## 1cheea2019005

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### INTRODUCTION
- Part of the 2019 Financial Sector Assessment Program (FSAP); based on regulatory framework and supervisory practices as of November 2018.
- Reviews selected Insurance Core Principles (ICPs) (October 2011 ICPs as revised in November 2017) focusing on 15 ICPs with macrofinancial relevance and material regulatory changes.
- Key ICPs analyzed include solvency requirements (valuation and capital adequacy), risk management (including reinsurance), business conduct (including insurance intermediaries), supervisory approach (including supervisory authority, supervisory review, macroprudential surveillance), group supervision and cross-border cooperation.
- Updates developments and risks to the Swiss insurance sector, including consolidation driven by the continuing low interest rate environment. A separate technical note summarizes stress test results.

### MARKET OVERVIEW AND KEY STATISTICS
- Switzerland hosts a highly developed insurance market with large internationally active groups, including one of the two largest reinsurers globally.
- 2017 sector and market statistics:
  - 2017 gross premium income: CHF 130 billion.
  - Sector balance sheet assets: almost CHF 700 billion (104 percent of GDP).
  - Life insurance sector share of total assets: 51 percent.
  - Asset allocation highlights:
    - Almost 40 percent of insurers’ assets are invested in sovereign and corporate bonds.
    - Stocks account for 16 percent.
    - Real estate accounts for 8 percent (mostly domestic).
- Solvency and profitability:
  - Solvency ratios (since 2014/15): life sector on average about 180 percent; non-life sector on average about 230 percent.
  - Non-life insurers: combined ratios consistently below 90 percent over last five years; return on equity averaged 17 percent.
  - Investment yields: came down from 3.3 percent in 2013/14 to 2.5 percent in 2017.
  - Return on equity averaged 8 percent over the last five years (sector aggregate).
- Market structure and distribution (end-2017):
  - 204 insurance and reinsurance companies licensed (down from 223 in 2013).
    - 130 non-life insurers.
    - 28 reinsurers.
    - 27 captives.
    - 19 life insurers.
  - Insurance density (2017): USD 6,811 per capita.
  - Insurance penetration (premiums as percentage of GDP, 2017): 6.9 percent.
  - Distribution: majority via tied agents, followed by brokers; banks and post offices minor.
- 2017 gross premiums written (CHF million, totals and shares preserved):
  - Non-life total: 27.648  100,0%
    - 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%
  - Life total: 31.544  100,0%
    - 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: 40  0,0%
    - Foreign branches: 1.603  5,1%
    - Reinsurance accepted: 368  1,2%

### REGULATORY FRAMEWORK AND THE SWISS SOLVENCY TEST (SST)
- SST in place since 2011; market-consistent valuation central to the regime.
- Rule-making hierarchy:
  - FINMASA (Financial Market Supervisory Authority Act of 22 June 2007) as umbrella law.
  - Insurance Supervision Act (ISA of 17 December 2004).
  - Federal Council’s Ordinance on the Supervision of Private Insurance Companies (ISO) and FINMA’s Ordinance on the Supervision of Private Insurance Companies (FINMA-ISO).
  - FINMA circulars/guidelines specify technical SST details but are non-binding; FINMA reviewing whether more SST features should be binding Ordinances.
- Valuation principles:
  - SST uses market-consistent valuation for assets and liabilities; insurance liabilities = best-estimate + market value margin (MVM).
  - Best-estimate: discounted expected future contractually agreed cashflows using a risk-free yield curve; excludes future non-guaranteed bonuses and future company taxes; prohibits explicit or implicit prudence margins.
  - MVM: cost-of-capital approach using 6 percent above the risk-free rate for capital costs; discounts expected future capital costs.
  - Discounting and UFR:
    - FINMA provides risk-free yield curves in CHF, EUR, USD, GBP as at 1 January each year.
    - UFR for CHF equals 2.55 percent for SST 2018; FINMA communicated lowering it by 15 basis points each year during at least the course of the next four years to reach 1.95 percent in 2022.
    - For EUR, USD, GBP FINMA UFR is 30 basis points lower than respective Solvency II UFRs.
- Tied asset regime:
  - Primary insurers must ensure claims are covered by tied assets (Art. 17 ISA).
  - Eligible asset types defined in Art. 79 ISO; valuation upper bounds in FINMA Circular 2016/5 with three valuation patterns: market value, nominal value, amortized cost.
- Capital adequacy and SST mechanics:
  - Total balance sheet approach measuring available capital (“risk-bearing capital”) versus target capital (risk exposure over next twelve months).
  - Risk measure: tail value at risk at 1 percent of the discounted change of the risk-bearing capital over a one-year period.
  - Core capital = market value of assets (A) minus market value of liabilities (L) plus MVM, with specified corrections; complementary capital subject to strict eligibility conditions (paid-in, irrevocable subordination, issuer ability to suspend interest, FINMA approval for early redemption).
  - Reinsurance: SST figures usually determined net of reinsurance; reinsurer counterparty credit risk included in target capital credit risk.

### SUPERVISION, GOVERNANCE, AND RESOURCES
- FINMA as integrated supervisor under FINMASA supervising banks, insurance companies, exchanges, securities dealers and other intermediaries; conducts restructuring, bankruptcy proceedings and AML/CFT prevention.
- Other supervisory roles:
  - Basic mandatory health insurers supervised by Federal Office of Public Health (FOPH).
  - Entities providing both basic and supplementary health insurance: FOPH supervises mandatory health insurance (including solvency); FINMA supervises supplementary health insurance.
  - Cantonal authorities supervise small cantonal building insurers.
- FINMA governance, independence and accountability:
  - Independent institution accountable to Federal Parliament and Government; parliamentary and government supervision limited to checking correct functioning and resource administration.
  - Funded by fees from supervised institutions.
  - Annual accounts audited by Federal Audit Office; no regular assessments of supervisory effectiveness by that institution.
- Board and appointment details:
  - Two-tier board: Management Board (CEO) and Board of Directors (oversight).
  - Board of Directors: 7 to 9 expert members, term of office 4 years, members may be reappointed twice; Federal Council appoints Board and determines remuneration.
  - CEO appointed by Board; appointment subject to Federal Council approval; termination of CEO subject to Federal Council approval if requirements for holding office no longer fulfilled.
- Insurance Supervision Division resources and organization:
  - Employs about 100 staff (~100 full-time equivalents); supervisory structure includes teams for different supervisory categories and group-specific teams (Zurich Insurance Group, Swiss Re Group), two onsite inspection teams, and specialized supporting teams (qualitative risk management, quantitative risk management and SST, actuarial office).
  - FINMA can deploy cross-functional expertise and task Enforcement and Recovery and Resolution divisions as needed.
- Audit, onsite inspections and supervisory cycle:
  - Insurers submit annual supervisory reporting by end-April (reinsurers by end-June); FINMA provides feedback by end-October.
  - Audit companies perform regulatory audits annually per FINMA audit programs.
  - Onsite resources: two teams with 13.5 full-time equivalents dedicated to onsite reviews; inspection pipeline described.
- Appeals and staff protections:
  - Appeals of FINMA rulings to Federal Administrative Court; further appeals to Federal Supreme Court available for certain counts.
  - FINMA staff not personally liable in civil law for duties; Article 19 FINMASA sets FINMA liability conditions; criminal procedure protections include FINMA bearing expenses if staff acted in good faith and requirement for Federal Department of Justice and Police authorization for criminal procedure against staff.

### RISKS, VULNERABILITIES, AND CONDUCT
- Low-yield environment and profitability pressure:
  - Investment yields fell from 3.3 percent in 2013/14 to 2.5 percent in 2017.
  - Life insurers face profitability pressure, especially legacy business with high interest rate guarantees; life premiums declining.
  - Industry response: reduce volume of guaranteed business; greater focus on protection products and products with low or no guarantees; introduction of hybrid and capital-light products.
- Non-life and reinsurance:
  - Non-life primary insurers show comfortable profits; combined ratios below 90 percent and return on equity averaged 17 percent.
  - Reinsurance profits volatile; aggregate sector remained slightly profitable in 2017 despite intense hurricane season.
  - Emerging product area: cyber risks.
- Operational risk and macroprudential surveillance:
  - FINMA expects identification, assessment and management of operational risks; operational risk not normally quantified for SST but FINMA may require capital if operational risks threaten solvency.
  - FSAP recommends strengthening monitoring of operational risks, prescribing capital add-ons if needed, and using aggregated ORSA findings for macroprudential surveillance.
  - FINMA should intensify analysis of group-specific risks, including liquidity risks and fungibility of capital.
  - Systematic collection of information on exposures towards the banking sector—particularly contingent convertible bonds—is recommended; regular reporting currently does not address exposures to specific sectors.

### SWISS SOLVENCY TEST (SST) REPORTING, SUPERVISORY ZONES, AND GROUP SUPERVISION
- SST reporting and supervisory zones:
  - Each insurer must submit an annual SST report to FINMA; must report target capital and risk-bearing capital if risk situation changes considerably.
  - Supervisory zones by SST ratio:
    - Green zone: SST ratio exceeds 100 percent.
    - Yellow zone: SST ratio between 100 and 80 percent.
    - Orange zone: SST ratio between 80 and 33 percent.
    - Red zone: SST ratio below 33 percent.
  - Remedial timelines:
    - Yellow/orange: action plan to FINMA within two months; yellow → green normally within three years; orange → yellow normally within two years and then green within another three years.
    - Red: submit emergency measures to FINMA for approval without delay; FINMA may withdraw license if measures ineffective within a short period.
- Group solvency approaches:
  - Consolidated group SST: model group as single fictional consolidated entity; solvency condition assessed at consolidated level.
  - Granular group SST: model group as network of granular entities; solvency condition satisfied by each granular entity.
- Reinsurance in supervision:
  - Reinsurance strategy filed in business plan; SST accounts for reinsurance and resulting counterparty credit risk in target capital.
  - FINMA does not directly supervise branches of foreign reinsurers; home supervisor responsible; reinsurance transactions subject to same supervision as if bought from a reinsurance company.
- Winding-up, recovery and resolution:
  - ISA defines liquidation and bankruptcy procedures; FINMA has exclusive competence to declare insolvency and initiate resolution without further court approval.
  - Tied assets protect policyholders in insolvency; tied assets used solely to compensate policyholders, surplus only after policyholder claims satisfied.
  - Proposed ISA amendments (public consultation 2018) would vest FINMA with restructuring powers where insurer is “over-indebted” or has “major liquidity problems” (Article 51a proposal), including powers to transfer portfolios, restructure debt and equity, amend insurance contracts, and defer termination of reinsurance contracts.
  - Observations on proposed regime: relies on tied assets and bail-in powers; no legal mechanism proposed for situations where tied assets and bail-in are insufficient and additional funding is needed; not designed for systemically significant insurer failure without further amendments.
  - Suggested additional amendments include specifying non-viability indicators, powers to run-off new business, ability to exercise resolution powers without consent, legal basis for continuity of essential services, powers to sell/merge insurers in resolution and transfer reinsurance without consent subject to safeguards, and legal basis for recovery and resolution planning.

### CONSUMER PROTECTION, PRODUCT APPROVAL, AND INTERMEDIARIES
- Regulatory foundations: ISA, ISO, Insurance Contract Act (ICA) and Unfair Competition Act; ICA sets disclosure and contract duration rules.
- FINMA product approval scope includes occupational pension plan risks, supplementary health insurance to basic mandatory health insurance, and certain natural hazard insurance where tariffs/coverage are uniform and binding.
- Planned ISA revision to introduce:
  - “Key Investor Document” for investment-character insurance products.
  - Conduct and organization rules for financial service providers (“Know your customer”: appropriateness and suitability reviews, documentation and accountability, third-party remuneration).
- Insurance intermediaries:
  - Non-tied intermediaries must register with FINMA prior to activities; registration voluntary for tied intermediaries.
  - Registrant requirements:
    - Adequate professional knowledge and experience (or legal entity with qualified staff).
    - No incompatible criminal convictions; not subject to insolvency procedures related to intermediation.
    - Professional liability insurance coverage of at least CHF 2 million per year.
    - Intermediaries handling client monies must be licensed under Anti-Money-Laundering Act.
  - Gaps: limited conduct supervision after registration; planned ISA revision to strengthen framework and FINMA powers up to market exclusion.
  - Recommendation: strengthen regulation of business conduct, create corresponding supervisory competences for FINMA, and allocate sufficient resources.

### MAIN RECOMMENDATIONS ON INSURANCE REGULATION AND SUPERVISION (Table 1)
- 1 Lay down more key SST features in legally binding Ordinances, and make insurance regulation more transparent (FDF, FINMA). ¶10 — Timing*: ST — Priority**: H
- 2 Systematically collect relevant information on exposures towards the banking sector, in particular with regard to contingent convertible bonds (FINMA). ¶109 — Timing*: ST — Priority**: H
- 3 Require that basic mandatory health insurance and supplementary health insurance are provided by two separate legal entities (FDF, FINMA). ¶22 — Timing*: ST — Priority**: M
- 4 Use aggregated ORSA findings as input for macroprudential surveillance (FINMA). ¶108 — Timing*: ST — Priority**: M
- 5 Strengthen regulation of business conduct, create corresponding competences for supervision by FINMA, and allocate sufficient resources to this task (Government). ¶87 — Timing*: ST — Priority**: M
- 6 Intensify the analysis of group-specific risks, including liquidity risks and the fungibility of capital (FINMA). ¶95 — Timing*: ST — Priority**: M
- 7 Increase the frequency of assessments of FINMA’s operational effectiveness by the Federal Audit Office (Federal Audit Office). ¶21 — Timing*: MT — Priority**: M
- 8 Intensify further the technical cooperation between FINMA and the FOPH (FINMA, FOPH). ¶23 — Timing*: C — Priority**: L
- 9 Strengthen the analytical framework for assessing operational risks, and prescribe capital add-ons if needed (FINMA). ¶99 — Timing*: ST — Priority**: L
- Timing key: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1–3 years); MT = Medium Term (within 3–5 years).
- Priority key: H = High; M = Medium; L = Low.

*Source: 1cheea2019005*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### INTRODUCTION
- This technical note is part of the 2019 Financial Sector Assessment Program (FSAP) and is based on the regulatory framework in place and the supervisory practices employed as of November 2018.
- The note reviews selected Insurance Core Principles (ICPs) issued by the International Association of Insurance Supervisors (IAIS), referring to the October 2011 ICPs as revised in November 2017, and focuses on ICPs with macrofinancial relevance and material regulatory changes.
- The 15 ICPs analyzed include solvency requirements (valuation and capital adequacy), risk management (including reinsurance), business conduct (including insurance intermediaries), supervisory approach (including supervisory authority, supervisory review, macroprudential surveillance), group supervision and cross-border cooperation.
- The note updates recent developments and risks to the Swiss insurance sector, including consolidation driven by the continuing low interest rate environment. A separate technical note summarizes stress test results.

### MARKET OVERVIEW AND KEY STATISTICS
- Switzerland has one of the most developed insurance markets in the world with high penetration and expenditure-per-capita ratios and hosts large internationally active insurance groups, including one of the two largest reinsurers globally.
- 2017 gross premium income: CHF 130 billion.
- The sector’s balance sheet assets: almost CHF 700 billion (104 percent of GDP).
- Life insurance sector share of total assets: 51 percent.
- Asset allocation highlights:
  - Almost 40 percent of insurers’ assets are invested in sovereign and corporate bonds.
  - Real estate accounts for 8 percent of insurers’ assets (mostly domestic).
- Solvency and profitability:
  - Solvency ratios (since 2014/15): life sector on average about 180 percent; non-life sector on average about 230 percent.
  - Non-life insurers record fairly comfortable profits; life insurers face profitability pressure from the prolonged low-yield environment, especially where legacy business carries high interest rate guarantees.

### REGULATORY FRAMEWORK AND THE SWISS SOLVENCY TEST (SST)
- The Swiss Solvency Test (SST) has been in place since 2011 and is one of the most developed solvency regimes globally, based on market-consistent valuation.
- The SST contributed to modern risk management practices and closer matching of assets and liabilities, reducing interest rate sensitivities.
- Original SST reliance on internal models led to wide use of internal models; a 2015 revision of the Insurance Supervision Ordinance (ISO) promoted standard models developed by FINMA, reducing internal model use to few large/complex companies.
- Rule-making hierarchy:
  - FINMASA (Financial Market Supervisory Authority Act of 22 June 2007) is the umbrella law.
  - Insurance Supervision Act (ISA of 17 December 2004) sets insurance-specific rules.
  - Federal Council’s Ordinance on the Supervision of Private Insurance Companies (ISO) and FINMA’s Ordinance on the Supervision of Private Insurance Companies (FINMA-ISO) implement further detail.
  - FINMA circulars/guidelines specify technical SST details but are non-binding; FINMA may enforce compliance and is reviewing whether more key SST features should be enshrined in binding Ordinances.

### SUPERVISION, GOVERNANCE, AND RESOURCES
- FINMA is the integrated supervisory authority supervising banks, insurance companies, stock exchanges, securities dealers and other financial intermediaries under FINMASA; it also conducts restructuring and bankruptcy proceedings and prevents money-laundering and terrorist financing.
- Other supervisory roles:
  - Basic (mandatory) health insurers are supervised by the Federal Office of Public Health (FOPH).
  - Undertakings providing both basic and supplementary health insurance in one legal entity are supervised by FOPH (mandatory health insurance, including solvency) and FINMA (supplementary health insurance).
  - Cantonal authorities supervise small cantonal building insurers.
- FINMA supervisory practice:
  - Strengthened supervision of internal control mechanisms and requires annual Own Risk and Solvency Assessment (ORSA).
  - Newly set-up teams for onsite inspections to bundle expertise.
  - FINMA’s annual accounts are audited by the Federal Audit Office; the FSAP recommends more frequent audits of FINMA’s operational effectiveness to enhance accountability.

### RISKS, VULNERABILITIES, AND CONDUCT
- Prolonged low-yield environment remains a major challenge for life insurers, prompting business model adjustments:
  - Reduced volume of guaranteed business.
  - Greater focus on protection products and products with low or no guarantees.
- Conduct regulation shortcomings:
  - The 2014 FSAP noted a lack of specific business conduct rules, supervision of tied agents performed only indirectly through insurers, and no ongoing reporting requirements for intermediaries.
  - A revision of the Insurance Supervision Act (consulted during winter 2018/19) foresees more stringent supervision of insurance intermediaries, more transparency towards policyholders, and a specific restructuring law for insurance companies; it will not enter into force before 2021 or 2022.
- Operational risk management and macroprudential surveillance:
  - FSAP recommends strengthening monitoring of operational risks, prescribing capital add-ons if needed, and using aggregated ORSA findings as input for macroprudential surveillance.
  - FINMA should intensify analysis of group-specific risks, including liquidity risks and fungibility of capital.
  - Systematic collection of information on exposures towards the banking sector—particularly contingent convertible bonds—is recommended.

### MAIN RECOMMENDATIONS ON INSURANCE REGULATION AND SUPERVISION (Table 1)
- 1 Lay down more key SST features in legally binding Ordinances, and make insurance regulation more transparent (FDF, FINMA). ¶10 — Timing*: ST — Priority**: H
- 2 Systematically collect relevant information on exposures towards the banking sector, in particular with regard to contingent convertible bonds (FINMA). ¶109 — Timing*: ST — Priority**: H
- 3 Require that basic mandatory health insurance and supplementary health insurance are provided by two separate legal entities (FDF, FINMA). ¶22 — Timing*: ST — Priority**: M
- 4 Use aggregated ORSA findings as input for macroprudential surveillance (FINMA). ¶108 — Timing*: ST — Priority**: M
- 5 Strengthen regulation of business conduct, create corresponding competences for supervision by FINMA, and allocate sufficient resources to this task (Government). ¶87 — Timing*: ST — Priority**: M
- 6 Intensify the analysis of group-specific risks, including liquidity risks and the fungibility of capital (FINMA). ¶95 — Timing*: ST — Priority**: M
- 7 Increase the frequency of assessments of FINMA’s operational effectiveness by the Federal Audit Office (Federal Audit Office). ¶21 — Timing*: MT — Priority**: M
- 8 Intensify further the technical cooperation between FINMA and the FOPH (FINMA, FOPH). ¶23 — Timing*: C — Priority**: L
- 9 Strengthen the analytical framework for assessing operational risks, and prescribe capital add-ons if needed (FINMA). ¶99 — Timing*: ST — Priority**: L

- Timing key: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1–3 years); MT = Medium Term (within 3–5 years).
- Priority key: H = High; M = Medium; L = Low.

*Italicized source attribution line below.*

### 11.      FINMA is an independent institution, being accountable to and subject to the overall

### 11.      FINMA is an independent institution, being accountable to and subject to the overall

### Governance, independence, and accountability
- FINMA is independent, accountable to and subject to the overall supervision of the Federal Parliament and Government.
- Parliamentary and government supervision is limited to checking if FINMA is correctly functioning and administering its resources and does not interfere in concrete supervisory actions.
- 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.

### Appeals and judicial review
- 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.

### Board structure, appointments, and internal audit
- FINMA has a two-tier board structure:
  - Management Board (headed by a Chief Executive Officer (CEO)) — operational responsibility.
  - Board of Directors — oversight responsibility.
- Internal audit function defined in an Audit Charter guaranteeing full independence of the audit function.
- The Federal Council appoints the Board of Directors including the Chair and the Vice-Chair, and determines the level of remuneration.
- Board composition and terms:
  - 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 “if the requirements for holding office are no longer fulfilled” (Art. 9 paragraph 5 FINMASA).
- CEO and Management Board appointments:
  - 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.
  - Federal Council approval is required to terminate the employment of the CEO “if the requirements for holding office are no longer fulfilled” (Art. 9 paragraph 5 FINMASA).
  - Ordinance on FINMA staff: termination of an employment contract must have objective grounds communicated in writing.

### Liability and criminal procedure protections for staff
- FINMA staff are not personally and directly liable in civil law for discharging their duties.
- Article 19 FINMASA: 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 benefits from protection from being held liable for supervisory measures taken 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.

### Use of third-party agents and mandataries
- FINMA can appoint third-party agents or mandataries to assist in performing its duties; more common in banking than insurance supervision.
- Agents and mandataries provide swift and flexible access to external experts for complex audits or investigations.
- Types of agent/mandatary (examples provided):
  - Mandated auditors: conduct audits on FINMA’s behalf as part of ongoing supervision; used for special or institution-specific events or doubts about audit quality.
  - Investigating agents: clarify circumstances relevant to enforcement proceedings or monitor implementation of supervisory measures; may be empowered to act in place of the intermediary’s executive bodies in individual cases.
- Deployment and selection:
  - FINMA maintains a list of suitable candidates for urgent deployment.
  - Selection criteria include nature and scope of mandate, specialist expertise and experience, language skills, costs and availability.
  - If no suitable candidate on the list, FINMA may select from outside the list.
  - Agents and mandataries must be independent of the supervised institution concerned.
  - Mandataries obliged to fulfil mandates diligently and cost effectively.
  - FINMA defines content and expected costs of mandate at outset and monitors discharge and proportionality of costs.
  - The costs of agents and mandataries are borne by the supervised institutions concerned.

### Insurance Supervision Division: resources and organization
- FINMA’s Insurance Supervision Division employs about 100 staff, considered adequately skilled by market participants.
- The Insurance Division has about 100 full-time equivalents for supervisory duties, including offsite monitoring and onsite inspections, structured as follows:
  - Regular supervisory teams:
    - Two teams for smaller and medium-sized insurance companies (supervisory categories 4 and 5).
    - One team for large insurance firms in supervisory category 3.
    - One team for groups and their insurance entities.
    - 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).
    - Actuarial office.
  - Division operating office (including legal expertise and authorizations).
- The Insurance Division can:
  - 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 with investigations and implementation of supervisory measures.

### Other supervisors and scope of supervision
- Other authorities supervise specific 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 (mandatory health insurance) and FINMA (supplementary health insurance).
    - In such cases of shared supervisory duties, FOPH is competent for the supervision of the institute, including the solvency position, whereas FINMA is competent for the supervision of the supplementary health products only.
    - Potential conflicts of interest among supervisors in times of financial distress can arise as policyholder interests in both schemes might differ.
  - Cantonal small building insurers are supervised by cantonal authorities.
- 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.
  - Supervised by a two-tier structure of eight cantonal authorities and a federal body which directly supervises certain entities and audits the cantonal authorities (indirect supervision).

### Recommendations
- Federal Audit Office should increase the frequency of assessments of FINMA’s operational effectiveness.
  - Regular assessments, while respecting FINMA’s independence in individual supervisory cases, could strengthen FINMA as an institution.
  - The Federal Audit Office already audits FINMA’s financial statements and conducted a similar (but slightly narrower) assessment in 2015 on cooperation between the FOPH and FINMA in supervision of health insurance companies.
- Basic mandatory health insurance and supplementary health insurance should be provided by two separate legal entities.
  - Ensures clear separation of responsibilities between FINMA and the FOPH; each authority would be competent supervisor for just one of the two companies.
  - Mandatory separation would broadly reflect recent market developments as some companies have already restructured accordingly.
- Technical cooperation between FINMA and the FOPH should be intensified further.
  - Information exchange improved since updating the legal basis in 2016.
  - Further technical cooperation and common tools should be sought, e.g., promoting temporary secondments of staff.

### Market structure: size, composition, and distribution
- As of end-2017, there were 204 insurance and reinsurance companies licensed in Switzerland, down from 223 in 2013.
  - Most companies (130) were non-life insurers.
  - 28 reinsurers.
  - 27 captives.
  - 19 life insurers.
- Insurance density and penetration (2017):
  - USD 6,811 per capita in 2017 — Switzerland recorded the third highest insurance density in the world.
  - Insurance penetration (premiums as a percentage of GDP) reached 6.9 percent — the thirteenth highest in the world and the sixth highest in Europe.
- Distribution channels:
  - Majority of business is generated by tied agents, followed by brokers.
  - Banks and post offices play a relatively minor role.
  - Most insurers use a multiple distribution strategy (including direct offerings).
- Product and business trends:
  - Material decline in new individual life business, especially traditional (guaranteed) life products.
  - Hybrid products offered: 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).
  - Products with shorter-term guarantees and “capital light” products with internal equalization reserves introduced.
  - Group life business: insurers scaled back full coverage insurance (“Vollversicherung”) capacity and concentrated on reinsuring death and disability risks.
  - Group life contracts are relatively short term by statutory requirements: maximum term of five years.
- Non-life main products for private clients:
  - Complementary health insurance, home insurance, motor insurance, liability insurance and accident insurance.
  - 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.
  - Building insurance is a state monopoly in 19 of 26 cantons.
- Swiss reinsurers:
  - Typically very international; domestic business often accounts for less than 5 percent of total underwritten business.
  - Emerging product area: cyber risks.
  - Reinsurers provide capacity with rather small limits given uncertainties in pricing models.

### Market statistics (2017 gross premiums written)
- 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: 40  0,0%
  - Foreign branches: 1.603  5,1%
  - Reinsurance accepted: 368  1,2%
  - Total: 31.544  100,0%

### Balance sheets, asset allocation, and currency exposure
- Sector balance sheet assets:
  - The sector has accumulated almost CHF 700 billion in balance sheet assets (104 percent of GDP).
  - Life insurance sector is the largest segment, accounting for 51 percent of total assets.
- Asset composition (end-2017):
  - Almost 40 percent of insurers’ assets are invested in sovereign and corporate bonds.
  - Stocks account for 16 percent.
  - (Mostly domestic) real estate accounts for 8 percent.
- Currency and hedging:
  - Primary insurers’ investment assets are more diversified in foreign currencies than the currency breakdown of liabilities suggests.
  - This mismatch is usually hedged with derivatives.

### Risks and vulnerabilities
- Low-yield environment challenges:
  - Prolonged low-yield environment remains challenging for insurers.
  - Investment yields came down from 3.3 percent in 2013/14 to 2.5 percent in 2017.
  - Return on equity averaged 8 percent over the last five years.
  - Life insurance premiums have been declining; low interest rates drain profitability, especially for legacy business with high interest rate guarantees.
  - Swiss insurers reacted by reducing guaranteed business volume, focusing more on protection products and products with low or no guarantees.
  - Early implementation of the Swiss Solvency Test contributed to closer asset-liability matching and reduced interest rate sensitivities.
- Non-life and reinsurance profitability:
  - Non-life insurers record fairly comfortable profits despite some premium declines:
    - Combined ratios of primary non-life insurers consistently below 90 percent over the last five years.
    - Return on equity averaged 17 percent.
  - Reinsurance profits more volatile; sector on aggregate remained slightly profitable even in 2017, a year with a very intense hurricane season.
- Profitability and yield trends (figures and charts referenced in source):
  - Change in Gross Written Premiums, Combined Ratio, Investment Yield, Return on Equity trends are discussed and presented graphically in the source.

### Capitalization and solvency
- Swiss insurance sector is well capitalized and solvent.
- Solvency ratios (based on the Swiss Solvency Test) have improved since 2014/15:
  - Life sector solvency ratio standing on average at about 180 percent.
  - Non-life sector solvency ratio standing on average at about 230 percent.
  - Both are well above binding regulatory requirements.
- Balance sheet leverage:
  - Pure balance sheet perspective reveals a slight increase of the leverage.
  - Capital and Reserves to Assets trends are presented in the source.

*Source: 1cheea2019005 - 11.      FINMA is an independent institution, being accountable to and subject to the overall*

### 33.      The Swiss regulatory framework has been strengthened since the last FSAP. A major

### 1cheea2019005 - 33.      The Swiss regulatory framework has been strengthened since the last FSAP. A major

### A. Prudential Regulation — overview
- The Insurance Supervision Ordinance (ISO) revision in 2015 promoted the standard model for capital requirements, introduced the Own Risk and Solvency Assessment (ORSA), strengthened corporate governance, and enhanced public disclosure.
- The European Commission recognized the Swiss insurance regulation and supervision system as equivalent with the Solvency II Directive in 2015.
- The Swiss Solvency Test (SST) is the central capital adequacy framework, formally introduced in 2006 and fully applicable since 2011.

### Valuation of assets and liabilities — general accounting vs SST
- SST uses market-consistent valuation for all assets and liabilities.
- General accounting valuation is based on prudence to present an economic position allowing reliable third-party assessment; this can result in assets valued below and liabilities valued above market-consistent amounts.
- Tied assets valuation rules are based on a prudent stance with upper bounds for valuations.

- General accounting valuation rules:
  - Assets must be valued no higher than acquisition or production costs when first recorded and in subsequent valuations.
  - Depreciation and valuation adjustments must follow generally recognized accounting principles and be charged to profit and loss.
  - Assets with an observable market price in an active market may be valued at that price; if a company elects this, it must apply market price consistently across corresponding positions.
  - For domestic insurers, fixed-income and comparable structured instruments valuation must not exceed amortized cost value; FINMA may permit foreign regulatory valuation methods for business abroad.
  - Investments related to unit-linked and similar contracts must use current market value.
  - Liabilities must be valued at nominal value; provisions for expected cash outflows must be recognized and charged to profit and loss.
  - Technical provisions must be sufficient for the entire scope of business (ISA Art. 16); business plans must disclose conditions for recognition and derecognition of technical provisions (ISO Art. 54).
  - FINMA Circular 2008/42 core principle: technical provisions must be equal to or higher than the market-consistent valuation of the insurance obligation.
  - FINMA Circular 2008/43 core principle: assumptions and methods must ensure provisions are sufficient to fulfil obligations at any time.

- SST valuation rules for assets and liabilities:
  - Assets: market values when available; for difficult-to-value assets FINMA can describe valuation methods; mix of mark-to-market and mark-to-model or pure mark-to-model possible; models must be accepted in financial mathematics, use observable market data whenever possible, tied to internal processes, reflect most recent liquid market information, lead to arm's length prices, and allow for counterparty default risk and other risks (FINMA Circular 2017/3).
  - Insurance liabilities: market-consistent value = best-estimate + market value margin (MVM).
    - Best-estimate: discounted value of expected future contractually agreed cashflows using a risk-free yield curve; include material options and guarantees; exclude future non-guaranteed bonuses and future company taxes; include allowances for expected losses and IBNR (incurred but not yet reported) claims.
    - Best-estimate principle prohibits explicit or implicit margins for prudence.
    - MVM: capital costs for risk-bearing capital required during winding-up of current insurance liabilities.
  - Discounting: risk-free yield curves provided by FINMA in CHF, EUR, USD, and GBP as at 1 January of every year.
    - FINMA uses an ultimate forward rate (UFR) to extrapolate the long end.
    - For EUR, USD, and GBP the UFR used by FINMA is considerably lower (i.e., 30 basis points) than the respective UFRs chosen under Solvency II.
    - For CHF, the UFR equals 2.55 percent for the SST 2018.
    - FINMA has communicated to lower it by 15 basis points each year during at least the course of the next four years, so that it will reach 1.95 percent in 2022.
  - Between 2013 and 2015 FINMA allowed temporary yield-curve adjustments for existing liabilities for a three-year period; starting in 2016 insurers had to use unadjusted risk-free yield curves and temporary measures were removed.

- MVM calculation approach:
  - SST follows a cost-of-capital-approach: MVM reflects capital costs because other costs are part of the current estimate and risks are reflected in capital requirements.
  - MVM at a given point in time is calculated as the sum of the expected values at that point in time of the discounted capital costs (6 percent above the risk-free rate) of each one-year risk capital over the future one-year periods required by the insurer to fulfil its insurance liabilities.
  - Valuation of liabilities may not contain any allowance for own counterparty risk, except for liabilities considered risk bearing in risk-bearing capital (supplementary capital).

### Valuation of assets in the tied asset regime
- FINMA Circular 2016/5 sets valuation rules for tied assets as upper bounds; lower values may be used for precautionary reasons.
- Three valuation patterns identified:
  1. Assets valued at market value:
     - Money market debt claims: at most market value; if not exchange traded, a market standard valuation method.
     - Structured products: valued as a whole at market value.
     - Securitizations: at most market value; quality of valuation (e.g., market liquidity) must be considered.
     - Equity and convertible bonds with equity character: at most market value.
     - Real estate investments: at most market value; direct investments must use audited market values according to IFRS, US-GAAP or Swiss-GAAP-FER if available; allowed methods: discounted cash flow, capitalized earning, hedonic; individual valuation and valuation continuity principles apply; every ten years each property value must be approved by a real estate appraiser; investments in real estate companies use pro rata net asset value as market value.
     - Alternative investments: at most market value.
     - Derivatives: at most market value; exchange-traded derivatives use traded exchange value; OTC derivatives use unwinding price.
     - Collective investment schemes: at most market value; if unlisted, can be valued at net asset value.
  2. Assets valued at nominal value:
     - Cash deposits, bank accounts and fixed term deposits: at most nominal value; security and income considered.
     - "Other loans": at most nominal value after recoverability considered.
     - Mortgages: at most nominal values.
  3. Assets valued at amortized cost:
     - Bonds: at most amortized cost with accrued interest added; linear cost amortization or scientific cost amortization methods may be used.

- Tied asset regime legal basis and scope:
  - Primary insurers must ensure claims from insurance contracts are covered by tied assets (Art. 17 ISA).
  - Art. 79 ISO defines asset types eligible for tied assets (cash, deposits and money market investments, bonds, structured products, securitizations, loans, equities, participation certificates, convertible bonds with equity character, domestic residential and commercial real estate, mortgages, alternative investments, derivatives, shares in collective investment schemes and single-investor funds).
  - Reinsurance business from reinsurance or primary insurance companies is not subject to tied assets regulation.
  - Detailed allocation rules, limits, valuation rules and further guidelines per asset class are in FINMA Circular 2016/5.

### Capital adequacy and SST mechanics
- SST characteristics:
  - Total balance sheet approach measuring available capital (“risk-bearing capital”) at the measurement day, typically 1 January.
  - Positions valued market-consistently; insurer’s own credit standing cannot be taken into account in valuation of own insurance liabilities and other liabilities.
  - No concept of off-balance sheet positions; contingent assets and liabilities are included.
  - Excludes corporation tax items consistent with a gone-concern perspective.

- Model use and standardization:
  - Originally SST relied heavily on insurer-developed internal models.
  - ISO revision in 2015 promoted standard models developed by FINMA with the sector; as a result, only a few large and complex companies now use an internal model.

- Risk measurement and target capital:
  - Risk-bearing capital is compared to target capital (risk exposure over next twelve months after valuation day).
  - Risk measured as 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.
  - Minimum risk types: market risk, credit risk and insurance risk.
  - If other risk types (e.g., operational risks, concentration risks) are not properly reflected, FINMA applies deductions from risk-bearing capital or add-ons to target capital.

- Risk-bearing capital composition:
  - Two layers: core capital and complementary capital.
  - Core capital defined as market value of assets (A) minus market value of liabilities (L) plus the market value margin (MVM), with corrections for foreseen dividend payments to shareholders, own shares, potential immaterial funds, and deferred taxes for real estate in Switzerland.
    - (Text includes the formulaic representation as presented in the source.)
  - Subordinated debt is not part of core capital.
  - Complementary capital: eligible risk-absorbing capital instruments (including hybrids) if they meet 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 winding-up;
    - Notional is not callable by the investor before the date of redemption, except in case of liquidation of the insurer;
    - Redemption prior to maturity needs FINMA approval.

- Reinsurance and guarantees:
  - Insurers usually determine SST figures net of reinsurance; ISO allows calculation net of reinsurance if risk-mitigating effects can be captured appropriately.
  - Reinsurer counterparty credit risk must be taken into account.
  - Eligible guarantees are recognized at their current market-consistent price, usually considerably lower than notional or guaranteed sum.
  - Risk-mitigating effect of guarantees might be captured in target capital, subject to FINMA approval and appropriate modelling.

- Solvency condition and SST ratio:
  - An insurer meets the solvency condition if risk-bearing capital is at least equal to target capital.
  - SST ratio: 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.
    - (Text includes the SST-ratio formula as presented in the source.)

*Source: 1cheea2019005 - 33.      The Swiss regulatory framework has been strengthened since the last FSAP. A major*

### 58.      Each insurer is required to submit an SST report on an annual basis to FINMA. In

### 1cheea2019005 - 58.      Each insurer is required to submit an SST report on an annual basis to FINMA. In

### Swiss Solvency Test (SST) reporting and supervisory zones
- Each insurer is required to submit an SST report on an annual basis to FINMA.
- Every insurer must determine and report the target capital and the risk bearing capital if its risk situation changes considerably.
- Supervisory intervention levels are defined as specific levels of the SST solvency ratio, corresponding to four zones:
  - 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.

### Remedial requirements and timelines by zone
- Yellow or orange zone:
  - The company must draw up an action plan based on realistic assumptions and submit it to FINMA for approval within two months of this being established.
  - Action-plan objectives:
    - From the yellow zone: the company can reach the green zone, normally within three years;
    - From the orange zone: the company can reach the yellow zone, normally within two years, and then reach the green zone, normally within another three years.
- Red zone:
  - The company 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 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.

### Target capital and modeling approaches
- 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.
  - FINMA is asked to provide various standard models that can be used as a modeling approach for reflecting the risk profile of most supervised entities, and to indicate which standard model an individual company has to use.
  - Standard models and their technical documentation are published on FINMA's website; FINMA consults with affected insurance companies or relevant associations during development, reviewing and refining of standard models.
  - The following standard models are currently in use: (figure referenced in source).
- (Partial) internal models:
  - Can be used to quantify risk only if none of FINMA's standard models is appropriate to reflect the company's 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; modeling criteria (risk measure, level of safety and time horizon) apply equally.
  - FINMA's approval process for (partial) internal models:
    - First step: summary review focusing on whether the model sufficiently reflects material risks, completeness of documentation, and compliance with qualitative and organizational requirements.
    - FINMA may approve subject to collateral clauses, adjustments or deductions from the risk-bearing capital or add-ons to the target capital.
    - Companies must conduct a regular review of the accepted SST model to ensure continued adequacy.
    - Summary reviews are subsequently complemented by material reviews; FINMA may compel replacement of an approved model only on basis of a material review or a material change in circumstances.

### Group solvency measurement and approaches
- The solvency of a Swiss domiciled insurance group is measured by the group SST.
- Two approaches to determine group solvency under group supervision of FINMA:
  - Consolidated group SST:
    - The group is modelled under the assumption that assets and liabilities of all group companies are consolidated in a single fictional legal entity (consolidated entity).
    - Target capital (required capital) and risk-bearing capital (available capital) are determined for the consolidated entity.
    - Solvency condition: 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 or a cluster forming a sub-consolidation of several legal entities within the group.
    - Solvency condition: satisfied by each granular entity.

### Reinsurance supervision and treatment in SST
- Switzerland is an important reinsurance market; FINMA comprehensively supervises both reinsurance business and ceding of business to reinsurers.
- The strategy for reinsurance ceded is filed as an element of the business plan.
- Annual supervisory reporting distinguishes most insurance elements in profit and loss and balance sheet items between gross and net of reinsurance/retrocession.
- FINMA Circular 2011/3: technical provisions must be determined before and after retrocession with meaningful segmentation.
- In SST target capital calculation:
  - Reinsurance is fully considered.
  - Resulting counterparty risk from reinsurance is separately covered in credit risk in the target capital.
  - Annual SST report must include and discuss exposure against reinsurers.
- No explicit test for a certain amount of risk transfer; statutory accounting often follows international accounting principles where possible.
- FINMA does not have mandate to directly supervise reinsurance branches of foreign reinsurers operating in Switzerland; supervision is conducted by the home supervisor. Reinsurance transactions by such branches with Swiss primary insurers are subject to same supervision as if bought from a reinsurance company.
- Supervision of reinsurance branches is foreseen in the current exposure draft for the upcoming ISA reform.

### Group supervision scope, intra-group transactions and reporting
- FINMA has no discretion regarding inclusion/exclusion of entities in group supervision; law requires the largest possible scope of entities.
- Article 64 ISA defines an insurance group as two or more companies if:
  - At least one is an insurance entity;
  - As a whole, they operate primarily in the insurance sector; and
  - They are an economic unit or are linked through influence or control.
- Article 65 ISA: FINMA can place an insurance group that has an entity in Switzerland under group supervision if:
  - Is actually managed from Switzerland; or
  - Is actually managed from abroad, but is not subject there to equivalent group supervision.
- Group supervision includes insurers, operating and non-operating holding companies, other regulated entities (banks, securities companies), and non-regulated entities (parent companies, subsidiaries, special purpose entities).
- Insurance groups must report legal structure regularly and material changes on an ad-hoc basis.
- Group structure and scope of group-wide supervision are included and regularly updated in the FINMA coordination agreement with other involved supervisors.
- Intra-group transactions (IGTs):
  - Valued according to valuation rules for respective asset class or transaction.
  - Must be effected at market terms and conditions; value attributed should be such that two independent knowledgeable persons would exchange at that value.
  - Swiss groups report IGTs to FINMA yearly or ad-hoc if they exceed predefined thresholds.
  - Interim portfolio reports required if portfolio or structure changes materially during the year.
  - If impact of non-reportable IGTs becomes material, group must list them separately in the IGT portfolio report for each IGT category, indicating quantity and total amount.

### Winding-up, recovery and resolution framework
- ISA defines options for exiting the market:
  - Liquidation of solvent insurers (if FINMA revokes the license);
  - Liquidation of insolvent insurers (insurance bankruptcy); or
  - Exit after voluntary surrender of the license (liquidation possible but not compulsory in every case).
- If justified concern insurer is over-indebted or has serious liquidity problems and recovery not possible, FINMA revokes license and starts bankruptcy proceedings.
- FINMA can revoke permission to continue business even before insolvency if insurer no longer fulfils activity requirements, seriously violates supervisory provisions, or insured interests are endangered.
  - In particular, FINMA will usually revoke permission if the SST ratio is at or below 33 percent.
- FINMA has exclusive competence to declare an insurance company insolvent and initiate a resolution procedure; no further court approval required.
  - After opening a resolution procedure FINMA conducts the procedure; FINMA can appoint a (bankruptcy) liquidator and oversee activities.
  - Courts do not have a direct function in resolution; decrees to initiate resolution procedures are subject to appeal to the Federal Administrative Court and ultimately to the Swiss Supreme Court.
- Special bankruptcy rules for insurance companies were introduced to:
  - Shift competence for opening and conducting resolution procedures from regular courts to FINMA;
  - Speed up conduct of resolution procedures; and
  - Deal with the special feature of tied assets.
- Tied assets and policyholder protection:
  - Policyholders in direct insurance are protected through tied assets; all claims arising from insurance contracts must be secured with tied assets.
  - In insolvency, tied assets are for sole use of compensating policyholders; only after all policyholders' claims are satisfied can surplus compensate other creditors.
  - IBO-FINMA aims for timely payout of benefits to policyholders; FINMA can make up-front payments to policyholders even before claims are legally determined in schedule of claims.
  - Strict rules exist on composition of tied assets, their security and ability to sell quickly if needed.
- Reinsurance without tied assets:
  - Policyholders are currently treated as regular, non-privileged creditors.
  - Current revision of the ISA adds a provision treating all policyholders as privileged to other regular creditors, enhancing protection of policyholders in reinsurance.

### Ongoing reforms and proposed insurance resolution powers (Box 1 summary)
- In 2018 authorities initiated public consultation on amendments to the ISA covering restructuring of insurers in crisis; proposed amendments vest in FINMA restructuring powers when an insurer experiences financial distress.
- Proposed amendments include powers to:
  - Transfer insurance portfolios;
  - Restructure debt and equity of the insurer;
  - Amend insurance contracts; and
  - Defer termination of reinsurance contracts.
- These powers may be exercised where an insurer has become “over-indebted” or has “major liquidity problems” (Article 51a of the proposed amendments to the ISA).
- Design considerations and observations:
  - Regime design driven by authorities’ experience of insurance failures; focus on powers to amend policyholder rights under insurance contracts in resolution.
  - Relies on each insurer having sufficient tied assets to cover claims and on bail-in powers to absorb losses.
  - No proposed legal mechanism for situations where tied assets and bail-in are insufficient and additional funding is needed; authorities could reconsider this approach.
  - Proposed regime not designed to deal with failure of a systemically significant insurer (authorities determined no systemically significant insurers currently); further legal amendments would be needed for systemic insurer resolution.
- Emerging additional amendments the authorities could consider to align with international standards (non-exhaustive list):
  - Specify suitable indicators of non-viability for triggering resolution (e.g., breach of minimum capital, assets backing technical provisions where no reasonable prospects of restoring compliance);
  - Include powers to discontinue writing new business while administering existing contractual policy obligations for in-force business (run-off);
  - Ensure FINMA can exercise resolution powers without requiring consent of interested parties, including policyholders, creditors or shareholders of the insurer in resolution;
  - Provide legal basis for FINMA to ensure continuity of essential services, including by requiring group companies to continue to provide such services to an insurer in resolution;
  - Allow FINMA, in addition to powers to transfer assets and liabilities, to effect sale or merger of an insurer in resolution and to transfer reinsurance contracts associated with transferred policies without reinsurer consent subject to adequate safeguards (e.g., continuation of premium payments);
  - Provide a legal basis for recovery and resolution planning.
- The provisions of the proposed insurance resolution regime are high-level; further analysis is required to determine whether this provides an appropriately sound legal basis for powers and tools needed in insurer resolution.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019005.pdf*

### 80.      A fundamental objective of insurance regulation is to protect policyholders. This is

### 1cheea2019005 - 80.      A fundamental objective of insurance regulation is to protect policyholders. This is

### Consumer protection and product approval
- Swiss legislation: Insurance Supervision Act (ISA), Insurance Supervision Ordinance (ISO), Insurance Contract Act (ICA) and Unfair Competition Act underpin policyholder protection; ICA sets disclosure and contract duration requirements.
- Regulatory approach: assumes customers are mature economic subjects; emphasis is on transparency and fighting misuse.
- FINMA product approval scope: when FINMA approves products (tariffs and General Insurance Conditions) it considers consumer protection, notably for:
  - insurance of risks in occupational pension plans for employed persons;
  - supplementary insurance to the basic (mandatory) health insurance;
  - natural hazard insurance where scope of coverage and premium rating are uniform and binding for all insurers.
- FINMA checks tariff calculations to ensure proposed premiums:
  - do not threaten solvency of the individual insurance undertaking; and
  - protect insured persons against misuse.
- Planned ISA revision to improve disclosure and advice for investment-character insurance products by introducing:
  - Documentation of product characteristics in a “Key Investor Document”; and
  - Conduct and organization rules for financial service providers (“Know your customer”: review of appropriateness and suitability, documentation and accountability, third-party remuneration).

### Insurance intermediaries and conduct supervision
- Registration requirements:
  - Intermediaries not tied to an insurance company must register with FINMA prior to intermediation activities.
  - Registration is voluntary for "tied insurance intermediaries" indirectly subject to FINMA via the responsible insurer.
- Formal requirements for registrants:
  - Adequate professional knowledge and experience, or that a legal entity has sufficient qualified staff.
  - Individuals must demonstrate no criminal conviction incompatible with intermediation activities and not be subject to insolvency procedures related to intermediation.
  - Professional liability insurance coverage of at least CHF 2 million per year is required for all registered intermediaries.
  - Intermediaries handling client monies must be licensed according to the Anti-Money-Laundering Act.
- Supervisory enforcement:
  - FINMA sets deadlines to restore compliance; failure can lead to withdrawal of registration.
  - FINMA conducts supervisory reviews of unregistered intermediaries if alleged intermediation activities are discovered.
- Identified gaps and planned changes:
  - Conduct after registration has limited requirements and supervision.
  - Planned ISA revision will strengthen framework against abusive practices; intermediaries will be required to exercise good conduct and FINMA will have broad supervisory tools up to market exclusion.
- Recommendation:
  - Strengthen regulation and FINMA’s competences in supervision of business conduct and allocate sufficient resources; FINMA should prepare for new tasks and evaluate staffing needs.

### Supervisory review and reporting
- FINMA supervisory approach:
  - Proportional and risk-based; institutions allocated into six categories (five relevant to insurance).
  - Allocation primarily by risk impact on policyholders, system, and reputation.
  - No Swiss insurers in Category 1 (reserved for systemically relevant undertakings).
  - Five insurers in Category 2 (large, internationally active).
  - Category 3: 38 mid-sized insurers.
  - Categories 4 and 5: 161 smaller companies.
- Ratings and supervision: Each institution also receives an institution rating; categorization plus rating determine supervisory extent and instruments.
- Supervisory cycle and reporting deadlines:
  - Insurers submit annual supervisory reporting by end-April.
  - Reinsurers submit by end-June.
  - FINMA examines reports and provides feedback by end-October.
- Audit and onsite inspections:
  - Audit companies perform regulatory audits annually per FINMA audit programs covering tied-assets, provisions, pension fund business, internal control systems, business continuity management and group-specific topics.
  - Two teams with 13.5 full-time equivalents dedicated to onsite reviews.
  - Focus topics in 2017: corporate governance and internal control systems, ceded reinsurance/retrocession, tied assets, variable annuities and closed portfolios.
  - In the last three years: 8 of 49 big- and medium-size insurers/groups inspected onsite annually; 16 inspected at least twice within three years.
  - Onsite inspections follow a rolling schedule (“pipeline”) accounting for category, key topics and ratings.
- 2018 supervisory focus:
  - Corporate governance and stress-resilient structures; impacts of the low interest rate environment; ensuring life insurers maintain adequate reserves.
  - In 2018, all insurance companies published financial reports including solvency ratios for the first time.
- Recommendation:
  - Intensify analysis of group-specific risks, including liquidity risks and fungibility of capital, to support smooth recovery and resolution at group level.

### Corporate governance and risk management
- Governance supervision:
  - FINMA evaluates governance structures, supervisory and management bodies, and control functions (risk management, compliance, internal revision) periodically.
  - Audit program assesses internal control systems on entity level every two years.
- ORSA requirements:
  - Insurers must perform an Own Risk and Solvency Assessment (ORSA) and comprehensively document risk situation and solvency capital requirements.
  - Processes must be appropriate to nature, scale and complexity; results documented in annual ORSA Report under board responsibility.
  - ORSA must analyze downside scenarios including at least one threatening the going-concern and quantify impacts across relevant capital views (e.g., SST, statutory, IFRS/GAAP, etc.).
- Operational risk:
  - FINMA does not normally require operational risk quantification for SST capital, but expects identification, assessment and management.
  - If operational risks require additional capital or threaten regulatory solvency, FINMA may intensify supervision and/or increase required SST capital.
  - Operational risk considerations apply to outsourcing.
- Recommendation:
  - FINMA should strengthen analytical framework for assessing operational risks, investigate operational and cyber risks diligently and prescribe capital buffers if necessary.

### Cross-border cooperation
- FINMA’s role in supervisory colleges:
  - Leads five supervisory colleges and participates in 14 foreign colleges as host supervisor.
  - Six insurance groups under FINMA group supervision; five are cross-border with FINMA-led colleges.
  - Since 2016, FINMA signed coordination agreements with all host supervisors in these colleges.
- FINMA-led college practices:
  - Yearly in-person meeting (June or July) with prior written exchange of quantitative and qualitative information.
  - For the two big colleges an interim call in November; smaller colleges convene when needed.
  - Mid-year written qualitative exchanges and ad-hoc cooperation bilateral or multilateral.
- Participation criteria as host supervisor:
  - Based on risk-based and proportionate approach; criteria include importance of the solo entity in Swiss market, interaction with group, and Swiss entity importance to the group.
  - FINMA participates for entities in supervisory categories 2, 3 or 4; usually does not participate for category 5 entities but offers bilateral cooperation.
  - FINMA currently participates in 14 foreign supervisory colleges as host supervisor.
  - For AXA (a G-SII), FINMA participates in the Crisis Management Group led by the French supervisor.
- Information sharing:
  - FINMA authorized to share non-public information with foreign supervisors via cooperation agreements.
  - IAIS Multilateral Memorandum of Understanding (MMoU) signatory since 2011.
  - Bilateral MoUs with competent insurance supervisors of all EEA countries (except Croatia at time of signature) and with EIOPA, various U.S. supervisors, APRA, DFSA and MAS.

### Macroprudential surveillance
- Risk barometer process:
  - Semi-annual comprehensive assessment of risk drivers grouped into: (1) macroeconomic and capital markets; (2) compliance and conduct; (3) operational; and (4) other.
  - Impact analysis discussed with supervision staff and FINMA’s board of directors and executive board.
  - “Real Estate Barometer” semi-annual analysis of mortgage interest rates, domestic mortgage claims, real estate prices, rents and housing construction.
- Monitoring exposures to banking sector:
  - Regular reporting does not address exposures to specific sectors.
  - Temporary quarterly reporting on bank exposures ran until October 2015; thereafter some data collected only via targeted surveys (e.g., high-yield bond survey in 2016).
  - Some insurers voluntarily report bank bond exposures in SST report; no comprehensive mandatory reporting means FINMA lacks overall view of trends.
- Market data publication:
  - FINMA publishes aggregated market data in annual “Insurance market report”.
  - Aggregated SST results for branches (life, non-life, health and reinsurance) including assets and liabilities composition, market risk analysis, interest risk analysis and all scenarios are published in the annual SST Survey.
- Too-big-to-fail status:
  - No insurance companies identified as systemically relevant in Switzerland; banks and financial market infrastructures identified instead.
- Recommendations:
  - Aggregated ORSA findings should inform macroprudential surveillance to feed market-wide risk assessment.
  - FINMA should systematically collect relevant information on exposures towards the banking sector, notably contingent convertible bonds, to understand macrofinancial interlinkages.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019005.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1cheea2019005.pdf_