be working on action plans as part of our commitment to continuous improvement. The IMF observations will be very useful in this regard.

53. In earlier exchanges with the IMF we shared observations on where we believe the assessment did not take sufficiently into account how Switzerland meets the spirit and substance of certain aspects of the ICP. Here we would like to summarize only two points.

Licensing

54. We strongly believe Switzerland meets the necessary threshold of observance of ICP 4 as a whole but also in respect of each of its components. Thus our review of our practices against each of the standards under ICP 4 shows consistency therewith. As we demonstrated, we have a clear and thorough licensing process, which has been improved further recently, including with the introduction of an approvals committee. We also interact with other supervisors where needed during the licensing review process to ensure all relevant considerations are taken into account. We do not deem the observations of the IMF—including regarding the current exemption for branches of foreign reinsurers which is already taken into account under ICP 13 — as sufficient for lowering our rating from “Observed” to “Largely Observed”.

Reinsurance

55. Switzerland effectively regulates and supervises reinsurers in a manner that we believe is consistent with the requirements of ICP 13. In earlier exchanges with the IMF, we indicated how we believe we meet ICP 13, including in respect of matters involving 1) treaties and documentation, 2) risk transfer, and 3) monitoring and acting on inappropriate risk concentrations. The fact that we currently do not supervise branches of foreign insurers is transparent in our law and supervision, though we will be considering ways to make this even better known publicly. Further, as already communicated, we will be considering changes to our regulation to cover branches of foreign insurers.

56. The Swiss authorities have already launched a process to systematically evaluate all IMF recommendations in order to assess in detail how, within which timeframe and to what extent the recommendations can be considered for implementation.

Detailed Assessments

Table 17.

Switzerland: Detailed Assessment of Observance of the ICPs

article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image
article image