A. Regulatory Structure

5. The Financial Market Supervisory Authority Act of 22 June 2007 (FINMASA) serves as an umbrella law for sector-specific laws governing financial market regulation and supervision. In addition to setting organizational parameters for FINMA as an institution including its liability, the FINMASA, together with two related Ordinances, defines principles for the regulation of financial market, as well as a set of harmonized supervisory instruments and sanctions. Eight sector-specific federal acts complement the FINMASA:

• Mortgage Bond Act of 25 June 1930;

• Federal Act on Contracts of Insurance of 2 April 1908;

• Collective Investments Act of 23 June 2006; Banking Act of 8 November 1934;

• Stock Market Act of 24 March 1995;

• Anti-Money Laundering Act of 10 October 1997;

• Insurance Supervision Act of 17 December 2004; and

• Financial Market Infrastructure Act of 19 June 2015.

6. The statutory framework for the regulation and supervision of private insurance business is provided both by the FINMASA and the Insurance Supervision Act (ISA). Whereas the FINMASA confers on FINMA the responsibility for insurance supervision in accordance with the ISA, and provides FINMA with the necessary supervisory powers and instruments, the ISA sets out the regulatory rules on the insurance business. The ISA thus defines the insurance-specific regulation, complementing the regulations defined in the FINMASA. The ISA lays down the general principles with regard to subject, purpose and scope of regulation and supervision, and contains provisions for the commencement, exercise and termination of insurance activities. There are also specific rules on ongoing supervision, safeguarding measures, cooperation and procedures, and sanctions, as well as regulations applying to individual lines of insurance. Finally, there are special rules for the supervision of insurance groups and insurance conglomerates.

7. Statutory ordinances issued by the Federal Council, the executive branch of government, and by FINMA implement the Financial Market Acts on a second and third level. Under the ISA, the specification of many of the details of insurance regulation is delegated by the Federal Parliament to the Federal Council (i.e., the executive branch of government). The Federal Council’s Ordinance on the Supervision of Private Insurance Companies (ISO) elaborates in more detail on the provisions of ISA. The ISO also delegates some rule-making powers to FINMA who has enacted an Ordinance on the Supervision of Private Insurance Companies (FINMA-ISO).

8. Circulars issued 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. These circulars address, inter alia, solvency, reserves and the investment of tied assets, governance and risk management, the position of the responsible actuary, the internal audit function and the external auditors, group supervision, and reporting. In the development of the SST, FINMA has specified a large number of technical details via circulars and guidelines, which are per se not binding in legal terms, but codify FINMA’s interpretations of the law. FINMA may thus take enforcement actions in case of non-compliance. While in the past the wide-spread use of internal models had caused some concerns about legal certainty, the increased level of standardization in the solvency regime has alleviated those concerns.

9. FINMA is the integrated supervisory authority for the Swiss Financial Market. FINMA supervises banks, insurance companies, stock exchanges and securities dealers as well as other financial intermediaries according to FINMASA as an umbrella-law, and the sector-specific financial market acts. 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 complaints body for decisions of the Takeover Board relating to public takeover bids for listed companies.

B. The Supervisory Authority

11. FINMA is an independent institution, being accountable to and subject to the overall supervision of the Federal Parliament and Government. However, this supervision is not interfering into concrete supervisory actions but is limited to checking if FINMA is correctly functioning and administering its resources. FINMA is financed by fees received from the supervised institutions such as banks or insurance companies. FINMA’s annual accounts are audited by the Federal Audit Office, but there are no regular assessments of the supervisory effectiveness by that institution.

12. 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.

13. FINMA has a two-tier board structure. The Management Board, headed by a Chief Executive Officer (CEO), has operational responsibility for FINMA, whereas the Board of Directors has oversight responsibility. This structure is designed to allow efficient decision making, while ensuring proper checks and balances and oversight. FINMA has an internal audit function whose role and responsibilities are defined in an Audit Charter. The Audit Charter guarantees the full independence of the audit function in carrying out its duties.

14. The Federal Council appoints the Board of Directors including the Chair and the Vice-Chair, and determines the level of remuneration. The Board of Directors has to comprise seven to nine expert members, who are independent of the supervised persons and entities. The Board of Directors is appointed for a term of office of four years; each member may be reappointed twice. The Federal Council removes members of the Board of Directors “if the requirements for holding office are no longer fulfilled” (Art. 9 paragraph 5 FINMASA).

15. The CEO and members of the Management Board are appointed by the Board of Directors. The appointment of the CEO is subject to approval by the Federal Council. Consequently, the Federal Council has to approve the decision of the Board of Directors to terminate the employment of the CEO “if the requirements for holding office are no longer fulfilled” (Art. 9 paragraph 5 FINMASA). Moreover, the ordinance on FINMA staff states that the termination of an employment contract must have objective grounds which have to be communicated to the person concerned in writing.

16. FINMA staff are not personally and directly liable in civil law for discharging their duties. Article 19 FINMASA determines that FINMA is liable if: a) its management bodies or its staff have committed a breach of fundamental duties; and b) loss or damage is not due to a breach of duty by a supervised person or entity. A breach of fundamental duties might have occurred if measures were taken in bad faith. FINMA therefore benefits from appropriate protection from being held liable for supervisory measures in good faith. Under criminal law, FINMA bears the expenses of a criminal procedure if a staff member acts in good faith. For a criminal procedure against staff of FINMA the criminal prosecutor needs an authorization of the Federal Department of Justice and Police.

17. FINMA can appoint third-party agents or mandataries to assist it in performing its duties—a practice far less common in insurance supervision than in banking supervision.

• Agents and mandataries are an essential element in FINMA’s repertoire of tools, giving the authority swift and flexible access to external experts when needed and enabling complex audits or investigations to be completed within a reasonable time. Agents can be deployed in every area of FINMA’s work. In terms of supervisory tasks, the types of agent or mandatary may include the following:

• Mandated auditors: Mandated auditors conduct audits on FINMA’s behalf as part of ongoing supervision of a supervised institution. They are used, for example, in response to special or institution-specific events if particular expert knowledge is required, or there are doubts about the quality of the audit conducted by the audit firm.

• Investigating agents: Investigating agents clarify circumstances relevant to enforcement proceedings or monitor the implementation of supervisory measures ordered by FINMA. In individual cases, they may be empowered to act in place of the intermediary’s executive bodies.

18. To ensure that an agent or mandatary can be deployed swiftly on matters of urgency, FINMA maintains a list of suitable candidates. They must have knowledge and experience of mandates in the specific field, as well as an appropriate infrastructure. The selection criteria include the nature and scope of the mandate, specialist expertise and experience, language skills, costs and availability at the time. If no suitable candidate is available, FINMA may also select from outside its list. Agents and mandataries must in all cases be independent of the supervised institution concerned. Mandataries are obliged to fulfil their mandates diligently and cost effectively. FINMA defines the content and the expected costs of the mandate at the outset. It also monitors discharge of the mandate on an ongoing basis and checks that costs remain proportionate. The costs of agents and mandataries are borne by the supervised institutions concerned.

19. In its Insurance Supervision Division, FINMA employs about 100 staff, which are considered adequately skilled by market participants. The Insurance Division of FINMA has adequate resources to perform its supervisory duties, including offsite monitoring and onsite inspections. The Insurance Division has about 100 full-time equivalents for this purpose, being structured as follows:

• Regular supervisory teams:

  • Two teams for smaller and medium-sized insurance companies (supervisory categories 4 and 5),²

  • One team for large insurance firms in supervisory category 3,

  • One team for groups and their insurance entities, and

  • One team each for Zurich Insurance Group and for Swiss Re Group.

• Two specialized supervisory teams for onsite inspections, and more intensive supervision.

• Specialized teams to support the supervisory teams:

  • Qualitative risk management,

  • Quantitative risk management and Swiss Solvency Test (insurance risks and financial risks), and

  • Actuarial office.

• Division operating office (including legal expertise and authorizations).

  The Insurance division can also:

  • Ask for cross-functional expertise on accounting and money laundering aspects; or

  • Task the Enforcement and Recovery and Resolution divisions with certain activities to help it with investigations and the implementation of supervisory measures.

20. While FINMA is the main supervisory body for the insurance sector, further authorities are in charge of supervising specific types of insurers and providers of retirement provisions. Basic (mandatory) health insurers are supervised by the FOPH. Undertakings providing both basic (mandatory) and supplementary health insurance in one single legal entity are supervised by the FOPH (supervision of the mandatory health insurance) and FINMA (supervision of the supplementary health insurance). In such cases of shared supervisory duties, FOPH is competent for the supervision of the institute, including the solvency position, whereby FINMA is competent for the supervision of the supplementary health products only. In those cases where one legal entity provides both types of health insurance could, conflicts of interest among supervisors in times of financial distress can potentially arise as policyholder interests in both schemes might differ.³ Cantonal small building insurers are supervised by cantonal authorities. More importantly, the occupational pension fund sector, comprised of nearly 1,700 rather heterogenous entities, managing close to CHF 1 trillion (149 percent of GDP), does not fall under FINMA’s supervision. Instead, it is supervised by a two-tier structure of eight cantonal authorities and a federal body which directly supervises certain entities, and exercises an indirect supervision of the sector by auditing the cantonal authorities.

C. Market Structure

24. The Swiss insurance market is large and well developed, with one of the highest penetration and expenditure per capita ratios in the world. As of end-2017, there were 204 insurance and reinsurance companies licensed in Switzerland, down from 223 in 2013. Most of these companies (130) were non-life insurers, in addition there were 28 reinsurers, 27 captives, and 19 life insurers. With USD 6,811 per capita in 2017, Switzerland recorded the third highest insurance density in the world (behind the Cayman Islands and Hong Kong), according to Swiss Re data⁴. The insurance penetration (premiums as a percentage of GDP) reached 6.9 percent—the thirteenth highest in the world and the sixth highest in Europe (behind Finland, Denmark, United Kingdom, the Netherlands, and France). Switzerland is home to large internationally active insurance groups, including one of the two largest reinsurers in the world. Accordingly, the share of domestic business for the two largest groups is only very minor. The majority of the business is generated by tied agents, followed by brokers, while banks and post offices play a relatively minor role. Most insurers use a multiple distribution strategy (including direct offerings).

Table 2.

Switzerland: Number of Insurance Companies

The number of life and non-life insurers as well as of captives has been declining since 2013, while new companies enter still regularly, particularly in non-life.

Source: FINMA.

Table 2.

Switzerland: Number of Insurance Companies

The number of life and non-life insurers as well as of captives has been declining since 2013, while new companies enter still regularly, particularly in non-life.

Number of Insurers (year-end)
		2013	2014	2015	2016	2017
	Life	23	21	20	19	19
	Non-life	138	141	135	133	130
	Reinsurance	28	29	30	30	28
	Captives	34	33	29	25	27
	Total	223	224	214	207	204
New Entries of Insurers
	Life	0	1	0	0	0
	Non-life	3	4	1	2	2
	Reinsurance	2	2	1	0	2
	Captives	0	0	1	1	2
	Total	5	7	3	3	6
Exits of Insurers
	Life	0	3	1	1	0
	Non-life	3	1	7	4	5
	Reinsurance	3	1	5	0	4
	Captives	0	1	0	5	0
	Total	6	6	13	10	9

Source: FINMA.

View Table

Table 2.

Switzerland: Number of Insurance Companies

The number of life and non-life insurers as well as of captives has been declining since 2013, while new companies enter still regularly, particularly in non-life.

Number of Insurers (year-end)
		2013	2014	2015	2016	2017
	Life	23	21	20	19	19
	Non-life	138	141	135	133	130
	Reinsurance	28	29	30	30	28
	Captives	34	33	29	25	27
	Total	223	224	214	207	204
New Entries of Insurers
	Life	0	1	0	0	0
	Non-life	3	4	1	2	2
	Reinsurance	2	2	1	0	2
	Captives	0	0	1	1	2
	Total	5	7	3	3	6
Exits of Insurers
	Life	0	3	1	1	0
	Non-life	3	1	7	4	5
	Reinsurance	3	1	5	0	4
	Captives	0	1	0	5	0
	Total	6	6	13	10	9

Source: FINMA.

25. There has been a material decline in new individual life business over the last years, in particular with regard to traditional (guaranteed) life products. Compensating for this decline, hybrid products are offered which are partially unit-linked and partially classic long-term interest rate guarantees (currently with a maximum 0.05 percent for single premium and 0.25 percent for annual premium due to regulatory requirements). Furthermore, products with shorter-term guarantees and “capital light” products with internal equalization reserves have been introduced by some companies.

26. In group life business, insurers scaled back the available capacity in the full coverage insurance sector (“Vollversicherung”) and concentrated instead on reinsuring the risks of death and disability. Full coverage contracts are contracts in which the life insurer assumes full ownership of the capital investments, manages them and bears the investment risk as well as the longevity risk. The main products sold are still full insurance contracts, but new business acceptance is highly selective, and insurers are trying to grow in the business of semi-autonomous pension schemes with coverage for death and disability. Group life insurance contracts in Switzerland are relatively short term by statutory requirements which foresee a maximum term of five years.

Table 3.

Switzerland: Premium Income

Health insurance and group life occupational pension schemes are by far the most important lines of business for non-life and life insurers, respectively.

Source: FINMA.

Table 3.

Switzerland: Premium Income

Health insurance and group life occupational pension schemes are by far the most important lines of business for non-life and life insurers, respectively.

Non-life: Gross premiums written (CHF million, 2017)
	Health	10.675	38,6%
	Fire/property	3.988	14,4%
	Land vehicles (comprehensive)	3.309	12,0%
	Accident	3.031	11,0%
	Land vehicles (liability)	2.690	9,7%
	Liability	1.976	7,1%
	Legal expenses	618	2,2%
	Financial losses	433	1,6%
	Marine, aviation and transport	352	1,3%
	Credit and surety	332	1,2%
	Tourist assistance	244	0,9%
	Total	27.648	100,0%
Life: Gross premiums written (CHF million, 2017)
	Group life occupational pension schemes	22.399	71,0%
	Classical individual capital insurance	4.240	13,4%
	Unit-linked life insurance	1.664	5,3%
	Classical individual annuity insurance	313	1,0%
	Capitalization and tontines	258	0,8%
	Life insurance linked to internal investment positions	198	0,6%
	Other life insurance segments	497	1,6%
	Health and casualty insurance	4	0,0%
	Foreign branches	1.603	5,1%
	Reinsurance accepted	368	1,2%
	Total	31.544	100,0%

Source: FINMA.

View Table

Table 3.

Switzerland: Premium Income

Health insurance and group life occupational pension schemes are by far the most important lines of business for non-life and life insurers, respectively.

Non-life: Gross premiums written (CHF million, 2017)
	Health	10.675	38,6%
	Fire/property	3.988	14,4%
	Land vehicles (comprehensive)	3.309	12,0%
	Accident	3.031	11,0%
	Land vehicles (liability)	2.690	9,7%
	Liability	1.976	7,1%
	Legal expenses	618	2,2%
	Financial losses	433	1,6%
	Marine, aviation and transport	352	1,3%
	Credit and surety	332	1,2%
	Tourist assistance	244	0,9%
	Total	27.648	100,0%
Life: Gross premiums written (CHF million, 2017)
	Group life occupational pension schemes	22.399	71,0%
	Classical individual capital insurance	4.240	13,4%
	Unit-linked life insurance	1.664	5,3%
	Classical individual annuity insurance	313	1,0%
	Capitalization and tontines	258	0,8%
	Life insurance linked to internal investment positions	198	0,6%
	Other life insurance segments	497	1,6%
	Health and casualty insurance	4	0,0%
	Foreign branches	1.603	5,1%
	Reinsurance accepted	368	1,2%
	Total	31.544	100,0%

Source: FINMA.

27. For private clients, the main non-life products are complementary health insurance, home insurance, motor insurance, liability insurance and accident insurance, but a lot of other products cover almost every insurable niche. There is no approval on property& casualty tariffs and products (except certain health and accident products with a social security function). Natural catastrophe insurance (excl. earthquake) is mandatory together with fire in most cantons, and building insurance is a state monopoly in 19 of 26 cantons.

28. Swiss reinsurers are typically very international and domestic business often accounts for less than 5 percent of total underwritten business. In terms of specific products emerging, cyber risks might create business opportunities. Swiss reinsures are as their international peers active providing some capacity with rather small limits considering the uncertainties in pricing models.

29. The sector has accumulated almost CHF 700 billion in balance sheet assets (104 percent of GDP), with the life insurance sector being the largest segment, accounting for 51 percent of total assets. Almost 40 percent of insurers’ assets are invested in sovereign and corporate bonds, but also stocks and (mostly domestic) real estate account for sizable portions with 16 and 8 percent, respectively. As investment opportunities in Swiss francs are rather limited, the (primary) insurers’ investment assets are more diversified in foreign currencies than the currency breakdown of liabilities would suggest. This mismatch is usually hedged with derivatives.

View Full Size

Switzerland: Asset Allocation in the Insurance Sector

Citation: IMF Staff Country Reports 2019, 185; 10.5089/9781498321693.002.A001

Source: IMF staff calculations based on FINMA data. Notes: Reinsurance includes captives.

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A. Prudential Regulation

Capital Adequacy

51. The capital adequacy regime in Switzerland is one of the most developed in the world. The Swiss Solvency Test (SST), formally introduced in 2006 and fully applicable since 2011, provides a robust solvency regime for the insurance sector, and has contributed to a proliferation of modern risk management practices across the sector. It uses a total balance sheet approach to measure available capital (“risk-bearing capital” in SST terminology) at the measurement day, typically 1 January of a calendar year. Positions are valued market-consistently. The insurer’s own credit standing cannot be taken into account in the valuation of its own insurance liabilities and own other liabilities. In order to provide a full economic picture, the SST has no concept of off-balance sheet positions. It therefore includes positions which would be termed “off balance sheet” in traditional accounting terminology, for example contingent assets and liabilities. Consequently, it ensures the provision of a full economic picture while excluding any corporation tax items consistent with its gone-concern perspective.

52. While originally the SST relied a lot on insurance companies developing their own internal models for calculating their capital requirements, a revision of the ISO in 2015 led to a promotion of standard models which were subsequently developed by FINMA in cooperation with the insurance sector. As a result, only a few large (and complex) companies now use an internal model.

53. The risk-bearing capital is compared to the target capital which is a measure of the risk to which the insurer is exposed to during the next twelve months after the valuation day. Risk is measured as the tail value at risk at 1 percent of the discounted change of the risk-bearing capital over a one-year period allowing for risk mitigating features of eligible risk-absorbing capital instruments. The risk types to be taken into account are, as a minimum, market risk, credit risk and insurance risk. If other risk types such as operational risks or concentration of risks are not properly reflected in an insurer’s SST figures, then FINMA uses deductions from the risk-bearing capital or add-ons to the target capital.

$CoreCapital=A[L-\frac{MV{M}_1}{1+r_{0,1}}]-Corrections,$

54. In the SST, risk bearing capital is composed of two layers called core capital and complementary capital. Core capital is defined as market value of assets (A) minus market value of liabilities (L) plus the market value margin (MVM):

Liabilities do not include own credit standing, i.e., it is assumed for the purpose of valuation that the insurer fulfills its financial obligations as they fall due. Subordinated debt is not part of core capital, therefore core capital is considered to absorb losses in a going-concern as well as in a winding-up situation. “Corrections” in the above formula refer to deductions of (a) foreseen dividend payments to shareholders, (b) own shares, (c) potential immaterial funds, and (d) deferred taxes for real estate in Switzerland.

55. Complementary capital consists of eligible risk-absorbing capital instruments, which include hybrid instruments, if they meet the following conditions:

• Instruments are paid-in;

• Instruments cannot be offset against other obligations;

• Subordination is contractually fixed and irrevocable;

• The insurer has the right to suspend interest payments;

• The notional debt and interest bear losses of the company without triggering the winding-up of the firm;

• Notional is not callable by the investor before the date of redemption, except in case of the liquidation of the insurer; and

• Redemption prior to maturity needs the approval of FINMA.

56. Insurers usually determine the SST figures net of reinsurance. The ISO allows the calculation net of reinsurance provided the risk-mitigating effects can be captured appropriately. In particular, the reinsurer’s counterparty credit risk must be taken into account. Eligible guarantees are recognized as part of the market-consistent balance sheet at their current market-consistent price, which is usually considerably lower than the notional amount or the guaranteed sum. The risk-mitigating effect of guarantees might be captured in the target capital, subject to FINMA approval of the guarantee in question, and its appropriate modelling.

57. An insurer meets the solvency condition under the SST if the risk-bearing capital is at least equal to the target capital. The SST ratio is the ratio of the risk-bearing capital less the expected value of the discounted market value margin in the numerator, to the target capital less the expected value of the discounted market value margin in the denominator, if the latter is positive. If this term is not positive, no SST ratio can be reported. The SST ratio is also shown in the following formula:

$SST-ratio=\frac{RB{C}_0-\frac{MV{M}_1}{1+r_{0,1}}}{TC-\frac{MV{M}_1}{1+r_{0,1}}}$

58. Each insurer is required to submit an SST report on an annual basis to FINMA. In addition, every insurer is required to determine and report the target capital and the risk bearing capital if its risk situation changes considerably.

59. Supervisory intervention levels are defined as specific levels of the SST solvency ratio, corresponding to four zones in which an insurance company can find itself:

• Green zone: the SST ratio exceeds the 100 percent threshold;

• Yellow zone: the SST ratio is between the 100 and 80 percent thresholds;

• Orange zone: the SST ratio is between the 80 and 33 percent thresholds; and

• Red zone: the SST ratio is below the 33 percent threshold.

60. If an insurance company is in the yellow or orange zone, the company draws up an action plan based on realistic assumptions and submits it to FINMA for approval within two months of this being established. The action plan is designed such that, with a high probability,

• The company can reach the green zone from the yellow zone, normally within three years;

• The company can reach the yellow zone from the orange zone, normally within two years, and then reach the green zone, normally within another three years.

61. If an insurance company is in the red zone, it must submit emergency measures to protect policyholders to FINMA for approval without delay. It must be immediately transparent to FINMA whether the emergency measures will result in the company leaving the red zone within a short period of time. If the insurance company is unable to take emergency measures that are likely to be effective, and the measures ordered by FINMA under Article 51 ISA are not effective within a short period of time, FINMA will withdraw the license.

62. In determining the target capital, an insurance company has to employ a risk model that reflects its relevant risks in a suitable manner. Following the amendment of the ISO in 2015, there is a precedence for standard models, and FINMA is asked to provide various standard models that can be used as a modeling approach for reflecting the risk profile of most of the supervised entities, and which of the standard models an individual insurance company has to use. Standard models and their technical documentation are published on FINMA’s website, and during the development, reviewing and refining of the standard models, FINMA consults with the insurance companies affected, either directly or indirectly via the relevant associations (e.g., the Swiss Insurance Association). The following standard models are currently in use:

View Full Size

Switzerland: Swiss Solvency Test Modules

Citation: IMF Staff Country Reports 2019, 185; 10.5089/9781498321693.002.A001

Source: FINMA.

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63. (Partial) internal models can be used to quantify the risk of an insurance company only if none of FINMAs standard models is appropriate to reflect its risk profile. Such internal models always have to be approved by FINMA. The definition of target capital does not distinguish between standard model and (partial) internal models. Therefore, the modeling criteria (risk measure, level of safety and time horizon) apply equally for (partial) internal models as for the standard model.

64. Following the amendment of the ISO in 2015, FINMA has redesigned its approval process of (partial) internal models. As a first step, FINMA now conducts a summary review, focusing primarily on whether the (partial) internal model sufficiently reflects the material risks, the completeness of the internal model documentation, and compliance with the qualitative and organizational requirements. FINMA may approve the internal model for which the application is made subject to collateral clauses, adjustments or deductions from the risk-bearing capital or add-ons to the target capital. The insurance company has to conduct a regular review of the SST model accepted by FINMA, in particular with regard to whether it still sufficiently reflects the risk situation. Summary reviews, once carried out, are subsequently complemented by so-called material reviews. In case of an approved internal model for which a summary review has already been carried out, FINMA may only compel an insurance company to replace such a model on the basis of a material review conducted by FINMA or a material change in circumstances.

65. The solvency of a Swiss domiciled insurance group is measured by the group SST. There are two approaches to determine group solvency for insurance groups under group supervision of FINMA:

• Consolidated group SST: The group is modelled under the assumption that the assets and liabilities of all group companies are consolidated in a single, fictional legal entity (consolidated entity), and the target capital (required capital) and risk-bearing capital (available capital) are determined for the consolidated entity. The solvency condition for the consolidated group SST is met if the consolidated risk-bearing capital is at least equal to the consolidated target capital.

• Granular group SST: The group is modelled as a network of granular entities with intra-group participations and intra-group transactions between them. A granular entity is a single legal entity of the group or a cluster in the form of a sub-consolidation of several legal entities within the group. The solvency condition for the granular group SST is met if it is satisfied by each granular entity.

B. Winding-up, Recovery and Resolution

73. The Insurance Supervision Act (ISA) defines several options for exiting the market:

• Liquidation of solvent insurers (if FINMA revokes the license);

• Liquidation of insolvent insurers (insurance bankruptcy); or

• Exit from the market after voluntary surrender of the license (a liquidation is possible, but not compelling in every case).

74. If there is a justified concern that an insurer is over-indebted or has serious liquidity problems and a recovery is not possible, FINMA revokes its license and starts bankruptcy proceedings. But even before reaching this point, FINMA can revoke the permission to continue the business if the insurer no longer fulfills the requirements for its activity or seriously violates the supervisory provisions or the interests of the insured are endangered. In particular, FINMA will usually revoke the permission if the SST ratio is at or below 33 percent. FINMA can impose other measures in case of immediate risks to policyholder interests.

75. FINMA has the exclusive competence to declare an insurance company insolvent and to initiate a resolution procedure. There is no need for further court approval. After opening a resolution procedure FINMA is responsible for conducting the resolution procedure. FINMA can appoint a (bankruptcy) liquidator and oversee its activities. The courts do not have a direct function in the resolution of an insurer. They serve as a possibility to appeal the decrees of FINMA. Hence the decree to initiate resolution procedures is subject to appeal to the Federal Administrative Court and ultimately to the Swiss Supreme Court. In bankruptcy proceedings, the creditors and owners of an insurer may only appeal against realization activities.

76. There are special bankruptcy rules designated for insurance companies. The general process is based on normal bankruptcy proceedings, but special rules were required for the following reasons:

• Shift of competence for opening and conducting resolution procedures from the regular courts to FINMA;

• Speeding up the conduct of resolution procedures; and

• Dealing with the special feature of tied assets.

77. The policyholders in direct insurance are protected through the tied assets. All claims arising from insurance contracts must be secured with tied assets. In case of an insolvency proceeding all tied assets are for the sole use of compensating policyholders. Only if all claims of policyholders have been satisfied can a surplus be used to compensate other creditors. Furthermore, the IBO-FINMA aims to achieve the timely payout of benefits to policyholders. For example, FINMA is able to make up-front payments to policyholders even before their claim has been legally determined in the schedule of claims. To enable this there are strict rules on the composition of the tied assets, their security and the ability to sell them quickly if needed.

78. In reinsurance where there are no tied assets the policyholders are currently treated as regular, non-privileged creditors. In the current revision of the ISA a provision is being added that treats all policyholders as privileged to other regular creditors. This will enhance the protection of policyholders in reinsurance.

79. In 2018, the authorities initiated a public consultation on amendments to the Insurance Supervision Act that would cover the restructuring of insurers in the event of a crisis. The proposed amendments vest in FINMA restructuring powers when an insurer experiences financial distress. Although insurance resolution is subject to ongoing regulatory developments at the international level, several emerging policy positions may guide the development of the insurance resolution framework. The authorities may consider, for example, enabling FINMA to exercise resolution powers without requiring the consent of interested parties, incorporating provisions on run-off or envisaging the possibility of transferring reinsurance contracts associated with the transferred policies in resolution. Box 1 discusses these concepts in greater detail.

C. Business Conduct

80. A fundamental objective of insurance regulation is to protect policyholders. This is elaborated further in the Insurance Supervision Act (ISA), the Insurance Supervision Ordinance (ISO) and the Insurance Contract Act (ICA)—especially the latter sets out the requirements on what needs to be disclosed to the customer before the conclusion of a contract and on the duration of the contract. The Unfair Competition Act also plays an important role in the protection of insurance customers. However, Swiss legislation is generally built on the assumptions that customers are mature economic subjects and able to understand and evaluate insurance contracts. The focus in this area is therefore primarily on transparency and the fight against misuse.

81. In those limited situations where FINMA approves products, it has more opportunity to consider the angle of consumer protection. This is the case for tariffs and General Insurance Conditions used in Switzerland for the insurance of risks in occupational pension plans for employed persons and for supplementary insurance to the basic (mandatory) health insurance. Also, with regard to natural hazard insurance, the scope of coverage and the premium rating for such insurance is uniform and binding for all insurers. FINMA examines within the approval process on the basis of the tariff calculations submitted by the insurance companies whether the proposed premiums are within a range which on the one hand is not threatening the solvency of the individual insurance undertaking and on the other hand protects insured persons against misuse.

82. There are some planned legislative actions to improve disclosure and advice with regard to insurance products with an investment character. The proposed revision of the ISA is expected to introduce more stringent rules on:

• Documentation of products characteristics in a “Key Investor Document”; and

• Conduct and organization of financial service providers (“Know your customer”: review of appropriateness and suitability, documentation and accountability, third-party remuneration).

83. Insurance intermediaries who are not legally, economically or in any other way tied to an insurance company must register with FINMA prior to engaging in their intermediation activities. Registration is voluntary for the remaining insurance intermediaries (“tied insurance intermediaries”) which are indirectly subject to FINMA’s supervision over the responsible insurer.

84. Various formal requirements have to be met by insurance intermediaries. Any insurance intermediary who applies for registration has to demonstrate that he has adequate professional knowledge and experience or in case of a legal entity that it has sufficient staff with these qualifications. Individuals also have to demonstrate that they have no criminal conviction for behavior not compatible with their intermediation activities and that they are not subject to insolvency procedures related to their intermediation activities. All registered insurance intermediaries are required to have a professional liability insurance with a coverage of at least CHF 2 million per year. Finally, insurance intermediaries who handle client monies are required to be licensed according to the Anti-Money-Laundering Act.

85. If an insurance intermediary is found not to meet the regulatory requirements, FINMA would set a deadline by which these have to be restored. If an insurance intermediary fails to do this, FINMA would ultimately withdraw the registration. FINMA also carries out supervisory reviews of unregistered insurance intermediaries should it become aware of alleged activities of insurance intermediation.

86. There is scope for improvement in respect of conduct after registration, where the current requirements and supervision are more limited. The planned revision of the ISA includes a further strengthening of the framework against abusive practices in the market. Intermediaries will be required to exercise good conduct. If an intermediary fails to meet this requirement, FINMA will have a broad tool box for an appropriate supervisory response, ultimately leading to the exclusion of the intermediary from the market.

A. Supervisory Review and Reporting

89. FINMA applies a proportional and risk-based approach that applies to all areas of supervision. All of the institutions FINMA supervises are put into one of six categories, five of which are relevant in insurance supervision. Insurance companies are allocated mainly according to their risk impact on policyholders but also the system as a whole, as well as the reputation of the Swiss financial sector. None of the Swiss insurance companies is in Category 1 which is reserved for systemically relevant undertakings. The five insurers in Category 2 are primarily large, internationally active companies. Category 3 includes a varied cluster of 38 mid-sized insurers, which—with the exception of reinsurers—are generally focused on the Swiss market. The 161 companies included in Categories 4 and 5 are smaller companies. Many are subsidiaries or branches of non-Swiss insurers or domestic undertakings with a restricted business focus.

90. In addition to being allocated to a category, each institution receives a rating corresponding to FINMA’s assessment of its current state. These two parameters— categorization and institution rating—serve as the basis for determining the extent of supervision and the use of supervisory instruments. The aim is to achieve a more proportional approach and systematic risk focus of supervisory activities.

91. The supervisory cycle builds on annual supervisory reporting and audit reports. Insurers must submit their annual supervisory reporting by end-April every year while reinsurers must submit their reports by end-June. Within the supervisory cycle, the audit companies perform regulatory audits on an annual basis according to the standard audit strategy and based on audit programs defined and provided by FINMA. Regulatory audits cover tied-assets, provisions, pension fund business, internal control systems, business continuity management and specific topics in the context of group supervision. FINMA examines these documents and concludes its reviews by providing feedback to the companies at the end of October.

92. In 2018, supervisory activities continued to focus on corporate governance whereby robust and stress-resilient structures were seen a priority by FINMA. Close attention is also paid to the impacts of the low interest rate environment. Ensuring that life insurers are maintaining adequate levels of reserves remains at the center of these activities. In 2018, all insurance companies published their financial reports including their solvency ratios for the first time.

93. Onsite reviews with an emphasis on identified risks play an important role. To make this supervisory instrument as effective as possible, FINMA’s activities aims to ensure that all information on the condition of the insurance companies is analyzed systematically. Currently, two teams with 13.5 full-time equivalents are dedicated for onsite reviews, with support from other supervisory and expert staff. Focus topics in 2017 were corporate governance and internal control systems, ceded reinsurance/retrocession, tied assets, variable annuities and closed portfolios.

94. The frequency of onsite inspections depends on several factors, including the supervisory category and the rating of the insurer. In the last three years, eight out of the 49 big-and medium-size insurers and insurance groups were inspected onsite annually, 16 have been inspected onsite at least twice within three years. Besides onsite inspections, FINMA holds high-level meetings with the board of directors and executive management of the insurance companies (category 2 and insurance groups) as well as regular key account management meetings with the relevant function holders within the insurance companies (categories 2 and 3) and groups. Onsite inspections are conducted on the basis of a rolling schedule or “pipeline”. This takes into account the supervisory category, key topics and the ratings of the supervised insurer, as described above. This rolling schedule allows FINMA to react quickly if further investigations are required or if the rating of an insurer changes.

B. Corporate Governance and Risk Management

96. FINMA has intensified its efforts in supervising the governance structure and internal control systems of insurance companies. The governance assessment involves evaluating periodically collected information about an insurer’s corporate governance by focusing on the insurer’s underlying governance structures, its supervisory and management bodies (board of directors, executive board) and its control functions (risk management, compliance and internal revision). The data collected allows FINMA to evaluate the insurer’s governance structures and identify any deficiencies. Collecting the data periodically also allows FINMA to monitor any developments made in corporate governance during a particular period. Governance assessment findings are included in the overall assessment of the insurer and in FINMA’s supervisory process. These can lead to follow-up activities at individual insurance companies, as well as for the entire market or for a selected group of insurance companies. With the audit program the insurer’s internal control system on an entity level is assessed every two years by the external auditor. It provides considerable insight on the effectiveness and robustness of the internal control systems in place.

97. Swiss insurers have to perform an ORSA process and to document comprehensively its risk situation and solvency capital requirements. All processes and procedures used which are appropriate to the nature, scale and complexity of the risk have to be documented and used for capital management and solvency purposes. The results are to be documented in the annual ORSA Report under the responsibility of the board. Insurers provide FINMA with a report on the results of the ORSA process. Within the ORSA process the insurer has to analyze the impact of various downside scenarios including at least one scenario which is threatening the going-concern. The scenario analysis has to cover and quantify the impact in all relevant capital views (e.g., SST, statutory, IFRS/GAAP, etc.).

98. With respect to operational risks, FINMA normally does not require quantification for regulatory capital purposes under the SST. However, it does expect the identification, assessment and management of operational risks. If these results either require additional capital or could put regulatory solvency at risk, FINMA has the possibility to intensify its supervision of operational risks and/or increase the required capital under the SST. Furthermore, FINMA considers operational risk in its requirements regarding outsourcing.

C. Cross-Border Cooperation

100. FINMA leads five supervisory colleges in its role as group-wide supervisor and participates in 14 foreign colleges as host supervisor. From a home perspective, six insurance groups are under FINMA group supervision, of which five are cross-border groups with established FINMA-led supervisory colleges. Since 2016, FINMA has signed coordination agreements with all host supervisors participating in these supervisory colleges. The coordination agreements set out rules for cooperation between supervisors in the colleges (including confidentiality provisions).

101. FINMA-led supervisory colleges are permanent platforms for cooperation between various authorities which are involved in the supervision of a group or conglomerate. The aim of this regular exchange of information and experience is to step up cooperation between supervisory authorities and improve supervision of internationally active groups and conglomerates by means of:

• A yearly in-person meeting in (June or July) including written exchange of quantitative and qualitative information beforehand;

• For the two big colleges an interim call (November), and for the smaller colleges when needed or requested;

• A mid-year written information exchange about qualitative information (e.g., risk management, compliance, supervisory activities); and

• Ad-hoc cooperation on a multilateral or bilateral basis.

102. From a host perspective, FINMA decides to participate in foreign supervisory colleges based on a risk-based and proportionate approach. Criteria considered include the importance of the solo entity in the Swiss market, its interaction with the group and the importance of the Swiss entity for the group. In practice, this means that FINMA participates in supervisory colleges where the entity supervised by FINMA falls within supervisory categories 2, 3 or 4. For entities in category 5, FINMA usually does not participate in the colleges concerned. A decision on non-participation is coordinated with the responsible group-wide supervisor, whom FINMA always offers bilateral cooperation as an alternative. Currently, FINMA participates in 14 foreign supervisory colleges as a host supervisor and in all the regular and ad-hoc written information exchange initiatives as defined by the responsible group-wide supervisor. In the case of AXA, as it is a G-SII and given the size of its entities in Switzerland, FINMA also participates in the respective Crisis Management Group led by the French insurance supervisory authority.

103. In accordance with international standards, FINMA is legally authorized to share non- public information with foreign financial market supervisory authorities, facilitated by a wide range of cooperation agreements. FINMA has been an IAIS Multilateral Memorandum of Understanding (MMoU) signatory since 2011. With the signatories FINMA can share non-public information based on the MMoU. FINMA has also signed bilateral MoUs with the competent insurance supervisors of all EEA countries (except for Croatia, which was not an EU country at the time of signature). Furthermore, FINMA has concluded bilateral MoUs with the European Insurance and Occupational Pension Authority (EIOPA), various U.S. insurance supervisors, the Australian insurance supervisor (Australian Prudential Regulation Authority, APRA), the Dubai Financial Services Authority (DFSA) and the Monetary Authority of Singapore (MAS).

D. Macroprudential Surveillance

104. FINMA has set up a comprehensive assessment of the risk drivers that could lead to financial instability and the possible mitigating actions. The assessment is undertaken semi-annually within the “risk barometer” process and takes into accounts insights gained by national and international authorities. The risk drivers considered are grouped into: (1) macroeconomic and capital markets; (2) compliance and conduct; (3) operational; and (4) other. The macroeconomic and risk analysis is followed by discussions with supervision staff, in which the impact of identified risks is assessed and measures that could effectively improve the resilience of the financial sector are evaluated. The impact analysis is regularly discussed with FINMA’s board of directors and executive board. Focusing on the development of the Swiss real estate market, the “Real Estate Barometer” analyzes on a semi-annual basis the latest developments in mortgage interest rates, domestic mortgage claims, real estate prices, rents and housing construction in depth.

105. Monitoring exposures towards the banking sector, in particular via contingent convertible bonds, is incomplete. Regular reporting to FINMA does not address exposures towards any special sector. During and after the financial crisis in 2008, FINMA established temporary quarterly reporting addressing explicitly the exposures towards the banking sector. This reporting ended in October 2015. From that point, some exposure data was only collected through targeted surveys, e.g., via a high-yield bond survey undertaken in 2016. Some insurers report on their exposures in bank bonds in their SST report on a voluntary basis, but as this is not required, FINMA has no overall view about trends in these exposures.

106. FINMA publishes aggregated market data in its annual “Insurance market report”. Aggregated results for insurance branches (life, non-life, health and reinsurance) for the SST including assets and liabilities composition, market risk analysis, interest risk analysis and all scenarios are published in the annual SST Survey.

107. In Switzerland, the too-big-to-fail discussions have produced a different result for banks and insurances: Two banks (Credit Suisse and UBS) have been identified as global systemically important banks, and three other banks (Raiffeisen, ZKB, and Postfinance) are recognized as being domestically relevant. Additionally, three financial market infrastructures (Swiss Interbank Clearing payment system, SIX SIS central securities depository including the SECOM securities settlement, and SIX x-clear, the central counterparty) have been identified as systemically relevant, but none of the insurance companies. FINMA actively participates in the IAIS process designed to evaluate potential G-SIIs, however the final designation will be decided by the Financial Stability Board and FINMA after consultation of the IAIS.