## Recommended Action Plan to Improve Observance of Insurance Core Principles

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---

### I. General information and assessment methodology
- Assessment scope: regulation of the reinsurance industry in Switzerland benchmarked against the Insurance Core Principles (ICP) issued by the International Association of Insurance Supervisors (IAIS) in October 2003.
- Basis of assessment:
  - (a) comprehensive self assessment dated July 2004 prepared by the Federal Office of Private Insurance (FOPI);
  - (b) review of applicable laws, regulatory/supervisory guidance and procedures;
  - (c) analysis of regulatory and market data;
  - (d) interviews with staff of the FOPI, reinsurers, industry and professional associations; and
  - (e) documentation provided by various interviewees.
- Observance ratings apply to essential criteria only; advanced criteria are not taken into account.
- Rating definitions: “Observed”, “Largely observed”, “Partly observed”, “Not observed”.
- Legal/regulatory context: Insurance Supervision Law (ISL) came into force in January 2006; provides broad parameters for the Ordinance on the Supervision of Private Insurance Companies (SO) and the FOPI Ordinance (FOPI-SO). FOPI is elaborating implementing decrees, regulations, and guidelines; regulatory initiatives not yet fully implemented are noted as additional comments.

### II. Market structure and supervisory scope — key findings
- Market participants and size:
  - Reinsurance industry comprises 20 professional reinsurers and 50 reinsurance captives.
  - Gross premiums written totaled SwF 37.4 billion for 2005.
  - Swiss Re, European Re, and Converium have consistently maintained more than 75 percent market share.
  - More than 95 percent of reinsurance premiums came from foreign business.
- Losses and capital events:
  - Catastrophic losses from the U.S. hurricane season in 2005 did not raise significant solvency issues for Swiss reinsurers; nonetheless, two smaller reinsurers had to be recapitalized.
  - In 2005, 8 reinsurers were admitted and 2 were liquidated. Five reinsurers are currently in run-off.
  - Claim payouts rose by SwF 2.4 billion (14.2 percent) in 2005.
  - Technical provisions rose by SwF 11.4 billion to reach SwF 81.5 billion.
- Financial position and asset composition (as at end-2005):
  - Total assets: SwF 131.7 billion.
  - Collateral deposits with cedants increased from less than 7 percent of assets (SwF 2.9 billion) in 1996 to 26 percent (SwF 34 billion) as at end-2005.
  - Intra-group loans and investments in related companies: SwF 23 billion (17.4 percent).
  - Fixed income securities: 25.4 percent of assets.
  - Investments in shares: less than 8 percent for the past 3 years, halved from 16 percent in 2000.
  - Average investment return: 4.3 percent.
- Capital and reserves:
  - Total equity of the reinsurance industry: SwF 18.6 billion at end-2005.
  - Total surplus rose from SwF 0.5 billion to SwF 1.4 billion despite record losses.
  - Total reserves held by the industry represent 70 times of surplus and 5.4 times of equity.
- Regulatory scope and implementation:
  - ISL generally applies same regulation for reinsurers and direct insurers, except for requirements to maintain tied assets and transfer of portfolios (Article 35 of the ISL).
  - Under phased implementation of the Swiss Solvency Test (SST): reinsurers required to implement the SST as from 2008 and compute target capital by 2010.
  - ISL applies to reinsurers domiciled in Switzerland; indirect control of foreign reinsurers exists because direct insurers need supervisory approval to get credit for outstanding claims against reinsurers.
  - FOPI formulating criteria and supervisory rules for granting credit for reinsurance.

### III. Summary of ICP assessment — levels of observance (essential criteria only)
- Aggregate outcomes:
  - TOTAL 4             19             1              -
    - O - Observed: 4
    - LO - Largely Observed: 19
    - PO - Partly Observed: 1
    - NO - Not Observed: -
- Selected individual ICP outcomes:
  - ICP 1 Conditions for effective insurance supervision — Observed
  - ICP 2 Supervisory objectives — Largely Observed
  - ICP 3 Supervisory authority — Observed
  - ICP 4 Supervisory process — Observed
  - ICP 5 Supervisory cooperation and information sharing — Largely Observed
  - ICP 6 Licensing — Observed
  - ICP 7 Suitability of persons — Largely Observed
  - ICP 8 Changes in control and portfolio transfers — Largely Observed
  - ICP 9 Corporate governance — Largely Observed
  - ICP 10 Internal control — Largely Observed
  - ICP 11 Market analysis — Largely Observed
  - ICP 12 Reporting to supervisors and off-site monitoring — Largely Observed
  - ICP 13 On-site inspection — Partly Observed
  - ICP 14 Preventive and corrective measures — Observed
  - ICP 15 Enforcement or sanctions — Largely Observed
  - ICP 16 Winding-up and exit from the market — Largely Observed
  - ICP 17 Group-wide supervision — Largely Observed
  - ICP 18 Risk assessment and management — Largely Observed
  - ICP 19 Insurance activity — Largely Observed
  - ICP 20 Liabilities — Largely Observed
  - ICP 21 Investments — Largely Observed
  - ICP 22 Derivatives and similar commitments — Largely Observed
  - ICP 23 Capital adequacy and solvency — Largely Observed
  - ICP 24 Intermediaries — Not assessed
  - ICP 25 Consumer protection — Not assessed
  - ICP 26 Information, disclosure and transparency towards the market — Largely Observed
  - ICP 27 Fraud — Largely Observed
  - ICP 28 AML/CFT — Not assessed

### IV. Key recommendations
- Supervisory System (ICP 2, 3, 4 and 5)
  - Consider providing greater clarity regarding the authority, circumstances and processes in addressing potential conflicts in supervisory objectives.
  - Enhance the FOPI’s independence and accountability through:
    - (a) public disclosure of the reasons if the Director of the FOPI is removed from office; and
    - (b) establishment of an internal audit function within the FOPI.
  - Push ahead with the regulatory reforms under the ISL.
  - Strengthen regulatory resources to effectively supervise a sophisticated and globally diversified reinsurance industry and implement the regulatory reforms.
  - Consider formal regulatory cooperation and information exchanges with foreign regulators outside the EU/EEA.
- Supervised Entities (ICP 6, 7, 8, 9 and 10)
  - Consider explicit requirements for:
    - (a) composite reinsurers to ensure proper segregation of life and non-life risks so as to better safeguard the interests of cedants; and
    - (b) reinsurers to seek the FOPI’s approval before they transfer all or any part of their insurance business so as to protect the interests of the policyholders of both the transferee and transferor.
- Ongoing Supervision (ICP 11, 12, 13, 14, 15, 16, 17)
  - Build adequate regulatory resources and cost-effective systems and processes to:
    - (a) enhance global market analysis;
    - (b) conduct risk-focused on-site inspections;
    - (c) enforce preventive and corrective measures; and
    - (d) conduct group/conglomerate supervision.
  - Consider quarterly reports on selected key financial indicators, particularly on solvency and asset-liability management, to facilitate ongoing off-site surveillance and timely intervention.
- Prudential Requirements (ICP 18, 19, 20, 21, 22, 23)
  - Maintain the momentum in implementing the SST as planned.
- Markets and Consumers (ICP 24, 25, 26, 27)
  - Plan for the effective implementation of the IAIS standards on public disclosures so as to facilitate market discipline.

### V. Authorities’ response — summary of comments
- General appreciation: FOPI noted appreciation of the high quality of the detailed assessment.
- Supervisory system recommendations:
  - Authorities agreed to consider greater clarity on authority, circumstances and processes for addressing potential conflicts in supervisory objectives; draft FINMA Act (Art. 7) is currently being discussed in Parliament.
  - On public disclosure of reasons for removal of the Director of the FOPI and establishment of an internal audit function: (a) public disclosure of reasons for removal is possible under existing legislation; and (b) the Federal Audit Office acts as the internal auditor for the FOPI.
  - Regulatory reforms under the ISL: current efforts focus on establishing integrated supervision of private insurance within scope of the ISL.
  - Strengthening regulatory resources: authorities have ongoing efforts to strengthen resources.
  - Formal regulatory cooperation and information exchange: FOPI expressed interest in signing the IAIS MMOU and providing a staff member for the validation team within the accession procedure; process expected to be initiated soon.
- Supervised entities recommendations:
  - Explicit requirements on segregation of life and non-life risks for composite reinsurers and prior FOPI approval for transfers will be given due consideration.
- Ongoing supervision recommendations:
  - (a) Market analysis function has been satisfactorily outsourced.
  - (b) Risk-focused on-site inspections are being performed and could be expanded.
  - (c) Effective preventive and corrective measures have been and will be taken as required.
  - (d) Group/conglomerate supervision is being strengthened; several Directives entered into force December 31, 2006, including on internal business transactions; cooperation with foreign supervisors is being enhanced.
  - (e) Risk-based direct supervision of intermediaries is being initiated and may require additional resources.
  - On quarterly reports: major insurance undertakings have long been providing quarterly selected financial indicators, including of solvency and asset/liability management; these indicators have been and are being used for off-site surveillance and intervention as required.
- Prudential requirements:
  - Implementation of the SST was on schedule according to authorities.

### Implementation of IAIS disclosure standards (detailed note)
- Finding: The recommendation to plan for the effective implementation of the IAIS standards on enhanced disclosure to facilitate market discipline will be followed up pending the intended consolidation of the standards into a single IAIS document.
- Interim approach: In the meantime, the provisions of the standards are being implemented in parallel with the application of the SST and IFRS disclosure requirements.
- Recommendation: The FOPI is advised to plan for the effective implementation of the IAIS standards on public disclosures, balancing transparency with commercial confidentiality. IAIS standards referenced:
  - Disclosures Concerning Technical Performance and Risks for Nonlife Insurers and Reinsurers, October 2004
  - Disclosures Concerning Investment Risks and Performance for Insurers and Reinsurers, October 2005
  - Disclosures Concerning Technical Risks And Performance For Life Insurers, October 2006

### Additional thematic findings and recommendations (condensed)
- Conditions for effective insurance supervision (Principle 1):
  - Predictability of macroeconomic, legal and institutional frameworks is a traditional strength of Switzerland.
  - FOPI expects insurers to adopt IFRS, U.S. GAAP, and Swiss FER GAAP.
  - Swiss Actuarial Association (SAA) introduced qualified actuary category; SAA has not taken disciplinary action against any of its members for the last 10 years.
  - Swiss Institute of Certified Accountants (SICA) adapted Swiss Audit Standards implementing ISAs published up to June 30, 2003; in 2007 Swiss Audit Standards will include the Audit Risk Standards.
  - Federal Audit Oversight Authority (FAOA) will be established in 2007 pursuant to the Audit Oversight Act (AOA) enacted in December 2005.
- Supervisory objectives and system (Principles 2–5):
  - ISL objective: “is designed to protect the insured from abuses and the insolvency risks to which insurance companies are exposed.”
  - FOPI remit under ISL (Article 46) includes monitoring compliance, checking solvency, monitoring business plans, protecting insured, intervening on mismanagement, and specific powers over claims settlement for motor vehicle third party liability.
  - Staffing constraint: currently only five staff supervising 70 reinsurers, including 3 large and globally diversified reinsurance companies — critical need to increase staff resources.
- Licensing, fit-and-proper, changes in control, corporate governance (Principles 6–9):
  - ISL coverage: reinsurers domiciled in Switzerland; reinsurers domiciled outside Switzerland exempted if they only offer reinsurance.
  - Exemptions: reinsurance captives are exempted from the SST; FOPI may withdraw exemption for complex or substantial-risk captives.
  - Minimum capital: SwF 10 million for professional reinsurers and SwF 3 million for captive reinsurers.
  - Grandfathered captive license fees: SwF 5 million.
  - Recommendation: require composite reinsurers to ensure proper segregation of life and nonlife risks; require FOPI approval for transfers of insurance business.
- Internal control, market analysis, reporting, and on-site inspection (Principles 10–13):
  - Internal audit required by ISL Article 27; state of internal control uneven across industry.
  - Reporting: FOPI may require more frequent reporting; plans to incorporate run-off statistics and breakdowns by line of business; consideration of quarterly reporting on solvency and ALM.
  - On-site inspection: Partly observed; no on-site examinations in 2006 due to resource constraints; need to build capacity for risk-based on-site inspections in light of SST implementation.
- Preventive measures, enforcement, winding-up (Principles 14–16):
  - Article 51 empowers a range of preventive measures; enforcement framework being refined with draft FINMA Act.
  - Administrative fine maximum under ISL Article 86: SwF 100,000.
  - Criminal/large fines under ISL Article 87: a prison sentence or a fine not exceeding SwF 1,000,000.
  - Recommendation: establish enforcement functions as a separate unit and ensure staff with appropriate skills.
  - Winding-up: FOPI approval required before bankruptcy proceedings; concern over lack of tied assets for reinsurers and segregation issues between life and nonlife assets.
- Group-wide supervision and intra-group transactions (Principle 17):
  - ISL recognizes group and conglomerate supervision equivalent to relevant EU Directives; MoU with all 28 member states of the EU and EEA.
  - Nine Swiss groups currently under group supervision.
  - Recommendation: issue explicit regulatory guidelines on “important internal transactions” including quantitative minimums and qualitative arm’s-length declarations.
- Prudential requirements, technical provisions, investments, derivatives, and solvency (Principles 18–23, 26):
  - SST target capital definition: “Defined as the sum of the expected shortfall in a change of risk-bearing capital within one year at the 99 percent confidence level plus the market value margin.”
  - SST implementation dates: reinsurers expected to fully implement SST in 2008; the target capital requirement is expected to come into force as of 2010.
  - Tied asset requirements do not apply to reinsurers; valuation rules: market consistent under SST and statutory basis for Solvency I.
  - Derivative use limited to hedging or efficient portfolio management (Article 100 SO) and subject to documentation, limits, internal controls, and reporting (Articles 101–108 SO).
  - Challenge: verification of internal models and need for FOPI expertise in company-specific models and global reinsurance risks.
- Information, disclosure & transparency towards the market (Principle 26):
  - FOPI and SIA publish selected reinsurance data at entity and industry level in annual reports on their websites.
  - Recommendation: plan for effective implementation of IAIS public disclosure standards to facilitate market discipline.

### Key statistics and numeric points (preserved exactly)
- Gross premiums written (2005): SwF 37.4 billion.
- Total assets (end-2005): SwF 131.7 billion.
- Technical provisions (end-2005): SwF 81.5 billion.
- Collateral deposits with cedants (end-2005): SwF 34 billion (26 percent of assets).
- Intra-group loans and investments in related companies: SwF 23 billion (17.4 percent).
- Fixed income securities: 25.4 percent of assets.
- Investments in shares: less than 8 percent for the past 3 years (16 percent in 2000).
- Average investment return: 4.3 percent.
- Total equity (end-2005): SwF 18.6 billion.
- Total surplus rose from SwF 0.5 billion to SwF 1.4 billion.
- Claim payouts increase in 2005: SwF 2.4 billion (14.2 percent).
- Collateral in 1996: SwF 2.9 billion (less than 7 percent of assets).
- Swiss Stock Exchange market capitalization (companies in the Swiss Performance Index) as at end-2005: SwF 1,021 billion.
- Swiss Stock Exchange turnover: SwF 1,338 billion.
- SAA disciplinary actions: none taken against any of its members for the last 10 years.
- SICA ISAs published up to June 30, 2003; Swiss Audit Standards will include Audit Risk Standards in 2007.
- Staff: currently only five staff supervising 70 reinsurers, including 3 large and globally diversified reinsurance companies.
- Market concentration: more than 75 percent of business is concentrated in 3 reinsurers.
- International business: more than 95 percent of reinsurance premiums are written from foreign business.
- Minimum capital: SwF 10 million for professional reinsurers and SwF 3 million for captive reinsurers.
- Grandfathered captive license fees: SwF 5 million.
- Administrative fine maximum under ISL Article 86: SwF 100,000.
- Criminal/fine maximum under ISL Article 87: a prison sentence or a fine not exceeding SwF 1,000,000.

*IMF staff assessment prepared by Su Hoong Chang (Monetary and Capital Markets Department). Source: IMF Staff Report — detailed principle-by-principle assessment excerpt (unit: _cr07200 - 20).*

### 1. Recommended Action Plan to Improve Observance of Insurance Core Principles ..............7

### 1. Recommended Action Plan to Improve Observance of Insurance Core Principles

### I. General information and assessment methodology
- Assessment scope: regulation of the reinsurance industry in Switzerland benchmarked against the Insurance Core Principles (ICP) issued by the International Association of Insurance Supervisors (IAIS) in October 2003.
- Basis of assessment:
  - (a) comprehensive self assessment dated July 2004 prepared by the Federal Office of Private Insurance (FOPI);
  - (b) review of applicable laws, regulatory/supervisory guidance and procedures;
  - (c) analysis of regulatory and market data;
  - (d) interviews with staff of the FOPI, reinsurers, industry and professional associations; and
  - (e) documentation provided by various interviewees.
- Observance ratings apply to essential criteria only; advanced criteria are not taken into account.
- Rating definitions preserved from source: “Observed”, “Largely observed”, “Partly observed”, “Not observed”.
- Legal/regulatory context: Insurance Supervision Law (ISL) came into force in January 2006; provides broad parameters for the Ordinance on the Supervision of Private Insurance Companies (SO) and the FOPI Ordinance (FOPI-SO). FOPI is elaborating implementing decrees, regulations, and guidelines; regulatory initiatives not yet fully implemented are noted as additional comments in the report.

### II. Market structure and supervisory scope — key findings
- Market participants and size:
  - Reinsurance industry comprises 20 professional reinsurers and 50 reinsurance captives.
  - Gross premiums written totaled SwF 37.4 billion for 2005.
  - Swiss Re, European Re, and Converium have consistently maintained more than 75 percent market share.
  - More than 95 percent of reinsurance premiums came from foreign business.
- Losses and capital events:
  - Catastrophic losses from the U.S. hurricane season in 2005 did not raise significant solvency issues for Swiss reinsurers; nonetheless, two smaller reinsurers had to be recapitalized.
  - In 2005, 8 reinsurers were admitted and 2 were liquidated. Five reinsurers are currently in run-off.
  - Claim payouts rose by SwF 2.4 billion (14.2 percent) in 2005.
  - Technical provisions rose by SwF 11.4 billion to reach SwF 81.5 billion.
- Financial position and asset composition (as at end-2005):
  - Total assets: SwF 131.7 billion.
  - Collateral deposits with cedants increased from less than 7 percent of assets (SwF 2.9 billion) in 1996 to 26 percent (SwF 34 billion) as at end-2005.
  - Intra-group loans and investments in related companies: SwF 23 billion (17.4 percent).
  - Fixed income securities: 25.4 percent of assets.
  - Investments in shares: less than 8 percent for the past 3 years, halved from 16 percent in 2000.
  - Average investment return: 4.3 percent.
- Capital and reserves:
  - Total equity of the reinsurance industry: SwF 18.6 billion at end-2005.
  - Total surplus rose from SwF 0.5 billion to SwF 1.4 billion despite record losses.
  - Total reserves held by the industry represent 70 times of surplus and 5.4 times of equity.
- Regulatory scope and implementation:
  - ISL generally applies same regulation for reinsurers and direct insurers, except for requirements to maintain tied assets and transfer of portfolios (Article 35 of the ISL).
  - Under phased implementation of the Swiss Solvency Test (SST): reinsurers required to implement the SST as from 2008 and compute target capital by 2010.
  - ISL applies to reinsurers domiciled in Switzerland; indirect control of foreign reinsurers exists because direct insurers need supervisory approval to get credit for outstanding claims against reinsurers.
  - FOPI formulating criteria and supervisory rules for granting credit for reinsurance.

### III. Summary of ICP assessment — levels of observance (essential criteria only)
- Tabulated summary (as presented in source):
  - TOTAL 4             19             1              -
    - O - Observed: 4
    - LO - Largely Observed: 19
    - PO - Partly Observed: 1
    - NO - Not Observed: -
- Individual ICP note (selection of ICP outcomes reported as assessed in the source):
  - ICP 1 Conditions for effective insurance supervision — Observed
  - ICP 2 Supervisory objectives — Largely Observed
  - ICP 3 Supervisory authority — Observed
  - ICP 4 Supervisory process — Observed
  - ICP 5 Supervisory cooperation and information sharing — Largely Observed
  - ICP 6 Licensing — Observed
  - ICP 7 Suitability of persons — Largely Observed
  - ICP 8 Changes in control and portfolio transfers — Largely Observed
  - ICP 9 Corporate governance — Largely Observed
  - ICP 10 Internal control — Largely Observed
  - ICP 11 Market analysis — Largely Observed
  - ICP 12 Reporting to supervisors and off-site monitoring — Largely Observed
  - ICP 13 On-site inspection — Partly Observed
  - ICP 14 Preventive and corrective measures — Observed
  - ICP 15 Enforcement or sanctions — Largely Observed
  - ICP 16 Winding-up and exit from the market — Largely Observed
  - ICP 17 Group-wide supervision — Largely Observed
  - ICP 18 Risk assessment and management — Largely Observed
  - ICP 19 Insurance activity — Largely Observed
  - ICP 20 Liabilities — Largely Observed
  - ICP 21 Investments — Largely Observed
  - ICP 22 Derivatives and similar commitments — Largely Observed
  - ICP 23 Capital adequacy and solvency — Largely Observed
  - ICP 24 Intermediaries — Not assessed
  - ICP 25 Consumer protection — Not assessed
  - ICP 26 Information, disclosure and transparency towards the market — Largely Observed
  - ICP 27 Fraud — Largely Observed
  - ICP 28 AML/CFT — Not assessed

### IV. Key recommendations
- The Supervisory System (ICP 2, 3, 4 and 5)
  - Consider providing greater clarity regarding the authority, circumstances and processes in addressing potential conflicts in supervisory objectives.
  - Enhance the FOPI’s independence and accountability through:
    - (a) public disclosure of the reasons if the Director of the FOPI is removed from office; and
    - (b) establishment of an internal audit function within the FOPI.
  - Push ahead with the regulatory reforms under the ISL.
  - Strengthen regulatory resources to effectively supervise a sophisticated and globally diversified reinsurance industry and implement the regulatory reforms.
  - Consider formal regulatory cooperation and information exchanges with foreign regulators outside the EU/EEA.
- The Supervised Entities (ICP 6, 7, 8, 9 and 10)
  - Consider explicit requirements for:
    - (a) composite reinsurers to ensure proper segregation of life and non-life risks so as to better safeguard the interests of cedants; and
    - (b) reinsurers to seek the FOPI’s approval before they transfer all or any part of their insurance business so as to protect the interests of the policyholders of both the transferee and transferor.
- Ongoing Supervision (ICP 11, 12, 13, 14, 15, 16, 17)
  - Build adequate regulatory resources and cost-effective systems and processes to:
    - (a) enhance global market analysis;
    - (b) conduct risk-focused on-site inspections;
    - (c) enforce preventive and corrective measures; and
    - (d) conduct group/conglomerate supervision.
  - Consider quarterly reports on selected key financial indicators, particularly on solvency and asset-liability management, to facilitate ongoing off-site surveillance and timely intervention.
- Prudential Requirements (ICP 18, 19, 20, 21, 22, 23)
  - Maintain the momentum in implementing the SST as planned.
- Markets and Consumers (ICP 24, 25, 26, 27)
  - Plan for the effective implementation of the IAIS standards on public disclosures so as to facilitate market discipline.

### V. Authorities’ response — summary of comments
- General appreciation: FOPI noted appreciation of the high quality of the detailed assessment.
- Supervisory system recommendations:
  - Authorities agreed to consider greater clarity on authority, circumstances and processes for addressing potential conflicts in supervisory objectives; draft FINMA Act (Art. 7) is currently being discussed in Parliament.
  - On public disclosure of reasons for removal of the Director of the FOPI and establishment of an internal audit function: (a) public disclosure of reasons for removal is possible under existing legislation; and (b) the Federal Audit Office acts as the internal auditor for the FOPI.
  - Regulatory reforms under the ISL: current efforts focus on establishing integrated supervision of private insurance within scope of the ISL.
  - Strengthening regulatory resources: authorities have ongoing efforts to strengthen resources.
  - Formal regulatory cooperation and information exchange: FOPI expressed interest in signing the IAIS MMOU and providing a staff member for the validation team within the accession procedure; process expected to be initiated soon.
- Supervised entities recommendations:
  - Explicit requirements on segregation of life and non-life risks for composite reinsurers and prior FOPI approval for transfers will be given due consideration.
- Ongoing supervision recommendations:
  - (a) Market analysis function has been satisfactorily outsourced.
  - (b) Risk-focused on-site inspections are being performed and could be expanded.
  - (c) Effective preventive and corrective measures have been and will be taken as required.
  - (d) Group/conglomerate supervision is being strengthened; several Directives entered into force December 31, 2006, including on internal business transactions; cooperation with foreign supervisors is being enhanced.
  - (e) Risk-based direct supervision of intermediaries is being initiated and may require additional resources.
  - On quarterly reports: major insurance undertakings have long been providing quarterly selected financial indicators, including of solvency and asset/liability management; these indicators have been and are being used for off-site surveillance and intervention as required.
- Prudential requirements:
  - Implementation of the SST was on schedule according to authorities.

*IMF staff assessment prepared by Su Hoong Chang (Monetary and Capital Markets Department).*

### 20.      The recommendation to plan for the effective implementation of the IAIS standards

### 20. The recommendation to plan for the effective implementation of the IAIS standards

### Implementation of IAIS disclosure standards
- Finding: The recommendation to plan for the effective implementation of the IAIS standards on enhanced disclosure to facilitate market discipline will be followed up pending the intended consolidation of the standards into a single IAIS document.
- Interim approach: In the meantime, the provisions of the standards are being implemented in parallel with the application of the SST and IFRS disclosure requirements.
- Recommendation: The FOPI is advised to plan for the effective implementation of the IAIS standards on public disclosures, balancing transparency with commercial confidentiality. IAIS standards referenced:
  - Disclosures Concerning Technical Performance and Risks for Nonlife Insurers and Reinsurers, October 2004
  - Disclosures Concerning Investment Risks and Performance for Insurers and Reinsurers, October 2005
  - Disclosures Concerning Technical Risks And Performance For Life Insurers, October 2006

### Conditions for effective insurance supervision (Principle 1)
- Findings:
  - Predictability of macroeconomic, legal and institutional frameworks is a traditional strength of Switzerland.
  - Accounting and auditing standards: regulators and professional associations set standards; FOPI expects insurers to adopt international standards such as IFRS, U.S. GAAP, and Swiss FER GAAP.
  - Swiss Actuarial Association (SAA) introduced a membership category of qualified actuaries based on the International Actuarial Syllabus; SAA has not taken disciplinary action against any of its members for the last 10 years.
  - External audit: Swiss Institute of Certified Accountants (SICA) adapted Swiss Audit Standards implementing ISAs published up to June 30, 2003; in 2007 Swiss Audit Standards will include the Audit Risk Standards; SICA has not taken disciplinary action against any of its members in respect of insurance audits.
  - Federal Audit Oversight Authority (FAOA) will be established in 2007 pursuant to the Audit Oversight Act (AOA) enacted in December 2005.
- Key statistic: Swiss Stock Exchange market capitalization SwF 1,021 billion (companies in the Swiss Performance Index) as at end-2005 and turnover of SwF 1,338 billion.

### Supervisory objectives and system (Principles 2–5)
- Findings:
  - ISL objective: “is designed to protect the insured from abuses and the insolvency risks to which insurance companies are exposed.”
  - Joint Guidelines for Effective Financial Market Regulation (September 2005) outline objectives: a) facilitate international competitiveness; b) ensure functionality, efficiency, and stability; c) maintain integrity; supported by principles including predictability, transparency, competitive neutrality, openness, impact-oriented approach, tailor-made design, and comprehensiveness.
  - FOPI remit under ISL (Article 46) includes monitoring compliance, checking solvency, monitoring business plans, protecting insured, intervening on mismanagement, and specific powers over claims settlement for motor vehicle third party liability.
  - External accountability: FOPI reports to minister of finance; director appointed by government; subject to audits by the FFA; parliamentary committee inquiry possible.
  - Internal audit: currently no internal audit function within FOPI; Federal Audit Office conducts audits.
  - Staffing: currently only five staff supervising 70 reinsurers, including 3 large and globally diversified reinsurance companies.
  - Confidentiality: strict protection of privileged or personal information; general public service legislation applies.
- Assessments and recommendations:
  - Independence and accountability could be strengthened by public disclosure of reasons for removal of the Director and establishment of an internal audit function.
  - Critical that FOPI has sufficient staff resources to supervise sophisticated and globally diversified reinsurers.

### Supervisory process, cooperation, and information sharing (Principles 4–5)
- Findings:
  - FOPI uses self-governance and self-assessment; developing Self-Assessment Modules (SAM) and industry benchmarks for corporate governance, risk management and internal controls.
  - Appeal process: Independent Appeal Commission for Private Insurance (first instance), final appeal to the Federal Court.
  - MoUs: FOPI has MoU with SFBC for co-coordinate supervision of financial conglomerates; April 2006 MoU with insurance supervisory authorities of some 20 Member States of the EU and EEA; inclusion in Coordination Committees established by Helsinki Protocol.
- Recommendations:
  - Consider independent assessment to validate SAM responses to enhance consistency of self-ratings.
  - Consider similar regulatory cooperation and information exchange arrangements with regulators outside the EU/EEA.

### Licensing, fit-and-proper, changes in control, corporate governance (Principles 6–9)
- Licensing (Principle 6):
  - Coverage: ISL covers all reinsurers domiciled in Switzerland; reinsurers domiciled outside Switzerland are exempted if they only offer reinsurance (no direct insurance) in Switzerland.
  - Exemptions: reinsurance captives are exempted from the SST; FOPI may declare exemption does not apply to reinsurance captives with complex risk structures or substantial financial risks.
  - Minimum capital: SwF 10 million for professional reinsurers and SwF 3 million for captive reinsurers.
  - Four existing captive reinsurers grandfathered; their license fees set at SwF 5 million by the FOPI.
  - Assessment: licensing process implemented systematically; however, no regulatory measures ensure segregation of life and nonlife risks within composite reinsurers; reinsurers not subject to tied assets requirements.
  - Recommendation: FOPI is advised to require composite reinsurers to ensure proper segregation of life and nonlife risks.
- Suitability of persons (Principle 7):
  - ISL empowers FOPI to prescribe required professional qualities (Article 14); fitness and propriety reviews for existing reinsurers when submitting business plans in 2007; ongoing notification requirement for changes in key persons.
  - Audit firms and lead auditors must be approved by FAOA and FOPI (ISL Article 28); accountable actuary professional qualifications issued by the Federal Council.
  - FOPI may demand dismissal and ban for up to five years (Article 51).
  - Assessment: legal authority supports fit-and-proper regime; effective implementation will bring Swiss regime into full observance of ICP7.
- Changes in control and portfolio transfers (Principle 8):
  - Prior notification required for acquisitions or changes in ownership thresholds exceeding 10 percent, 20 percent, 33 percent or 50 percent of capital or voting rights (Article 21).
  - Reinsurers are exempted from Article 62 (prior approval for transfers of reinsurance portfolios), though contract law requires cedant and counterparties’ consent; notification requirement for portfolio transfers is stated in Guideline on intra-group transactions.
  - Assessment: FOPI’s vetting powers enhance oversight; recommendation that FOPI require approval before insurers transfer all or any part of their insurance business to protect policyholders.
- Corporate governance (Principle 9):
  - ISL and SO set fitness and propriety requirements; prohibits chairman from holding dual CEO role; FOPI has issued Guidelines on Corporate Governance (binding).
  - External auditors’ role to notify FOPI of criminal offences and irregularities (Article 30); FOPI is defining roles of external auditors and accountable actuaries under ISL and SST.
  - Assessment: ISL empowers FOPI to supervise corporate governance; FOPI finalizing templates under SAM and defining roles of auditors and accountable actuaries.

### Internal control, market analysis, and surveillance (Principles 10–13)
- Internal control (Principle 10):
  - ISL Article 27 requires (re)insurers to establish an internal audit function and provide an annual activity report to external audit; FOPI has access to internal audit reports.
  - Industry structure: over 70 reinsurance entities; more than 75 percent of business concentrated in 3 reinsurers.
  - Assessment: state of internal control uneven; large firms have in-depth controls, small firms have thinner control operations; effective implementation of FOPI powers will bring full observance.
- Market analysis (Principle 11):
  - Since 2004, FOPI publishes company-specific and aggregated data in its annual reports.
  - More than 95 percent of reinsurance premiums are written from foreign business.
  - Recommendation: FOPI needs to strengthen resources and cost-effective systems/processes for efficient market analysis.
- Reporting and off-site monitoring (Principle 12):
  - Insurers submit annual supervisory report in FOPI-prescribed format; FOPI may require more frequent reporting.
  - FOPI analyzing returns against benchmarks; plans to incorporate run-off statistics and breakdown of technical provisions by line of business in revised returns.
  - Considering timelier reporting (quarterly/semi-annual) based on internal management/risk reports.
  - Recommendation: more timely regulatory reporting—e.g., quarterly reports focusing on solvency positions and asset-liability management.
- On-site inspection (Principle 13):
  - On-site visits have been conducted for specific concerns; no on-site examinations in 2006 due to resource constraints; no inspection plan for 2007 at time of assessment.
  - Reinsurers to perform SST in 2008; need for FOPI validation of internal controls and governance to ensure data integrity for solvency computation.
  - Assessment: Partly observed; FOPI needs to build regulatory resources, systems, and processes for risk-based on-site inspections; SST implementation requires staff skilled in internal models and diverse global risks.

### Preventive measures, enforcement, winding-up (Principles 14–16)
- Preventive and corrective measures (Principle 14):
  - Article 51 empowers FOPI to take measures including denying access to assets, ordering deposits/blocking assets, assigning powers to third parties, transferring portfolios, demanding dismissal and disqualification for up to five years.
  - Assessment: Observed.
- Enforcement and sanctions (Principle 15):
  - FOPI drafting regulatory intervention levels: base capital adequacy ratios (Solvency I, SST) and three sets of actions (company action level, supervisory action level, withdrawal of license).
  - Publication obligations for FOPI decisions that set precedent, have implications for more than one (re)insurer, or are of industry/public interest.
  - Administrative fine: maximum SwF 100,000 for breaches of ISL provisions (Article 86).
  - Criminal/large fines: prison sentence or a fine not exceeding SwF 1,000,000 for contraventions including licensing/registration breaches, misrepresentation, failure to maintain minimum capital, and accountable actuaries/auditors failing obligations (Article 87). Court may ban a person sentenced to prison from senior positions for up to five years.
  - Institutional observation: no dedicated enforcement unit within FOPI; draft FINMA Act provides for streamlined sanctions including new administrative sanctions.
  - Recommendation: establish enforcement functions as a separate unit; ensure staff with appropriate skills for enforcement.
- Winding-up and exit (Principle 16):
  - Approval from FOPI required before an insurer can commence bankruptcy proceedings; FOPI may appoint liquidator.
  - Reinsurers exempted from tied assets requirements; lack of segregation of life and nonlife risks may complicate winding-up.
  - SST does not address legal entitlement and priority of claims of different stakeholders.
  - Recommendation: FOPI advised to review the need to segregate assets supporting life and nonlife technical provisions.

### Group-wide supervision and intra-group transactions (Principle 17)
- Findings:
  - ISL recognizes group and conglomerate supervision equivalent to relevant EU Directives; equivalence formally recognized; MoU with all 28 member states of the EU and EEA.
  - FOPI can serve as lead supervisor or co-supervisor; consolidated supervision may encompass all companies of a Swiss group worldwide.
  - Currently nine Swiss groups placed under group supervision: Baloise-Holdings, Swiss Life, Swiss Re, Winterthur Group, Zurich Financial Services Group, Helvetia, Mobilar, Vaudoise, and National.
  - Criteria for group supervision include geographical scope and complexity.
  - Article 194 SO requires insurance groups to submit all important intra-group transactions and an annual report on the state of intra-group transactions.
  - Assessment: Largely observed; effective implementation of new mandate will bring Swiss regime into full observance of ICP17.
- Recommendation: issue explicit and consistent regulatory guidelines on “important internal transactions” including quantitative minimum values and qualitative declarations on arm’s length execution.

### Prudential requirements (Principles 18–23, 26)
- Risk assessment and insurance activity (Principles 18–19):
  - Article 96 SO requires appropriate risk management and internal monitoring; Articles 97 and 98 require proper and updated risk-management documentation and management of operational risks.
  - SST discussions with large reinsurers are informing FOPI’s understanding of risks and risk management practices.
  - Assessment: Largely observed; SST in transition—implementation from 2008, target capital from 2010.
- Technical provisions and liabilities (Principle 20):
  - Article 24 ISL requires reinsurers to maintain sufficient technical reserves and provides legal basis for FOPI review.
  - Accountable actuary designated to ascertain adequacy of technical provisions under Solvency I and SST.
  - FOPI to issue guidelines on technical provisions for life risks and draft guidelines on nonlife risks.
  - Assessment: Largely observed.
- Investments and derivatives (Principles 21–22):
  - Tied asset requirements do not apply to reinsurers; valuation rules: market consistent basis under SST and statutory basis for Solvency I.
  - Reinsurers required to have sound investment management policies (security, return, liquidity, diversification); SST imposes capital charges for risky assets and ALM mismatches.
  - Article 100 SO limits use of derivative financial instruments to hedging or efficient portfolio management; Articles 101–108 define requirements (investment strategy, documentation, limits, risk analysis, internal controls, qualified personnel, management reporting); annual reports on derivative activities required.
  - Intra-group derivative/credit derivative transactions must be reported (Arts. 193–196 SO). FOPI can require reduction of intra-group exposures (Article 51).
  - Assessment: Largely observed.
- Capital adequacy and solvency (Principle 23):
  - Current regime: all reinsurers, including captive reinsurers, required to comply with Solvency I requirements.
  - SST: principle-based solvency regulation; target capital defined as the sum of the expected shortfall in a change of risk-bearing capital within one year at the 99 percent confidence level plus the market value margin.
  - SST implementation timeline: reinsurers expected to fully implement SST in 2008; target capital requirement expected to come into force as of 2010.
  - SST features: market consistent valuation of assets/liabilities; technical provisions = best estimate (BE) plus a market value margin (MVM) calibrated by a cost of capital (CoC) approach; internal models mandated for reinsurers; SST report is management responsibility (Article 53 AVO).
  - Accountable actuary responsibilities under Article 24 ISL include adequacy of technical provisions, maintenance of solvency margin and related assets.
  - Challenge: verification of internal models and need for FOPI expertise in company-specific models and global reinsurance risks.
  - Assessment: Largely observed; SST will be in full observance of ICP23 when fully implemented and effectively supervised.
- Information, disclosure & transparency towards the market (Principle 26):
  - FOPI and SIA publish selected reinsurance data at entity and industry level in annual reports on their websites.
  - Assessment: Largely observed.
  - Recommendation: FOPI advised to plan for effective implementation of IAIS public disclosure standards to facilitate market discipline.

### Key statistics and numeric points (preserved exactly as in source)
- Swiss Stock Exchange market capitalization: SwF 1,021 billion (companies in the Swiss Performance Index) as at end-2005.
- Swiss Stock Exchange turnover: SwF 1,338 billion.
- SAA disciplinary actions: none taken against any of its members for the last 10 years.
- SICA implementation: International Standards on Auditing published up to June 30, 2003; in 2007 Swiss Audit Standards will include the Audit Risk Standards.
- Staff: currently only five staff supervising 70 reinsurers, including 3 large and globally diversified reinsurance companies.
- Concentration: more than 75 percent of business is concentrated in 3 reinsurers.
- International business: more than 95 percent of reinsurance premiums are written from foreign business.
- Minimum capital: SwF 10 million for professional reinsurers and SwF 3 million for captive reinsurers.
- Grandfathered captive license fees: SwF 5 million.
- Administrative fine maximum under ISL Article 86: SwF 100,000.
- Criminal/fine maximum under ISL Article 87: a prison sentence or a fine not exceeding SwF 1,000,000.
- SST target capital definition: “Defined as the sum of the expected shortfall in a change of risk-bearing capital within one year at the 99 percent confidence level plus the market value margin.”
- SST implementation dates: reinsurers expected to fully implement SST in 2008; the target capital requirement is expected to come into force as of 2010.

*Source: IMF Staff Report — detailed principle-by-principle assessment excerpt (unit: _cr07200 - 20).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07200.pdf_