## _cr07201 - Section 1

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---

### Introduction
- As at 31 August 2006, there were 214 (re)insurers—23 Swiss life insurers, 4 foreign life insurers, 78 Swiss non-life insurers, 40 foreign non-life insurers, and 69 reinsurers active in the Swiss market.
- Swiss insurers generate more than 70 percent of the sector’s global premiums from abroad.
- Market concentration:
  - The 5 largest non-life insurers account for 72 percent of gross premium written.
  - The 5 largest life insurers account for 82 percent of the premium earned.
  - Swiss Re, European Re and Converium maintain about 79 percent share of the Swiss reinsurance market.
- Summary finding from the FSAP stress tests: a moderate correction in share and property values, with interest rates ending somewhat lower than prior cyclical lows, could cause distress to five out of nine life insurers, two of twelve non-life insurers and two of nine health insurers that participated in the 2006 Swiss Solvency Test (SST) field tests.
- Reinsurers did not participate in the 2006 SST field tests; tests were conducted on a legal-entity basis and do not reflect intra-group capital or risk transfers.

### Stress Test Scenarios and Considerations
- Participants: 30 direct-writing insurers in the 2006 SST field tests: nine life insurers, twelve non-life insurers, and nine health insurers.
- The simulated integrated scenario represents a modest global recession and applies five instantaneous portfolio shocks to insurer portfolios:
  - A fall in interest rates (I.R.) by 25 bps (short-end) to 75 bps (long-end) lower than the low in the last economic cycle (see Table 2 for last-cycle lows).
  - A widening of credit spreads by 50 bps.
  - An increase of 20 percent in the value of the Swiss franc, euro and British pound against the U.S. dollar.
  - A 30 percent fall in international equity markets.
  - A 20 percent fall in the value of real estate.
- Effects measured:
  - As a percentage of the actual risk-bearing capital (RBC) of the 30 insurers; and
  - In terms of the reduction (in Swiss francs) in the RBC of the 30 insurers.
- Asset concentration (end-2005, average percent of total assets):
  - Real Estate (including own property and mortgage loans): Non-Life 15.0, Life 18.1, Health 11.3, Industry 12.8
  - Bonds: Non-Life 38.6, Life 37.8, Health 48.2, Industry 41.7
  - Equities: Non-Life 7.4, Life 4.3, Health 14.6, Industry 8.4
  - Investment funds: Non-Life 11.4, Life 2.4, Health 11.4, Industry 8.5
  - Hedge Funds: Non-Life 0.8, Life 1.2, Health 0.5, Industry 0.9
  - Private Equity: Non-Life 0.2, Life 0.2, Health 0.1, Industry 0.2
  - Derivatives: Non-Life 0.0, Life 0.1, Health 0.7, Industry 0.2
  - Other assets: Non-Life 26.6, Life 35.8, Health 23.2, Industry 27.3
- Market-risk channel considerations:
  - Interest-rate falls harm insurers with liabilities longer than assets and increase the cost of guaranteed policy options.
  - Wider credit spreads disproportionately affect insurers holding lower-quality fixed-income assets.
  - Appreciation of the Swiss franc versus the U.S. dollar disadvantages insurers with U.S. dollar liabilities funded by other currencies.
  - Equity and real estate declines disproportionately affect insurers with higher proportional investments in those asset classes.
- Policy implication: development and enforcement of standards or guidelines for RBC capacity to reflect exposure to illiquid, volatile, or low-quality assets.

### Stress Test Results — Life Insurance
- Summary of stress outcomes for the nine participating life insurers:
  - Interest-rate term mismatch:
    - One life insurer has risked a small portion of its RBC to protect against an interest rate rise.
    - Two insurers are relatively neutral.
    - Six insurers have risked a portion of their RBC if interest rates fall.
    - The two insurers with the largest asset–liability term mismatch would have losses of about 20 percent of their RBC if interest rates fell to the scenario level.
  - Credit-spread exposure:
    - The two insurers with the largest term mismatch also invested in the lowest quality fixed-interest investments; these two would experience cumulative losses of between 30-40 percent of RBC if credit spreads increased.
  - Currency mismatch:
    - Most life insurers maintain a relatively neutral stance.
    - The insurer with the greatest currency mismatch is also the insurer with the greatest combined interest-rate and credit-spread risk; under the scenario where the Swiss franc rises against the US dollar, this reduces that insurer’s cumulative loss of RBC to 30 percent.
  - Equity exposure:
    - A 30 percent correction in equity markets would cause:
      - The riskiest insurer to lose over 2/3 of its RBC.
      - Two additional insurers to lose over 1/3 of their RBC.
  - Real estate exposure:
    - A 20 percent correction in real estate markets would result in:
      - Three insurers experiencing losses over two-thirds of their RBC (of which one would be bankrupt).
      - Two additional insurers experiencing losses over one-third of their RBC.
- Observations and recommendations:
  - The insurer that would become bankrupt adopted aggressive concentration across all tested market risks and lacked RBC to support those risks.
  - The four life insurers that did not experience distress had avoided aggressive positions across the tested areas.
  - Further supervisory analysis is recommended for the five life insurers that would experience distress to determine whether they can reduce risk profiles or secure additional capital.
  - FOPI should develop risk-bearing standards or guidelines for life insurers with respect to market-risk exposures.

### Stress Test Results — Non-Life Insurance
- Summary of stress outcomes for the twelve participating non-life insurers:
  - Interest-rate risk: Only one non-life insurer assumed significant interest-rate risk and is only modestly vulnerable to an interest-rate rise.
  - Credit-spread risk: Non-life insurers do not seem to have assumed major credit-spread risk.
  - Currency risk: No non-life insurers assumed a major currency risk.
  - Equity risk: Almost all have equity exposure; only two have taken a major equity risk relative to RBC.
  - Real estate risk: Significant exposure across the sector; the two insurers with the highest real estate concentration also have the highest equity concentration.
- Overall outcome:
  - Two non-life insurers would experience financial distress (losing more than one-third of their RBC) under the global recession scenario; both have the highest relative exposure to real estate and equity markets.
- Recommendation:
  - Further analysis of these two non-life insurers to assess potential distress, options to reduce risk profiles, or need for additional capital; consider industry-wide RBC guidance for non-life insurers.

### Stress Test Results — Health Insurance
- Summary of stress outcomes for the nine participating health insurers:
  - No participating health insurers have significant interest-rate term mismatch risk, credit-spread risk, or significant currency risk.
  - Two health insurers have exposure to significant equity risk.
  - The same two health insurers have exposure to significant real estate risk.
- Overall outcome:
  - Two health insurers would experience financial distress (losing more than one-third of their RBC) under the global recession scenario; both rank among the highest in equity and real estate exposure.
- Recommendation:
  - Further analysis of these two health insurers to determine potential distress mitigation (risk reduction or additional capital) and development of RBC standards/guidelines for health insurers.

### Overall Observations from Stress Test Results
- Across participating entities:
  - Five of nine life insurers, two of twelve non-life insurers, and two of nine health insurers showed potential for financial distress under the simulated scenario.
  - Distress is concentrated among firms with high concentrations in illiquid real estate and volatile equity investments, often combined with term mismatches and lower-quality fixed-income holdings.
- Supervisory actions advised:
  - Focused inspections of insurers with large market-risk concentrations.
  - Development of RBC-related standards or guidelines to limit excessive concentration in illiquid, volatile, or low-quality assets.
  - Reassess next year once reinsurers and the remainder of direct insurers participate in the SST.

---

### Section 2 — Stress Test Results for Health Insurance

### Overall observations from stress test results
- All insurers that would experience financial distress have well above average exposure to the real estate markets and almost all of these also have above average exposure to the equity markets.
- A strong majority of insurers that participated in the 2006 SST field test would appear to handle well the stress resulting from a global recession of the magnitude tested.
- Exposure to illiquid assets, volatile assets and lower quality assets could lead to distress, sometimes significant.
- Consideration needs to be given to whether the FOPI should bring in risk-bearing standards or guidelines with respect to market risk that link the market risks assumed to the RBC capacity of the insurers.
- The FOPI staff were very adept at modifying the SST software to perform the global recession scenario testing; analysis was usually performed in at least a day – and sometimes within hours of suggested changes. This suggests that the FOPI staff have the adequate tools to meaningfully discuss the situation of those insurers that are exposed to significant risk of financial distress with senior management, or the Board, as appropriate.

### Commentary on other scenarios from the 2006 SST field test
- The FOPI requested companies to submit stress results for other individual market scenarios based on reoccurrence of various historical market crises. While each of these scenarios led to different orders of distress in the insurance industry, similar issues to those raised by the global deflation scenario were generally raised.
- In 2006, the FOPI also asked insurers for analysis of the effects of a global pandemic. For direct insurers, the largest risks appeared to be related to asset market turbulence rather than to additional insurance claims. This suggests that similar thinking as to risk-bearing guidelines that link the market risks assumed to the RBC capacity of the insurers that were raised in the global recession scenario testing should be undertaken by the FOPI.
- For reinsurers, a global pandemic might have much more impact on insurance claims. This conclusion is tentative since reinsurers do not yet participate in the SST field tests. However, the large reinsurers have been trying to assess the impact of this risk. Expansion of the scenario testing to reinsurers in 2007 should help quantify the risks assumed.
- The other major risky scenario that the FOPI asked the insurers to consider was a major terrorist act. To date, there is no one scenario that captures the risks borne by the different insurance segments. However, in a rapidly changing world, attention needs to be paid to the potential exposure to such risks.

*International Monetary Fund, Monetary and Capital Markets Department, Technical Note: Insurance Sector Stress Testing (May 2007).*

### Section 1

### _cr07201 - Section 1

### Introduction
- As at 31 August 2006, there were 214 (re)insurers—23 Swiss life insurers, 4 foreign life insurers, 78 Swiss non-life insurers, 40 foreign non-life insurers, and 69 reinsurers active in the Swiss market.
- Swiss insurers generate more than 70 percent of the sector’s global premiums from abroad.
- Market concentration:
  - The 5 largest non-life insurers account for 72 percent of gross premium written.
  - The 5 largest life insurers account for 82 percent of the premium earned.
  - Swiss Re, European Re and Converium maintain about 79 percent share of the Swiss reinsurance market.
- Summary finding from the FSAP stress tests: a moderate correction in share and property values, with interest rates ending somewhat lower than prior cyclical lows, could cause distress to five out of nine life insurers, two of twelve non-life insurers and two of nine health insurers that participated in the 2006 Swiss Solvency Test (SST) field tests.
- Reinsurers did not participate in the 2006 SST field tests; tests were conducted on a legal-entity basis and do not reflect intra-group capital or risk transfers.

### Stress Test Scenarios and Considerations
- Participants: 30 direct-writing insurers in the 2006 SST field tests: nine life insurers, twelve non-life insurers, and nine health insurers.
- The simulated integrated scenario represents a modest global recession and applies five instantaneous portfolio shocks to insurer portfolios:
  - A fall in interest rates (I.R.) by 25 bps (short-end) to 75 bps (long-end) lower than the low in the last economic cycle (see Table 2 for last-cycle lows).
  - A widening of credit spreads by 50 bps.
  - An increase of 20 percent in the value of the Swiss franc, euro and British pound against the U.S. dollar.
  - A 30 percent fall in international equity markets.
  - A 20 percent fall in the value of real estate.
- Effects measured:
  - As a percentage of the actual risk-bearing capital (RBC) of the 30 insurers; and
  - In terms of the reduction (in Swiss francs) in the RBC of the 30 insurers.
- Asset concentration (end-2005, average percent of total assets):
  - Real Estate (including own property and mortgage loans): Non-Life 15.0, Life 18.1, Health 11.3, Industry 12.8
  - Bonds: Non-Life 38.6, Life 37.8, Health 48.2, Industry 41.7
  - Equities: Non-Life 7.4, Life 4.3, Health 14.6, Industry 8.4
  - Investment funds: Non-Life 11.4, Life 2.4, Health 11.4, Industry 8.5
  - Hedge Funds: Non-Life 0.8, Life 1.2, Health 0.5, Industry 0.9
  - Private Equity: Non-Life 0.2, Life 0.2, Health 0.1, Industry 0.2
  - Derivatives: Non-Life 0.0, Life 0.1, Health 0.7, Industry 0.2
  - Other assets: Non-Life 26.6, Life 35.8, Health 23.2, Industry 27.3
- Market-risk channel considerations:
  - Interest-rate falls harm insurers with liabilities longer than assets and increase the cost of guaranteed policy options.
  - Wider credit spreads disproportionately affect insurers holding lower-quality fixed-income assets.
  - Appreciation of the Swiss franc versus the U.S. dollar disadvantages insurers with U.S. dollar liabilities funded by other currencies.
  - Equity and real estate declines disproportionately affect insurers with higher proportional investments in those asset classes.
- Policy implication: development and enforcement of standards or guidelines for RBC capacity to reflect exposure to illiquid, volatile, or low-quality assets.

### Stress Test Results — Life Insurance
- Summary of stress outcomes for the nine participating life insurers:
  - Interest-rate term mismatch:
    - One life insurer has risked a small portion of its RBC to protect against an interest rate rise.
    - Two insurers are relatively neutral.
    - Six insurers have risked a portion of their RBC if interest rates fall.
    - The two insurers with the largest asset–liability term mismatch would have losses of about 20 percent of their RBC if interest rates fell to the scenario level.
  - Credit-spread exposure:
    - The two insurers with the largest term mismatch also invested in the lowest quality fixed-interest investments; these two would experience cumulative losses of between 30-40 percent of RBC if credit spreads increased.
  - Currency mismatch:
    - Most life insurers maintain a relatively neutral stance.
    - The insurer with the greatest currency mismatch is also the insurer with the greatest combined interest-rate and credit-spread risk; under the scenario where the Swiss franc rises against the US dollar, this reduces that insurer’s cumulative loss of RBC to 30 percent.
  - Equity exposure:
    - A 30 percent correction in equity markets would cause:
      - The riskiest insurer to lose over 2/3 of its RBC.
      - Two additional insurers to lose over 1/3 of their RBC.
  - Real estate exposure:
    - A 20 percent correction in real estate markets would result in:
      - Three insurers experiencing losses over two-thirds of their RBC (of which one would be bankrupt).
      - Two additional insurers experiencing losses over one-third of their RBC.
- Observations and recommendations:
  - The insurer that would become bankrupt adopted aggressive concentration across all tested market risks and lacked RBC to support those risks.
  - The four life insurers that did not experience distress had avoided aggressive positions across the tested areas.
  - Further supervisory analysis is recommended for the five life insurers that would experience distress to determine whether they can reduce risk profiles or secure additional capital.
  - FOPI should develop risk-bearing standards or guidelines for life insurers with respect to market-risk exposures.

### Stress Test Results — Non-Life Insurance
- Summary of stress outcomes for the twelve participating non-life insurers:
  - Interest-rate risk: Only one non-life insurer assumed significant interest-rate risk and is only modestly vulnerable to an interest-rate rise.
  - Credit-spread risk: Non-life insurers do not seem to have assumed major credit-spread risk.
  - Currency risk: No non-life insurers assumed a major currency risk.
  - Equity risk: Almost all have equity exposure; only two have taken a major equity risk relative to RBC.
  - Real estate risk: Significant exposure across the sector; the two insurers with the highest real estate concentration also have the highest equity concentration.
- Overall, two non-life insurers would experience financial distress (losing more than one-third of their RBC) under the global recession scenario; both have the highest relative exposure to real estate and equity markets.
- Recommendation: further analysis of these two non-life insurers to assess potential distress, options to reduce risk profiles, or need for additional capital; consider industry-wide RBC guidance for non-life insurers.

### Stress Test Results — Health Insurance
- Summary of stress outcomes for the nine participating health insurers:
  - No participating health insurers have significant interest-rate term mismatch risk, credit-spread risk, or significant currency risk.
  - Two health insurers have exposure to significant equity risk.
  - The same two health insurers have exposure to significant real estate risk.
- Overall, two health insurers would experience financial distress (losing more than one-third of their RBC) under the global recession scenario; both rank among the highest in equity and real estate exposure.
- Recommendation: further analysis of these two health insurers to determine potential distress mitigation (risk reduction or additional capital) and development of RBC standards/guidelines for health insurers.

### Overall Observations from Stress Test Results
- Across participating entities:
  - Five of nine life insurers, two of twelve non-life insurers, and two of nine health insurers showed potential for financial distress under the simulated scenario.
  - Distress is concentrated among firms with high concentrations in illiquid real estate and volatile equity investments, often combined with term mismatches and lower-quality fixed-income holdings.
- Supervisory actions advised:
  - Focused inspections of insurers with large market-risk concentrations.
  - Development of RBC-related standards or guidelines to limit excessive concentration in illiquid, volatile, or low-quality assets.
  - Reassess next year once reinsurers and the remainder of direct insurers participate in the SST.

*International Monetary Fund, Monetary and Capital Markets Department, Technical Note: Insurance Sector Stress Testing (May 2007).*

### Section 2

### Stress Test Results for Health Insurance

### Overall observations from stress test results
- All insurers that would experience financial distress have well above average exposure to the real estate markets and almost all of these also have above average exposure to the equity markets.
- A strong majority of insurers that participated in the 2006 SST field test would appear to handle well the stress resulting from a global recession of the magnitude tested.
- Exposure to illiquid assets, volatile assets and lower quality assets could lead to distress, sometimes significant.
- Consideration needs to be given to whether the FOPI should bring in risk-bearing standards or guidelines with respect to market risk that link the market risks assumed to the RBC capacity of the insurers.
- The FOPI staff were very adept at modifying the SST software to perform the global recession scenario testing; analysis was usually performed in at least a day – and sometimes within hours of suggested changes. This suggests that the FOPI staff have the adequate tools to meaningfully discuss the situation of those insurers that are exposed to significant risk of financial distress with senior management, or the Board, as appropriate.

### Commentary on other scenarios from the 2006 SST field test
- The FOPI requested companies to submit stress results for other individual market scenarios based on reoccurrence of various historical market crises. While each of these scenarios led to different orders of distress in the insurance industry, similar issues to those raised by the global deflation scenario were generally raised.
- In 2006, the FOPI also asked insurers for analysis of the effects of a global pandemic. For direct insurers, the largest risks appeared to be related to asset market turbulence rather than to additional insurance claims. This suggests that similar thinking as to risk-bearing guidelines that link the market risks assumed to the RBC capacity of the insurers that were raised in the global recession scenario testing should be undertaken by the FOPI.
- For reinsurers, a global pandemic might have much more impact on insurance claims. This conclusion is tentative since reinsurers do not yet participate in the SST field tests. However, the large reinsurers have been trying to assess the impact of this risk. Expansion of the scenario testing to reinsurers in 2007 should help quantify the risks assumed.
- The other major risky scenario that the FOPI asked the insurers to consider was a major terrorist act. To date, there is no one scenario that captures the risks borne by the different insurance segments. However, in a rapidly changing world, attention needs to be paid to the potential exposure to such risks.

*Source: _cr07201 - Section 2 — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07201.pdf*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07201.pdf_