FOPI: Well prepared for the future

Bern, 23.05.2006 - The Federal Office of Private Insurance (FOPI) is well prepared in its efforts to implement the Insurance Supervision Law, which entered into force at the beginning of 2006. The paradigm shift towards risk-based supervision is affecting the insurance sector during a favourable economic phase. Director Herbert Lüthy has taken the successful new orientation of FOPI as an occasion to submit his resignation effective the end of the year.

The implementation of the Insurance Supervision Law (ISL) and the associated Supervision Ordinance (SO), which entered into force on 1 January 2006, takes place in an environment that can be considered favourable for both the insurance sector and the responsible regulator – the Federal Office of Private Insurance (FOPI).

On the one hand, the Swiss insurance industry has further recovered from the difficult years in 2001 and 2002 and has again built up a healthy equity base; on the other hand, FOPI has been able to conclude the new orientation it began in 2003, both in terms of organization and content. After the expansion decision approved by Parliament in December 2005, FOPI can now be strengthened in a targeted manner for this implementation phase.

Results of the 2005 SST field test

As part of the new orientation of supervision, a risk-based supervision has been developed, especially through the Swiss Solvency Test (SST) for all supervised insurance companies. The SST determines the amount of the capital necessary to sustain the risks (“target capital”). The available capital (“risk-bearing capital”) must be at least equivalent to this target capital. If this is not the case, either the capital must be increased or the risks must be decreased. The SST adopts an economic perspective, i.e. all relevant factors are evaluated not on the basis of regulations, but on the basis of economic criteria.

After a first field test in 2004, a second test run was initiated last year that was representative of the entire market, covering about 93% of the total premium volume in the life insurance sector and about 85% of the total premium volume in the non-life insurance sector. The most important insights:

  • There is only a very weak correlation between statutory solvency according to Solvency I and solvency according to the SST. In particular, this is due to the fact that the required solvency margin according to Solvency I does not take the market and credit risks into account.
  • Despite the dramatic reduction of the share ratio after the bad experiences of 2001 and 2002, market risk still constitutes 50% to 80% of the capital needs of the insurance companies.
  • The share of insurance risks as part of the overall risk is the second most important risk among both life insurers and non-life insurers.
  • The credit risk, which expresses the risk of default by borrowers of all kinds, is of subordinate significance for the insurance industry, in contrast to banks.

For the large life and non-life insurers, the SST has already been mandatory since the beginning of 2006. Smaller companies, however, have a two-year grace period to build up the necessary know-how and to find a responsible actuary. Within five years, the insurance companies must provide evidence of sufficient risk-bearing capital to cover the target capital.

FOPI promotes voluntary transparency of insurers

Based on the new legal foundations, FOPI defines its supervision philosophy with the following key terms: risk-based, principle-based, and competition-oriented. In this way, FOPI aims to support and promote self-regulation by the financial market to the extent possible.

For this purpose, FOPI supports the voluntary transparency of insurance companies. It is desirable both for the policyholders and for the insurance market itself if insurance companies publish relevant risk information, as well as their rating or the probability of failure according to the SST, so that market participants can get an idea of the extent to which the insurance company exceeds the regulatory requirements. In this context, FOPI does not primarily define its role as a supervisory authority by formulating detailed transparency requirements. Rather, the market and the relevant market participants themselves should call for more relevant information.

Resignation of Director Herbert Lüthy

Herbert Lüthy has informed Federal Councillor Hans-Rudolf Merz of his desire to resign from his function as Director of the Federal Office of Private Insurance (FOPI) effective the end of 2006. The 63-year-old director took over FOPI in October 2002, at a time that was very difficult both for the insurance industry and for FOPI itself. Coming from the private sector, he successfully reoriented FOPI to the demands of an increasingly globalised insurance industry. In particular, Herbert Lüthy undertook pioneering work in developing the Swiss Solvency Test (SST).


Address for enquiries

Patrick Jecklin, FOPI Media Spokesperson, tel. 031 325 01 65



Publisher

Federal Office of Private Insurance
http://www.bpv.admin.ch

https://www.admin.ch/content/gov/en/start/documentation/media-releases.msg-id-5240.html