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FOPI has been keeping a close eye on its supervised insurance companies ever since the financial turbulence began in mid-2007. The focus has been both on the asset side of insurance company balance sheets (i.e. the investment categories used to cover tied assets) as well as on the passive side (i.e. share capital and Solvency I criteria). Solvency II and the Swiss Solvency Test (SST) have not yet been fully implemented and therefore only give an idea of the overall trends as far as share capital and stress resistance are concerned.
FOPI surveys to determine exposure to asset-backed securities and capital losses on the stock market
In August and November 2007, FOPI conducted two surveys to determine the extent of insurance company investment exposure. These surveys showed that Swiss-based insurance companies were not directly exposed to subprime loans and mortgages. Only a few insurance companies had indirect exposure due to their having taken sizeable positions in investments with underlying subprime loans and mortgages. However, the average exposure that the supervised direct insurance companies in Switzerland had to these asset categories did not exceed 1% of tied assets. In 2007, only reinsurance groups were deeply exposed to the subprime turbulence. The posted losses came from investments in credit derivatives.
FOPI conducted a survey of exposure to capital losses on the stock market in January 2008 and a follow-up survey in March and April. These surveys show that the developments on financial markets have indeed had various impacts on insurance company share capital. However, insurance companies continue to meet Solvency I criteria and tied assets remain fully covered. In particular, private insurance companies have maintained the required minimum reserve threshold of 100% for their fully reinsured pension capital.
The prevailing market uncertainty makes it impossible to predict whether current developments will accentuate further, forcing individual insurance companies to write down more of their investments, or whether there will be other consequences. FOPI will therefore continue to monitor the situation.
Investment guidelines have had the desired impact
On the whole, Swiss insurance companies are much better capitalised today than they were in the crisis years 2001 and 2002. Many companies are now reaping the benefits of previous-year share capital increases. The resulting stronger financial position has enabled them to better handle market volatility. Insurance companies also took steps to reduce the portion of stocks in their overall investment portfolios. Generally speaking, insurance companies have managed to maintain their required minimum reserve thresholds despite difficult market conditions. This also proves that the regulations introduced back in 2006 on investment of tied assets, which require insurance companies to maintain enough assets to cover their actuarial provisions, were on track.
Consistent follow-up on the integrated supervision concept
Despite the robustness observed thus far, Swiss insurance companies still face certain challenges. The economic climate and intensified competition, which are likely to pull down premiums, are two major factors. FOPI will therefore consistently follow up on the integrated supervision concept that it launched in early 2007. The main focus will be on continued implementation of traditional supervisory aspects (Solvency I, actuarial provisions, tied capital etc.), quantitative supervisory aspects (SST) and qualitative supervisory aspects (requirements in the area of risk management, corporate governance, etc.). In order to ensure that data flows between insurance companies and the supervisory authority (FOPI) remain as open and flexible as possible, FOPI has developed a new IT tool based entirely on Web technology. The new IT tool is expected to be introduced starting next year.
As a concept, integrated supervision means ensuring that insurance companies remain solvent and that adequate check-and-balance mechanisms are in place to ensure responsible corporate decision-making. Within this context, regulation acts as a guardrail to protect solvency. On the one hand, it prevents risky capital market transactions from eroding the reserves needed by insurance companies to cover their insurance obligations. On the other, it gives companies the freedom they need to innovate and grow.
This approach will also be used by the new Swiss Financial Market Supervisory Authority (FINMA). The varying effects of the current financial market turbulence in the individual financial market sectors and the various mechanisms set in place show that FINMA will need to apply proportionally a case-by-case approach.
Explanation of terms used
Solvency I criteria formally establish how much free and unencumbered share capital must be maintained in relation to an insurance company’s business volume.
Direct insurance companies are required to cover their actuarial provisions with a certain amount of tied assets; investment regulations are established to ensure that insurance companies adhere to prudent investment policies. These investment regulations do not apply to free assets. Direct insurance companies in Switzerland have over CHF 300 billion in capital investments in tied assets. This ensures that potential policyholder claims are directly covered by adequate reserves.
Basing itself on economic criteria, the Swiss Solvency Test (SST, Solvency II) gathers data on all relevant and quantifiable risks. The SST model is used to determine a company’s minimum capital requirement (i.e. target capital). A company’s risk capital is the total amount of capital may be used to cover the target capital. The amount of risk capital is based on a market value assessment.