08 September 2017

Transparency report on private occupational pension schemes: decline in premium volume and income

The premium volume of private Swiss life insurers offering occupational pension schemes has fallen by 6% compared with the previous year and now stands at CHF 23 billion. This reflects the reduced capacity and willingness of life insurers to write new full coverage insurance business. Life insurers generated a total income of CHF 8 billion, which is also 6% less than in 2015. 93% of these revenues went to insured persons. The reason for the fall in income is the decline in the return on investments due to low interest rates.
There are eight life insurers who provide occupational pensions under the Federal Act on Occupational Retirement, Survivors' and Disability Pension Plans and who are supervised by the Financial Market Supervisory Authority FINMA. Together they manage around one fifth of all the pension assets in Switzerland (CHF 197 billion of CHF 983 billion as at the end of 2015). They insure almost half of the 4.1 million active insured persons and pay pensions to around a fifth of the 1.1 million retirees (as at the end of 2015).

Reduced premium volume

In 2016, life insurers experienced a 6% decline in premium volume to CHF 23 billion. This shows that they are placing ever tighter limits on the provision of new full coverage insurance. None of these insurers offered any additional capacity, and no new providers have entered this market in over ten years. The main cause is likely to be the low return on the capital required to meet insurance benefits.

92.7% of income for insured persons

In 2016, private life insurers active in the occupational pensions sector generated a total income of CHF 8 billion, 5.7% less than in 2015. Of this amount, 92.7% went to insured persons in the form of insurance benefits, additional technical provisions and surpluses. The statutory minimum ratio is 90% (see also the"Minimum quota: distribution of surpluses from Pillar 2" ). An additional CHF 1.6 billion went towards strengthening technical provisions in 2016.

Reduced operating result

In 2016, life insurers again posted a positive operating result in occupational pensions. At CHF 602 million, it was 5.6% lower than in 2015. Since total assets grew over this period, it is clear that the total return on the entrepreneurial risk fell. The result is that providers are restricting capacity and employers are experiencing real difficulty in finding a full coverage insurance solution. Demand in this sector clearly exceeds supply.

Declining investment income

In 2016, private life insurers generated investment income of 2.6%, making this the third consecutive year in which returns have fallen (2015: 3.0%, 2014: 3.2%). Between 2005 and 2016, the average annualised net return on investments was 2.96% per year. The fact that interest rates have fallen to historically low levels has therefore led to a further erosion of investment income. As a consequence, life insurers have reduced the technical interest rate which is used for calculating actuarial reserves for annuities to an average of 1.43%. Taking account of changes in value of the investments, performance was 3.3% in 2016, after a low 1.9% in 2015 and a high 8.6% in 2014. These fluctuations clearly illustrate how exposed insurers are to capital market risks.

Claims expenses unchanged, operating costs falling

In 2016, claims expenses remained at the same level as in 2015, following falls of 5% and 13% in 2015 and 2014 respectively and a rise of 21% in 2013. The stagnating trend, combined with a slight fall in premium income, meant that the claims ratio in 2016 was 56%. Reported per capita operating costs fell by an average of 7% compared to the previous year, making this the ninth year in a row in which costs have fallen. Per capita costs, which stood at CHF 462 in 2007, fell to CHF 314 in 2016.

FINMA ensures transparency

This is now the twelfth year in which FINMA has published a comprehensive report on the performance of Swiss life insurers who are active in the occupational pensions sector. FINMA’s aim in producing this report is to provide transparency with regard to key figures such as costs, the payout ratio and investments. The data highlights the strengths and weaknesses of market participants and enables companies which are looking for pension solutions from private life insurers to compare the various offerings.

Supervision aims to deliver sustainable protection for insured persons

In its role as supervisor, FINMA’s primary objective is to ensure that assets entrusted to life insurers in the occupational pensions sector are used in a way which is both secure and lawful. Guaranteed insurance obligations are comprehensively covered by separate tied assets which are subject to strict investment requirements in terms of quality, risk diversification, permitted asset classes, risk management and administration. In addition, all life insurers must have adequate, prudently calculated technical provisions which are sufficient to meet their insurance obligations at all times. The ultimate goal is to provide sustainable protection to insured persons. Finally, life insurers must hold enough equity capital to provide a high level of security for insured persons' benefits. As in all other insurance sectors, this is measured by the Swiss Solvency Test (SST).