The new framework for business with professional policyholders under the revised ISA and revised ISO is designed to align the intensity of regulation and supervision more closely with customers’ need for protection.
For example, professional policyholders can be assumed to be able to assess the solvency and counterparty risk of insurance companies themselves. Therefore they do not need the statutory protection afforded by tied assets in accordance with Article 17 ISA. The possible exemptions an insurance company can apply for in this context are set out in Article 30a ISA and include organisation funds, the recovery plan and tied assets. The definition of professional customers is contained in the Insurance Contract Act (ICA).
There are a number of obligations associated with the exemptions, however. Insurance companies that claim the exemptions under the ISA are legally obliged to clarify and document the status of professional policyholders before concluding a contract. Moreover, an insurance company that insures professional policyholders must inform them of their designation as professional policyholders. The insurance company also has a disclosure obligation to inform professional customers of the legal consequences of this designation, specifically if their claims are not backed by tied assets. Professional customers must be informed before the contract is concluded. In the event of a breach of this disclosure obligation, Article 3a ICA applies.
All primary insurers are eligible to apply for the exemptions set out in Article 30a ISA. However, business with professional policyholders which can result in claims by non-professional policyholders under mandatory insurance is excluded. In addition, insurers must create tied assets when covering occupational pension risks.
When the revised ISA and revised ISO enter into force on 1 January 2024, insurance companies will not benefit automatically from the potential exemptions for business with professional policyholders contained in Article 30a ISA. Insurance companies that wish to claim the exemptions must apply to FINMA to do so. If FINMA approves the application, the insurance companies will be exempt from certain requirements in the legislation.
An application for exemption under Article 30a ISA can only be made for new business or if existing customers are transferred via new contracts or amendments to their contracts (cf. Art. 111c para. 2 ISO). In all such cases, the insurer must comply with its clarification, documentation and disclosure obligations. The insurance customers must expressly agree to any change of contract and the legal requirements must be observed. The existing client base (where there have not been any contract amendments) and run-off business are excluded from the exemptions.
The ISO and ISO-FINMA also contain specific provisions on creating and managing portfolios or part-portfolios containing insurance contracts with professional customers.
The provisions in the ISA and ISO regarding organisation and risk management must also be complied with for business with professional policyholders. The insurance company is required to have an appropriate organisation and appropriate processes, risk management and an internal control system (ICS) to operate, manage and monitor the business with professional policyholders in a manner commensurate with the risks.
FINMA monitors compliance with the rules governing business with professional policyholders annually or if circumstances require. It will collect the information it needs to fulfil this mandate. It can also use the results of audits by FINMA mandataries.
To better monitor compliance with the regulations FINMA also conducts in-depth reviews at selected insurance companies.
Below you will find the key information regarding business with professional policyholders.
In accordance with Article 30a para. 1 of the Insurance Supervision Act (ISA), the insurance company must submit an application to FINMA stating which insurance sectors and categories of professional policyholders the application is being made for. A further application should also be submitted for business plans K (Art. 4 para. 2 let. k and Art. 5 para. 1 ISA) and if applicable D (Art. 4 para. 2 let. d and Art. 5 para. 2 ISA). The technical provisions covering the professional policyholders for whom the exemptions under Article 30 a ISA are being claimed must be created and managed separately. If this means changes are needed to business plan form D or its technical annex, this should be submitted together with the application for exemptions. Otherwise an explanation needs to be given as to why no changes are needed.
An insurer may conduct business with both professional and non-professional policyholders. However, the business must be reported separately and appropriate steps must be taken to ensure the differing statutory requirements are met at all times (cf. Art. 4 para. 2 let. k ISA). The same applies to mandatory insurance in accordance with Article 30a para. 4 ISA. The insurer must disclose information on its compliance with these requirements if requested by FINMA and the auditors at any time.
Insurance companies may not claim any of the exemptions listed in Article 30a para. 1 ISA for professional policyholders in relation to mandatory insurance that could result in contractual or legal claims by non-professional policyholders (Art. 30a para. 4 ISA).
Article 30a para. 2 ISA does not provide a separate definition of who is deemed to be a professional policyholder and instead refers to Article 98a para. 2 lets. b-g of the Insurance Contract Act (ICA), leaving out occupational pension schemes, which are enumerated in letter a of Article 98a. Therefore the criteria for classifying professional policyholders are not in complete agreement in the ISA and ICA.
In accordance with Articles 30b and 30c ISA, insurers are required to establish the status of professional policyholders, and inform customers of this, before concluding a contract. The exemptions under Article 30a para. 1 ISA are therefore by their nature intended for new business. But it is also possible for new contracts to be concluded with existing customers or a new contract to be offered to those who qualify as professional policyholders. The disclosure, classification and documentation obligations for professional policyholders must be met in the course of the offer process, as in accordance with Article 111c para. 2 of the Insurance Supervision Ordinance (ISO), new contracts or significant amendments to a contract are also defined as concluding a contract within the meaning of Article 30b ISA.
The insurer may take account of the fact that customers in the insurance industry may use brokers for certain tasks, for example with regard to the question of whether customers have adequate risk management. In accordance with Article 111c para. 1 ISO, these responsibilities may also be conferred on an external party. In this case the insurance company must investigate and document the role of third parties or brokers to ensure that the responsibilities are allocated properly and the third party is competent to fulfil them. Merely stating that a broker is being used is insufficient.
The insurance company is therefore permitted to use third parties to perform classification, documentation and disclosure obligations. However, the responsibility for correct implementation remains wholly with the insurer. Delegating such obligations may constitute outsourcing in accordance with Article 4 para. 2 let. j and Article 5 para. 2 ISA, which is subject to approval by FINMA.
FINMA expects the insurer to be prepared for changes in status and be able to make the necessary changes quickly to ensure the legal requirements are met. The insurer must take account of this in the contractual agreement with the customer. Therefore the necessary arrangements need to be made at an operating level to achieve this, e.g. to transfer the customer to a portfolio where they can again benefit from coverage by tied assets. If the exemptions for professional policyholders are to be utilised, the insurance company must ensure that the category does not include any contracts that are not qualified for this status (cf. Art. 4 para. 2 let. k ISA and Art. 30a paras. 3 and 4 ISA). The emphasis is on reviewing the status of policyholders at a contract renewal. However, there are also other options that can be implemented relatively easily to monitor customer status effectively. Customer contact beyond the signing of the contract can provide an opportunity to review status, e.g. if policyholders have to provide information periodically on their business activities.
In accordance with Article 111c para. 2 ISO, any significant amendment to the contract is deemed to be concluding a contract within the meaning of Article 30a ISA. This applies particularly to changes in insured risks or benefits and the other elements set out in Article 3 ICA that constitute significant components of the insurance contract. Any change in this area is material and means that the status of the insurance policyholder needs to be reviewed again (cf. Article 30b ISA).
In accordance with Article 30d ISA, a captive does not need to obtain approval from FINMA to benefit from the exemptions under the revised ISA. The classification and disclosure obligations vis-à-vis their customers under Articles 30b and 30c ISA do not apply to them.
A reinsurance company does not need to obtain authorisation from FINMA to benefit from the exemptions under the ISA. These already apply automatically. None of the obligations under Articles 30b and 30c ISA apply to a reinsurance company that solely engages in reinsurance (cf. Art. 35 para. 1 ISA).
A financial intermediary under the Banking Act (BA) in accordance with Article 98a para. 2 let. b ICA or an insurance company under the ISA in accordance with Article 98a para. 2 let. c ICA is treated as a professional policyholder if it is an institution that holds a licence under the relevant financial market legislation and is supervised by FINMA. If an institution is permitted to conduct business in a sandbox without supervisory authorisation, then it is not supervised by FINMA. To qualify as a professional policyholder in such cases, the entity must either have professional risk management or meet the financial size criteria applying to professional policyholders.
In accordance with Article 90a paras. 1 and 2 ISA, an insurer that wishes to utilise the exemptions for business with professional policyholders is required to report this to FINMA within six months of the legislation entering into force. This is considered an administrative (non-binding) deadline under Swiss law. It is designed to quickly create clarity about which of the insurance companies active today want to utilise these exemptions. FINMA will continue to accept applications for exemptions with respect to business with professional policyholders even after expiry of the deadline.