Requirements for the investment activities of insurance companies will also apply following the entry into force of the revised Insurance Supervision Act (ISA) and the revised Supervision Ordinance (SO) on 1 January 2024. These are intended to ensure that investment activities are carried out in particular in line with the risk capacity, solvency and business activities of the insurance companies. The investment requirements for insurance companies applicable until 31 December 2023 can be found here.
Insurance companies are legally obliged to guarantee entitlements arising from insurance contracts by establishing tied assets. This is insofar as they are not exempt pursuant to ISA (Art. 30a ISA or Art. 35 ISA). The claims of the insured persons are satisfied from this liability substrate before those of all other creditors if an insurance company becomes insolvent.
All insurance companies must abide by certain requirements when investing. These requirements are laid down in the ISO and are based on the ‘prudent person’ principle. For example, it must be ensured that insurance companies only invest in assets and instruments whose risks they can adequately assess, monitor, manage and include in their reporting.
In addition, the ISO also includes specific requirements for the investment of tied assets as well as their establishment and safekeeping. Security, liquidity and availability of assets play a special role when claims arising from insurance contracts are to be secured. Prior authorisation from FINMA is therefore required for the investment of parts of the tied assets in more complex and riskier asset classes.
FINMA generally monitors compliance with the investment requirements, in particular with regard to tied assets, on an annual basis or in the event of specific incidents. For this purpose, it collects the necessary information. In addition, it can also use the results of an inspection by appointed third parties.
FINMA also conducts in-depth reviews of selected insurance companies in order to better monitor compliance with the requirements.
Below you will find information on the requirements for insurance companies’ investment activities and tied assets in the revised Insurance Supervision Act (ISA) and revised Insurance Supervision Ordinance (ISO).
An application will be required in these cases in future. However, the transitional regulations in Article 16c paras. 3 and 4 rev. ISO apply to assets that were assigned to the tied assets before the revised ordinance took effect. In accordance with Article 216c para. 3 rev. ISO, these can remain allocated to the tied assets during the transitional period of three years from entry into force of the revised ISO (under the administrative rules relating to deadlines, the transitional period ends at midnight on Monday, 4 January 2027).
During the transitional period the following rules apply to the allocation of assets that were previously eligible, but are now outside the standard list in the revised ordinance, to the tied assets:
If the insurance company was permitted to invest in this category of assets before the revised ordinance entered into force and allocated these assets to the tied assets, it may allocate them to the tied assets during the transitional period on the same scale without an application. For example, reinvestments in assets outside the standard list on a similar scale and allocating these to the tied assets does not require an application to FINMA during the transitional period. However, the insurance company remains responsible for making an application for its own list in good time before expiry of the transitional period in accordance with Article 79 para. 1 rev. ISO.
In accordance with Article 216c para. 3 let. c rev. ISO, an application is required before allocating assets if the allocation of assets outside the standard list, which the insurance company invested in before entry into force of the revised ISO, will no longer be on a similar scale but is to be significantly increased. The same applies to assets outside the standard list that the insurance company invested in before the revised ISO entered into force but did not allocate to the tied assets. In accordance with Article 216c para. 3 let. c rev. ISO, the insurer must submit an application to begin allocating these assets to the tied assets.
If the insurance company intends to invest in assets outside the standard list, which it has not previously invested in, after the revised ISO enters into force, it must apply to allocate them to the tied assets in accordance with Article 216c para. 3 let. c rev. ISO.
The key point to note is that the transitional provision in Article 216c para. 3 rev. ISO only relates to assets that were previously eligible. After entry into force of the revised ISO, other assets may not be allocated to the tied assets without FINMA’s prior approval.
The requirements for third-party custody and current or custody account relationships derive primarily from Articles 84 and 87 rev. ISO. It is the insurance company’s responsibility to ensure these requirements are met. Under the revised ordinance, third-party custody by an appropriate custodian remains permitted. The principles of Article 69a rev. ISO, which sets out the requirements of the prudent person principle, must be observed (cf. Art. 87 para. 2 rev. ISO). In addition, the insurance company must ensure that the custodian bears liability for meeting the custody obligations. This liability must be at an appropriate level and in line with the purpose of the tied assets (Art. 87 para. 2 let. a rev. ISO). In the event of third-party custody abroad, the seniority of the claim to the tied assets in accordance with Article 54abis rev. ISA must be maintained (Art. 87 para. 2 let. b rev. ISO). As was previously the case, assets held in the tied assets may not be encumbered. The insurance company’s liabilities may not be offset against tied assets (Art. 84 para. 2 rev. ISO). FINMA will not provide any supplementary agreement or model provisions to ensure the above requirements are met.
In FINMA’s view, previous FINMA supplementary agreements largely but not entirely meet the requirements for third-party custody and current or custody account relationships under the revised ordinance. In FINMA’s view there is a need for amended provisions in relation to liability and encumbrance of tied assets (see the discussion below on expectations for appropriate liability and the prohibition on encumbrance).
FINMA expects that this will lead contracts for third-party custody and current or custody account relationships to be examined and amended if necessary to ensure appropriate liability and the prohibition on encumbrance of tied assets in all circumstances.
As regards liability, FINMA believes appropriate liability within the meaning of Article 87 para. 2 let. a rev. ISO is usually met if the relevant contract is in line with the following guidelines:
The contract contains no (or at least no significant) agreements that reduce or qualify liability in connection with custody of the tied assets.
The contract contains at least the same liability that applies by virtue of the relevant legislation to the asset held in the tied assets (e.g. liability provisions of the Intermediated Securities Act for book-entry securities).
For third-party custody, i.e. authorized use of a sub-custodian, appropriate liability must at a minimum comprise responsibility for due diligence in selecting and instructing the sub-custodian, as well as monitoring ongoing compliance with the selection criteria. This standard of liability must apply at a minimum between the first custodian and the first sub-custodian, irrespective whether it is a domestic or foreign sub-custodian.