Supervision of Reinsurance

Reinsurers have long played a decisive role in the financial management of large loss events which primary insurers are unable to bear themselves. Reinsurance is a very international business. With approximately 70 supervised companies, Switzerland is an important location for reinsurers. - evidenced not only by its large volume of premiums (currently standing at over CHF 30 billion), but also by the fact that one of the world's leading reinsurers is domiciled in Switzerland. The Insurance Supervision Act (ISA) imposes on reinsurers the same provisions laid down by the new supervisory philosophy as apply to direct insurers; however, it also takes account of the differing nature of the reinsurance business.

The significance of reinsurers

At the end of 2008 there were approximately 70 reinsurance companies subject to FINMA supervision in Switzerland. Of these, 28 are professional reinsurers, the remainder reinsurance captives. The figures attest to the importance of the reinsurance sector: annual gross premiums now total more than CHF 30 billion, while equity, which has grown by an average of 14% per year since 1997, accounts for over 40% of the equity of all insurance companied supervised by FINMA combined.

The reinsurance business is extremely international in nature, and therefore it is not possible to talk about a Swiss reinsurance market. Pure risk business in Switzerland has always been relatively small when compared with the business as a whole, and many reinsurers have long had a very strong international focus. This has helped Switzerland to establish itself as an important location for reinsurance companies.

Supervision of reinsurers

The business conducted by reinsurers is different from that conducted by direct insurers. The most obvious distinction is that reinsurers' clientele consists solely of legal entities. The Insurance Supervision Act (ISA), which also governs reinsurance companies, takes account of these differences. The situation was even more acute under the old ISA, where the provisions governing direct insurers sometimes differed substantially from those governing reinsurers. However, the revised ISA imposes on reinsurers the same provisions laid down by the new supervisory philosophy as apply to direct insurers.

The revised ISA does recognise some differences, however. For example, the regulations on tied assets do not apply to reinsurers, so reinsurance companies have essentially no restrictions on investing their assets provided they comply with general guidelines. With regard to the Swiss Solvency Test (SST), all reinsurers must develop an internal model based on the principles of the SST. Reinsurance captives are released from this obligation as long as their risk structure is below a certain degree of complexity. The risk-based solvency requirement for reinsurance captives exempt from the SST is set using a factor model.

Ongoing reinsurance supervision comprises recurring activities such as assessing the annual reports as well as reviewing transactions conducted by reinsurance companies. These reviews are carried out through the entire lifecycle of a company, from obtaining an operating licence and conducting all possible transactions involved in expanding or restructuring a company such as shareholdings, financing arrangements, acquisitions, mergers, changes to governing bodies, etc, through to discontinuing business activities, establishing a run-off plan and releasing the company from insurance supervision. The business plan forms a crucial element of this process, since it is frequently affected by such transactions. Changes to the business plan must be reported to or approved by the supervisory authorities.