In a 2002 Financial System Stability Assessment (FSSA) based on Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000, the International Monetary Fund (IMF) concluded that the authorities were, in general, fully or largely compliant with ICPs. Since 2003, the regulatory and supervisory regime for the insurance industry in Switzerland has been updated through legal reforms to bring it in line with international best practices, as noted in the IMF's 2007 Factual Update of the 2002 FSSA. The Update assesses insurance supervision framework in Switzerland against the new, more stringent ICPs and Methodology developed by the IAIS in October 2003 and focuses on significant market and regulatory developments in the Swiss insurance industry. One of the major developments was the adoption of the Insurance Supervision Act, which entered into force on January 1, 2006. The Act replaced the "compliance with rules" approach to the supervision with a "risk-based supervision" system. An integrated financial supervisory authority -- the Financial Market Supervisory Authority (FINMA) -- was established under the 2007 FINMA Act. According to the IMF's 2007 FSSA Update, while the new regulatory framework in Switzerland has a very high level of observance of ICPs, the implementation process is not yet complete. The IMF concluded that the effective implementation of recently issued or drafted decrees and guidelines in key areas by the insurance supervisory authority -- the Federal Office of Private Insurance -- will bring the Swiss regime into full observance of ICPs.

General Overview

In a 2002 Financial System Stability Assessment (FSSA), which benchmarks insurance supervision in Switzerland against Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000, the International Monetary Fund (IMF) concluded that the authorities were in general fully or largely compliant with ICPs. Per the same report, improvements were needed in the area of change of control, supervision of intermediaries, internal control, and corporate governance. The IMF noted that the proposed revised Insurance Supervision Act (ISA) would address most of the shortcomings.

In its 2007 Factual Update of the 2002 FSSA (hereafter referred to as "2007 Update"), which uses the new, more stringent methodology and ICPs developed by the IAIS in October 2003, the IMF noted that the regulatory and supervisory regime for the insurance industry in Switzerland has been updated through legal reforms since 2003 to bring it in line with international best practices. The ISA entered into force on January 1, 2006, replacing the "compliance with rules" approach of the insurance supervisory authority -- the Federal Office of Private Insurance (FOPI) -- with a "risk-based supervision" system. Prior to the adoption of the ISA, the Swiss regulatory framework was fragmented into five federal statutes, eleven Federal Council ordinances and decisions, and other unpublished directives. The ISA includes a range of corrective and preventive regulatory measures, and the "risk-based and principle-based approach to regulation and supervision is aligned with the structure of the Swiss Insurance Industry" (p. 4), as noted in the IMF's 2007 Update. The Update adds that the FOPI introduced a new solvency regime -- the Swiss Solvency Test (SST) -- in January 2006 to establish a modern solvency and risk-based liability measurement framework. Full implementation of the SST by insurance and reinsurance companies, as well as by groups and conglomerates is planned for 2010. The 2006 FOPI Annual Report noted that the amendment to the Supervision Ordinance (SO) also entered into force on January 1, 2007. According to the IMF's 2007 FSSA Update, although the "updated regulatory framework has a very high level of observance with the ICPs, implementation of the reforms is in transition" (p. 4). The report also added that the effective implementation of FOPI's recently issued or drafted decrees and guidelines in key areas such as corporate governance, regulatory intervention, role of external auditors and actuaries, and intra-group transactions will bring the Swiss regime into full observance of ICPs.

The IMF's 2007 Update reported that, in accordance with the ISA, the FOPI supervises and regulates all private insurance and reinsurance companies, groups and conglomerates, as well as insurance and reinsurance intermediaries. While basic health insurance is mandatory and offered by health insurance associations, supplementary private health insurance is provided by the FOPI. The report added that FOPI has a headcount of 90 staff who monitor about 200 insurers, 60 supplementary health insurance funds, and 8,000 intermediaries, and its supervisory sections are supported by the Supervisory Development, Legal Services, Financial Accounting, Financial Investments, and International Affairs departments. The IMF recommended providing the FOPI with adequate regulatory resources to ensure more effective and timely off-site supervision, risk-oriented onsite examinations, and the implementation of the new SST. An integrated financial supervisory authority -- the Financial Market Supervisory Authority (FINMA) -- was established under the 2007 FINMA Act. This Act incorporates the functions of the FOPI, the Swiss Federal Banking Commission (SFBC), and the Anti-Money Laundering Control Authority (AMLCA), each of which nonetheless retains its regulatory and supervisory roles under existing sectoral legislation. The FINMA Act is expected to enter into force on January 1, 2009, according to the FOPI's website.

Switzerland is a member of the IAIS, and has an "established insurance center, well served by large and sophisticated insurers" (p. 5), as noted in the IMF's 2007 Update. As of 2006, Switzerland has the highest per capita expenditures for insurance in the world, with 214 insurance and reinsurance companies. Furthermore, more than 70 percent of insurers' global premiums are sourced from abroad.

The Principles

ICP 1 Conditions for effective insurance supervision

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According to the IMF's 2007 Technical Note on the reinsurance industry (hereafter referred to as "2007 Technical Note"), Switzerland is characterized by a "stable and progressive macroeconomic, legal, and supervisory frameworks" (p. 11). The Federal Audit Oversight Authority (FAOA) was established in 2005 under the Audit Oversight Act (AOA), and is responsible for licensing and supervising auditors, as stated in the IMF's 2007 Update. The FAOA is expected to be operational by end of 2007. Per the same report, the ISA entered into force on January 1, 2006, replacing FOPI's "compliance with rules" approach with a "risk-based, principle-based, and competition-oriented" (p. 10) supervision approach. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regards to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 1 on Conditions for effective insurance supervision is observed.

ICP 2 Supervisory objectives

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According to the IMF's 2007 Technical Note, FOPI's supervisory objectives are clearly defined under the ISA, which is "designed to protect the insured from abuses and the insolvency risks to which insurance companies are exposed" (p. 11). The report recommended ensuring checks and balances between the objectives of ISA, regulatory costs, and international competitiveness in Switzerland. The IMF report further advised clarifying the "authority, circumstances, and processes in addressing potential conflicts in objectives, and preserving the independence of the FOPI" (p. 11). However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regards to the reinsurance industry, as stated in the IMF's 2007 Technical Note, ICP 2 on Supervisory objectives is observed.

ICP 3 Supervisory authority

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The IMF's 2007 Update stated that, in accordance with the ISA, the FOPI supervises and regulates all private insurance and reinsurance companies, groups and conglomerates, as well as insurance and reinsurance intermediaries. The FOPI has a headcount of 90 staff who monitor about 200 insurers, 60 supplementary health insurance funds, and 8,000 intermediaries, and the supervisory sections are supported by the Supervisory Development, Legal Services, Financial Accounting, Financial Investments and International Affairs departments. The Update recommended strengthening regulatory resources to ensure more effective and timely off-site supervision, risk-oriented onsite examinations, and the implementation of the SST under the ISA. It also advised improving FOPI's independence and accountability by establishing an internal audit function within the FOPI and enhancing information disclosure regarding FOPI's director. The FINMA, an integrated financial supervisory authority, was established under the 2007 FINMA Act, which incorporates the FOPI, the SFBC and the AMLCA. The Update added that these authorities retain their regulatory and supervisory roles under existing sectoral legislation. The FINMA Act is expected to enter into force on January 1, 2009, as noted on the FOPI website. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 3 on supervisory authority is only largely observed, due to FOPI's lack of regulatory resources to effectively conduct supervision and regulation in the Swiss insurance industry.

ICP 4 Supervisory process

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Regarding the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 4 on Supervisory process is only largely observed. The Note recommended clarifying the "authority, circumstances, and processes in addressing potential conflicts in objectives, and preserving the independence of the FOPI" (p. 11). However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

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According to the IMF's 2007 Technical Note, the FOPI is given powers to exchange information with both domestic and foreign regulators under the ISA. In 2006, the FOPI executed a Memorandum of Understanding (MoU) with 28 members of the European Union (EU) and the European Economic Area (EEA), which "recognizes the equivalence of the Swiss insurance regulatory regime" (p.18), as noted in the IMF's 2007 FSSA Update. Furthermore, according to the IMF's 2007 Update, the FOPI concluded a MoU with the Committee of European Insurance and Occupational Pensions Supervisors. The 2007 Update recommended establishing formal regulatory cooperation and exchange of information with supervisory authorities outside the EU/EEA. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regards to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 5 on supervisory cooperation and information sharing is observed.

ICP 6 Licensing

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According to the IMF's 2007 Technical Note, the Swiss licensing process is systematic, and the FOPI has implemented international best practices in evaluating and approving licensing applications in accordance with the ISA. Furthermore, FOPI's licensing powers have been strengthened under the ISA, as noted in the IMF's 2007 Update. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regards to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 6 on Licensing is largely observed. The report advised requiring conglomerate reinsurance companies to make a clear separation between life and non-life risks to better safeguard the interests of policyholders.

ICP 7 Suitability of persons

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With regard to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 7 on suitability of persons is largely observed. The report noted that legal provisions for fit and proper testing did not exist under the previous insurance legislation. Under the ISA, the FOPI has the authority to approve fit and proper persons. The IMF report recommended effectively implementing this regulatory measure to bring Switzerland's insurance regime into full observance of ICP 7. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

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As noted in the IMF's 2007 Update, the FOPI approves changes in control and portfolio transfers. With regard to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 8 on changes in control and portfolio transfers is largely observed. The report recommended requiring insurers to seek approval from the FOPI prior to all transfers. It also advised protecting the interests of both the transferee and transferor's policyholders. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle.

ICP 9 Corporate governance

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As stated in the IMF's 2007 Technical Note, the FOPI is given powers to regulate corporate governance of insurance and reinsurance companies under the ISA. On January 1, 2007, the FOPI issued a Directive on Corporate Governance, Risk Management, and Internal Control Systems. Furthermore, the 2007 IMF FSSA Update reported that the FOPI is in the process of issuing or drafting decrees and guidelines in key areas such as corporate governance, regulatory intervention, role of external auditors and actuaries, and intra-group transactions. According to the IMF's 2007 Factual Update, fitness and propriety criteria of board members and management are also determined in the SO. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 9 on corporate governance is largely observed.

ICP 10 Internal control

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The IMF's 2007 Factual Update reported that the FOPI is given powers to regulate internal controls under the ISA. Furthermore, insurers are required to establish an independent internal audit function, and external auditors have "whistle blowing" duties towards the FOPI. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 10 on internal control is largely observed. The report recommended effectively implementing FOPI's enhanced powers to supervise internal controls of insurance and reinsurance companies to bring Switzerland's insurance regime into full observance of ICP 10.

ICP 11 Market analysis

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As stated in the IMF's 2007 Technical Note, the FOPI is aware of, and has access to, various sources for market analysis. It is also informed on market developments regarding the reinsurance industry. Since 2004, FOPI's annual reports contain both company-specific and aggregated data, and are also available in electronic format. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 11 on market analysis is largely observed. The report recommended strengthening FOPI's regulatory resources, including cost-effective processes for market analysis.

ICP 12 Reporting to supervisors and off-site monitoring

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In its 2007 Factual Update, the IMF supported FOPI's initiatives to improve off-site supervision, by implementing more timely and extensive regulatory reporting, including quarterly reports on solvency and asset-liability-management (ALM), and ensuring timely regulatory intervention. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 12 on reporting to supervisors and off-site monitoring is largely observed.

ICP 13 On-site inspection

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According to the IMF's 2007 Technical Note, on-site examinations were not conducted in 2006 by the FOPI due to resource constraints, and the formulation of regulatory policies to implement the ISA, decrees and guidelines. Moreover, on-site inspections have not been planned during 2007. The IMF's 2007 Factual Update recommended reviewing the scope and depth of on-site inspections. Further, the IMF's 2007 FSSA Update stated that the FOPI should focus on inspections of high risk insurers to reduce their vulnerability to market risks and strengthen risk management practices. The report further recommended requiring an increase in capital and reserves, or a reduction in risk exposures. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 13 on on-site inspection is only partly observed.

ICP 14 Preventive and corrective measures

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Although the FOPI is given powers to enforce corrective and preventive measures under the ISA, the IMF's 2007 Factual Update stated that it may lack regulatory resources to take corrective actions. The report recommended allocating adequate and trained staff to the FOPI to enforce preventive and corrective measures under ISA. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 14 on preventive and corrective measures is observed.

ICP 15 Enforcement or sanctions

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As stated in the IMF's 2007 Technical Note, the FOPI is in the process of drafting intervention-related regulatory rules. The 2007 FINMA Act comprises both revisions to the existing criminal law provisions, as well as new administrative sanctions. However, the same report noted that the FOPI lacks an enforcement unit and may have insufficient regulatory resources to take corrective actions. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 15 on enforcement or sanctions is largely observed. The IMF report recommends establishing separate enforcement units to ensure independent on-site and offsite inspections.

ICP 16 Winding-up & exit from the market

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With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 16 on winding-up & exit from the market is largely observed. The report advised reviewing the "need to segregate assets held in support of reinsurers' life and non-life technical provisions" (p. 22). However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle.

ICP 17 Group-wide supervision

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The FOPI has the authority to supervise on a consolidated basis, according to the IMF's 2007 Factual Update. Group/conglomerate supervision, as provided under the ISA, is in line with EU Directives. The same report stated that, as of 2005, nine insurance groups are subject to group supervision. In its 2006 Annual Report, the FOPI noted that, in addition to supervising individual insurance entities, it monitors "fitness and properness of managers, the capital adequacy of the required solvency, the risk management and internal control system of the group, and transactions within the group" (p. 22). However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note reported that ICP 17 on group-wide supervision is largely observed. The report recommended effectively implementing FOPI's enhanced powers to supervise on a consolidated basis to bring Switzerland's insurance regime into full observance of ICP 17.

ICP 18 Risk assessment and management

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Article 96 of the SO requires insurance and reinsurance companies to conduct risk management, in line with their activities and internal monitoring procedures. It also requires the adequate management of operational risks, and updated risk management documentation. According to the IMF's 2007 Factual Update, the FOPI is given powers to implement risk management standards, and require insurers to asses and manage their risks. The SST also aims to strengthen effective risk management, including ALM. In its 2007 FSSA Update, the IMF recommended conveying inspections of high risk insurers, and if necessary, requiring an increase in capital and reserves, or a reduction in risk exposures. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note added that ICP 18 on risk assessment and management is largely observed.

ICP 19 Insurance activity

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Article 96 of the SO requires insurance and reinsurance companies to ensure that all risks are recognized and evaluated, and measures are in place to prevent or cover such risks in a timely manner. The IMF's 2007 Factual Update added that the SST under the ISA also aims to strengthen effective risk management. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the report stated that ICP 19 on Insurance activity is largely observed, and recommended allocating skilled and experienced staff to the FOPI to supervise insurance and reinsurance companies' management of reinsurance risks.

ICP 20 Liabilities

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As stated in the IMF's 2007 Technical Note, FOPI's authority has been strengthened under the ISA to ensure that "reinsurers maintain adequate technical provisions to meet policy liabilities" (p. 25). Furthermore, the IMF's 2007 Factual Update stated that the SST ensures that assets and liabilities are valued on a market basis. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note added taht ICP 20 on Liabilities is largely observed.

ICP 21 Investments

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The FOPI has the authority to "require reinsurers to diversify their assets or reduce concentration risks" (p. 25) under the ISA, according to the IMF's 2007 Technical Note. Furthermore, the IMF's 2007 Factual Update, reported that the SST ensures that assets and liabilities are valued on a market basis. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 21 on Investments is largely observed.

ICP 22 Derivatives and similar commitments

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According to the IMF's 2007 Technical Note, Article 100 of the SO restricts insurance and reinsurance companies' use of derivative financial instruments to hedging or efficient portfolio management. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the report added that ICP 22 on derivatives and similar commitments is largely observed.

ICP 23 Capital adequacy and solvency

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With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 23 on capital adequacy and solvency is largely observed. The report added that the FOPI needs to fully implement and effectively supervise the SST to bring Switzerland's insurance regime into full observance of ICP 23. In its 2007 Factual Update, the IMF recommended providing the FOPI with adequate regulatory resources to implement the SST. Furthermore, in the FOPI's 2006 Annual Report stated that, in addition to supervising individual insurance entities, it monitors capital adequacy of the required solvency for groups and conglomerates. However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle.

ICP 24 Intermediaries

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ICP 24 was not assessed by the IMF's 2007 Technical Note. According to the IMF's 2007 Factual Update, the FOPI is given powers under ISA to supervise insurance intermediaries and ensure consumer protection. Furthermore, disclosure requirements of intermediaries are regulated by the ISA and Insurance Contract Act (ICA). However, the FOPI does not intend to conduct routine inspections of intermediaries. Nevertheless, there is insufficient publicly available information directly addressing Switzerland's compliance with this principle.

ICP 25 Consumer protection

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ICP 25 was not assessed by the IMF's 2007 Technical Note According to the IMF's 2007 Factual Update, an important development under the ISA relates to FOPI's authority to supervise insurance intermediaries. The new insurance regulation also addresses concerns relating to transparency, and therefore enhances consumer protection. The report added, however, that the FOPI does not intend to conduct routine inspections of intermediaries. Nevertheless, there is insufficient publicly available information directly addressing Switzerland's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

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As noted in the IMF's 2007 Factual Update, the ISA addresses concerns relating to transparency, and disclosure requirements of intermediaries. The latter are also regulated by the ICA. The IMF report recommended improving disclosure and market conduct requirements for unit-linked policies (i.e. policies where returns are linked to the performance of the units in the unit trust). However, the information provided above does not directly address the Swiss insurance industry's compliance with this principle. With regard to the reinsurance industry, the IMF's 2007 Technical Note stated that ICP 26 on information, disclosure, and transparency towards the market is largely observed. In order to improve market discipline, the same report advised the FOPI to "plan for the effective implementation of the IAIS standards on public disclosures" (p. 28).

ICP 27 Fraud

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ICP 27 was not assessed by the IMF's 2007 Technical Note. According to the IMF's 2007 Factual Update, fraud related to claims is "punishable under the Criminal Code, which obliges insurers to report fraud to relevant authorities and take preventive measures" (p. 16). Furthermore, the FOPI has the authority to require insurance companies to report fraud to law enforcement authorities, and cooperates with other competent authorities, including the Department of Justice. It also provides guidelines on mandatory internal control systems to prevent insurance fraud. Nevertheless, there is insufficient publicly available information directly addressing Switzerland's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

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ICP 28 was not assessed by the IMF's 2007 Technical Note. A 2007 U.S. Department of State report noted that money laundering legislation in Switzerland applies to both banks and non-bank financial institutions. According to the IMF's 2007 Factual Update, the Swiss Insurance Association has established a self-regulatory organization to implement FOPI regulations related to anti-money laundering (AML) and combating the financing of terrorism (CFT) activities. The 2006 FOPI Ordinance on Measures to Combat Money Laundering brings the Swiss AML/CFT regime in line with standards established by the Financial Action Task Force (FATF). Furthermore, the FOPI is given powers under the ISA to approve changes in control and beneficial ownership. It also collaborates closely with Switzerland's Financial Intelligence Unit -- the Money Laundering Reporting Office Switzerland -- and other domestic AML/CFT supervisory authorities (the SFBC and the AMLCA). Although the FOPI, the SFBC, and the AMLCA are integrated into the FINMA under the 2007 FINMA Act, the IMF's 2007 Factual Update noted that they will retain their regulatory and supervisory roles under existing sectoral legislation. The FINMA Act is expected to enter into force on January 1, 2009, as noted on the FOPI website. Nevertheless, there is insufficient publicly available information directly addressing Switzerland's compliance with this principle.