This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the Switzerland.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
Before they can start insurance business in or from Switzerland, insurance companies have to be authorised by the Swiss Financial Market Supervisory Authority (Eidgenössische Finananzmakrtaufsicht – FINMA). The FINMA has the competency to supervise the activities of insurance companies in or from Switzerland in accordance with the Financial Market Supervision Act (Bundesgesetz vom 22. Juni 2007 über die Eindgenössiche Finanzmarkaufsicht, Finanzmarktaufsichtsgesetz, FINMAG- FINMASA).
The Insurance Supervision Act (Bundesgesetz betreffend die Aufsicht über Versicherungsuntermen vom 17. 12. 2006, Versicherungsaufsichtsgetz, VAG- ISA) sets down the regulatory requirements that have to be met by insurance companies in order to obtain a license and the business rules that have to be respected in the proper course of the conduct of their business up until run-off. The ISA is relatively lean when compared with the more detailed and more technical Insurance Supervision Ordinance (Verordnung betreffend die Beaufsichtigung von Versicherungsunternehmen, Aufsichtsverordnung AVO- ISO), which complements it. The ISA and ISO are further complemented by Circulars of the FINMA that give details concerning the FINMA’s supervisory practice. Such Circulars are binding on the FINMA so far as supervisory practices described in its Circulars are concerned.
The relationship between an insurance company and its policyholders is predominantly regulated by the Insurance Contract Act (Bundesgesetz über den Versicherungsvertrag of 1908, Versicherungsvertragsgesetz, VAG- ICA). The provisions of the ICA are themselves complemented by the general principles of the Code of Obligations (Obligationenrecht, OR-CO).
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Insurance companies that do life insurance business may not conduct other lines of insurance business, except for health and accident insurance, Art 12 ISA. 36.
Reinsurance companies are exempt from certain provisions of the ISA in accordance with art 35 LAS. The other provisions apply accordingly to Swiss reinsurers.
For life insurance companies, certain additional provisions regarding the maximum guaranteed interest rate, tariff calculation, surplus participation, surrender values and information duties apply, Art 36 ISA in connection with Art 120 et seqq. ISO. Further details are set out in FINMA Circular RS 2016/06.
Collective life insurance in connection with occupational schemes is subject to further regulation in accordance with Art 37 ISA, in connection with Art 137 ISA. In particular, these provisions require separate accounting for this particular type of life insurance. Art 4 para 2 lit r ISA requires, in addition, that tariffs and terms and conditions for life insurance in connection with occupational schemes are subject to FINMA’s in advance approval.
Are insurance brokers and other types of market intermediary subject to regulation?
Intermediaries doing business in Switzerland are subject to regulation in accordance with Art 40 to 45 ISA in combination with Art 182 to 190 ISO.
Brokers (i.e. intermediaries who are not legally or economically tied to an insurance company) have to register themselves in FINMA’s public intermediaries’ register, Art 42, 43 ISA.
The broker has to meet the following prerequisites to get registered in accordance with Art 44 ISA, 184 et seq ISO:
- Professional qualification evidenced by an exam or equivalent proof.
- Personal integrity, i.e. no criminal or debt records.
- PI insurance or equivalent financial security.
Intermediaries are deemed tied intermediaries and exempt from the duty to register if they:
- Realise commission payments in the course of 1 calendar year predominantly from one or two insurance companies
- Receive remuneration from an insurance company that could affect their independence or have a cooperation agreement with an insurance company that could impair their independence
- hold a participation in an insurance company that exceeds 10 per cent, are in the management of an insurance company, or can influence the business of the company by any other means.
The exemption applies accordingly if an insurance company holds more than 10 per cent of the share capital of the intermediary’s operation, or if the company can influence the business of the intermediary by other means.
Intermediaries are subject to certain obligations concerning information towards their customers, Art 45 ISA, 190 ISO.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Taking up insurance business in or from Switzerland is subject to authorisation by the FINMA (see question 1 above). In the course of the application a business plan of the insurance company must be submitted to FINMA. The business plan consists of the following information and documents:
- Organisation and local area of activity including, where applicable, the group or conglomerate of insurance companies the companies belongs to
- If activity abroad is envisaged: authorisation or equivalent by the foreign supervisory authority
- Information on capital and reserves
- Balance sheets of the last 3 business years or opening account
- Information on persons holding at least 10 per cent of the share capital in the insurance company or who can influence the company by other means
- Information (including names and CVs) on the persons who are in the senior management and those who are in charge with the supervision and control of the senior management
- Name (including CV) of the appointed actuary
- Agreements by which essential functions of the insurance company shall be outsourced
- Envisaged classes of insurance and kind of risks to be covered
- Where applicable: membership in the national insurance burau and national guarantee fund.
- Where authorisation for assistance is applied for: information on means to perform assistance benefits
- Reinsurance plan and retrocession plan for active reinsurance
- Estimated costs for the set-up of the insurance company
- Budgeted balance sheets and budgeted profit and loss accounts for the first 3 years
- Information on risk management
- In case of life insurance in connection with occupational schemes and in supplemental health insurance: Tariffs and general terms and conditions.
The duration of the licensing process depends on various issues, including the quality and completeness of the documents submitted to the FINMA, the complexity of the envisaged business, whether authorisation is sought for a newly established insurance company with its seat in Switzerland or for a branch of an EU based insurance company (the latter profit from some a certain liberalisation) communication with FINMA and, last but not least FINMA’s workload.
On average, once the documentation has been completed and lodged, one should expect that it may take between 3 and 6 months before a licence is granted.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
Information regarding persons holding at least 10 per cent of the shares in an insurance company has to be submitted to FINMA during the authorisation process for approval. Anyone who intends to acquire a participation in an existing Swiss insurance company has to inform FINMA if such participation reaches 10, 20, 33 or 50 per cent of the share capital or the voting rights of such company. The same notification duties apply if an existing participation is reduced, Art 21 para 2 and 3 ISA. FINMA is authorised to restrict such participation if it might endanger the insurance company or the interests of the insureds, Art 21 para 4 LSA.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
Risks located in Switzerland can be covered on a non-admitted basis to a very limited extent only. As a matter of principle, an insurance contract (i) made with a policyholder based in Switzerland or (ii) covering a risk located in Switzerland can only be written by an insurance company that holds a Swiss license. Art 1 para 2 ISO allows non-admitted insurance by companies based abroad in the following cases:
- Cover of risks in connection with shipping on the high-seas, aviation and cross- border transportation;
- Cover for risks abroad (where the policyholder is located in Switzerland);
- Cover for war risks.
What penalty is available for those who operate without appropriate permission?
Those who intentionally conduct insurance business in Switzerland without appropriate authorisation may be penalised by imprisonment of up to 3 years. In case of negligence, a fine of up to 250 000 Swiss Franc can be imposed, Art 44 FINMASA.
How rigorous is the supervisory and enforcement environment?
We view FINMA as being relatively strict in enforcing any violations against the applicable laws and in particular if companies operate in Switzerland without appropriate authorisation.
How is the solvency of insurers (and reinsurers where relevant) supervised?
A company that intends to start insurance or reinsurance business in Switzerland has, during the licensing process, to provide evidence to FINMA that it meets the applicable solvency margin, Art 9 ISA. In addition, the company must establish (?) a so-called organisational fund to cover all costs in connection with the establishment, the set-up, or an extraordinary expansion of the business. The amount of the required organisational fund is normally 50 per cent of the amount of the required solvency margin, Art 10 ISO.
In the course of the ongoing business of the insurance company, an appointed actuary is responsible for the calculation of the solvency margin at any time, Art 24 ISA. FINMA supervises the adequacy of the solvency margin regularly through annual reports that have to be provided to FINMA, Art 25 ISA.
The Solvency margin of insurance companies is assessed in accordance with the Swiss Solvency Test (SST). Following SST, the solvency margin is determined by the risk exposure of the insurance company (target capital) and the creditable (to the solvency margin) own capital (risk bearing capital) of the company. Further details are set out in Art 21 et seq ISO and in the recent FINMA Circular RS 2017/3 (released on 7 December 2016).
What are the minimum capital requirements?
The applicable minimum capital requirements depend on the type of insurance business conducted by an insurance company. In life insurance (Art 7 ISO) they are:
- 5 million Swiss Francs for life insurers (excluding occupational schemes) that provide, exclusively, death benefits and/or waiver of premium in the event of disability
- 8 million Swiss Francs for life insurers (excluding occupational schemes) that provide in addition to death benefits and/or waiver of premium in the event of disability a capital guarantee or other guarantee at the maturity date
- 10 to 12 million Swiss Francs for collective life insurance in the framework of occupational schemes.
In non-life insurance (Art 8 ISO) they are:
- 8 million Swiss Francs for most classes of non-life insurance business (excluding those mentioned under the following bullet point).
- 3 million Swiss Francs for class B 9 (other property losses), B 16 (various financial losses), class B 17 (legal cost insurance), B 18 (assistance).
In reinsurance (Art 9 ISO) they are:
- 10 million Swiss Francs and 3 million for captive reinsurers.
Is there a policyholder protection scheme?
According to Art 55 ISA, life insurance contracts for which particular “restricted assets” have been established (these are particularly life insurance contracts that also provide endowment benefits) are not terminated in the case of the bankruptcy of the insurance company. Instead FINMA may temporarily restrict cancellation rights for such policies. This has the aim of giving FINMA the possibility of finding another insurance company that is prepared to assume the portfolio of the bankrupt insurance company and to duly fulfil the obligations under the respective insurance contracts. If FINMA finds such other insurance company it can request that a portfolio transfer to such company takes place.
Legislation on the reorganisation of insurance companies is currently under discussion with the aim to improve the policyholder’s position.
How are groups supervised, if at all?
Groups and conglomerates are supervised in accordance with Art 62 et seq ISA (insurance groups) and Art 72 et seq (conglomerates of insurance).
Two or more companies are deemed an insurance group in accordance with Art 62 ISA if at least one of the companies is an insurance company, the “ensemble” of companies predominantly conducts insurance business and if the companies form an economic unit.
FINMA can bring such an insurance group under its supervision if the group is effectively managed from Switzerland. The same applies if the group is managed from abroad, provided that it is not subject to equivalent group supervision in the respective country, Art 65 ISA.
Group supervision becomes necessary when a group operates on an international scale and has a complex structure. Conglomerate supervision is used if the group also plays a key role in the financial services sector; this applies in particular to banks and securities dealers.
Group supervision applies in addition to the individual supervision of the insurance company, Art 66 ISA. Senior management must fulfil the same “fit and proper” criteria as the senior management of an insurance company (see question 13 below). Group supervision focusses on in particular on 3 main areas (see Art 191 et seq ISO for details):
- Organisation, group structure and internal processes.
- Risk management on a group level.
- Consolidated solvency on a group level (group SST).
A conglomerate of insurance companies (art 72 et seq LSA) is an insurance group (according to the criteria set out in Art 62 LSA) in which at least one of the group companies is a bank or a securities trader. The principles that apply for the supervision of conglomerates of insurance companies are equivalent to those that apply to insurance groups (see e.g. Art 204 ISO). FINMA has set out further details on group supervision in its Circular RS 2016/04.
Do senior managers have to meet fit and proper requirements and/or be approved?
Senior management, i.e. the board of directors (Verwaltungsrat), the top management, and the appointed actuary have to ensure (by character and qualification) the flawless operation of the insurance company. Art 14, 23 para 2 ISA in connection with Art 12 et seqq ISO.
The eligibility of the senior management is assessed in the course of the licensing process, Art 4 para 2 lit g and h ISA (see no 4 above) and continuously monitored by FINMA. Changes in the senior management must be notified to FINMA (and in case of the appointed actuary, approved by it).
Are there restrictions on outsourcing parts of the business?
Agreements by which the “essential functions” of an insurance company are outsourced to service providers (“Outsourcing Agreements”) are considered to be a part of the business plan of an insurance company. According to FINMA the following functions are essential for an insurance company: production; portfolio administration; claims handling; accounting; investment and asset management; IT.
Such Outsourcing Agreements must be submitted to FINMA during the licensing process (Art 4 para 2 lit j ISA). It is deemed an amendment of the business plan if an existing insurance company enters into an outsourcing agreement. Thus, it has to inform FINMA accordingly. The amendment of the business plan is deemed approved if FINMA does not start any investigations within 4 weeks.
According to a new draft Circular , which is supposed to become effective on 1 July 2017, in principle, all essential functions of an insurance company can be outsourced, except senior management and controlling by senior management, if the following prerequisites are met:
- The eligibility of the service provider must be documented.
- Responsibility for outsourced services remains with the insurance company.
- The insurance company must be entitled to examine the provider’s business at any time; FINMA’s supervision must not be impeded by outsourcing.
- Outsourcing to a service provider based abroad is admissible only if the insurance company can prove that examination and supervision rights by FINMA are not impeded by such outsourcing.
- Outsourcing Agreements must be made in writing and provide for a minimum content set out in FINMA’s draft circular.
How are sales of insurance supervised or controlled?
Sales is one of the key functions of an insurance company and as such subject to the general supervision by FINMA. In particular, FINMA may intervene in case of inappropriate sales techniques based on Art 46 ISA in connection Art 117 ISO.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
Currently, neither the ISA, ISO, nor ICA contain consumer protection provisions. Since 2012, however, Art 8 of the Unfair Competition Act (Bundesgesetz gegen den unlauteren Wettbewerb) provides for protection of consumers against unfair clauses in general terms and conditions of insurers. No relevant case law exists so far but is expected to develop in the future.
Further, de lege ferenda a certain number of consumer protection provisions may be implemented in the ICA, which is currently proposed to be amended.
Are the courts adept at handling complex commercial claims?
The Swiss court system is both experienced and adept at handling even complex commercial claims.
Is alternative dispute resolution well established in the jurisdiction?
In principle, ADR techniques i.e. arbitration and mediation are well established in Switzerland. Most reinsurance contracts and a considerable number of (industrial) direct insurance contracts governed by Swiss law contain arbitration clauses. However, reinsurance disputes are often settled amicably in Switzerland before arbitration even starts. Thus, the number of arbitration proceedings may be smaller than it appears to be in other industry sectors. We expect, however, that arbitration and other ADR techniques will become more important for the insurance sector within the next years.
Consumers have the possibility to assert their complaints against an insurance company – free of charge – with the Swiss Insurance Ombudsman (Versicherungsombudsmann). The Swiss Ombudsman of Insurance is a Foundation established by the Swiss Insurance Association in 1972. The main function of the Ombudsman is
- to receive communications in respect of complaints, disputes and claims in connection with or arising out of private insurance contracts;
- to provide guidance and advice to insurance customers;
- to facilitate the settlement of claims and the resolution of disputes by recommendations.
However, the Ombudsman is not entitled to make any binding settlement decisions.
What are the primary challenges to new market entrants?
For direct insurers entering the Swiss market, in our view, the main challenge is on sales, in particular if the business predominantly focusses on consumers. Recruiting may be another challenge, since even though the Swiss market provides numerous highly skilled individuals, the competition among the insurance companies to hire these individuals is very strong. Product adaptations to Swiss law are, of course, a challenge too.
To what extent is the market being challenged by digital innovation?
Several InsureTech start-ups have been established within the last years and we believe that further start-ups will follow. FINMA tries to make Switzerland a FinTech/InsureTech hub and gradually provides for a proper regulatory environment. We also observe that traditional insurance companies have recently started to take digital innovation seriously and that they invest a considerable amount of time and money in connected projects.
Over the next five years what type of business do you see taking a market lead?
We are neither brokers nor fortune-tellers. We think, however, that in a market like the Swiss market where banks, securities dealers, asset managers and other financial institutions have a predominant position, financial lines insurance is an important business line and may gain importance within the coming years. Moreover, digitalisation may become a decisive factor for business success in insurance.