01 Mar 2009 Doing Insurance Overview Business in Switzerland
With an annual premium volume of about USD 5,558 (2005) per capita (amount spent on insurance premiums per capital and country, not including social security), Switzerland has the highest insurance density in the world. The premium volume of Swiss private insurance companies in 2005 generated in Switzerland or abroad amounted to approximately CHF 175.8 billion. The sector employed about 135,000 people in 2006, about 45,000 of whom worked in Switzerland.
Social insurances schemes, including mandatory health and work accident insurance as well as pension, are subject to the supervision of the Swiss Federal Office of Social Insurance. All other insurance lines are under the supervision of the Swiss Financial Market Supervisory Authority (“FINMA”).
As of 31 December 2006, approximately 270 private insurance and reinsurance institutions were subject to the supervision of FINMA. Around 120 insurance companies offer non-life insurance in Switzerland, approximately 40 of which are branch offices of foreign insurance companies. These non-life insurers generate an annual total premium volume of approximately CHF 21 billion (direct insurance business in 2007).
There are also more than 11,000 individuals registered as insurance intermediaries with FINMA.
As Switzerland is neither a member of the European Union (“EU“) nor of the European Economic Area (“EEA“), it retains certain independence in regulating its financial markets and is able to offer greater legislative flexibility while still preserving a solid and reliable regulatory framework. The Swiss insurance supervisory rules and regulation have been recently entirely revised. The new Federal law of 17 December 2004 on Insurance Supervision (“ISA”) has entered into force on 1 January 2006. The complete overhaul of the insurance supervisory legislation was mainly driven by two factors: (i) the stock market crisis in 2001/2002, which affected the balance sheets of many Swiss insurers and undermined the confidence of consumers in the financial stability of insurers; and (ii) the need to improve the “eurocompatibility” of the Swiss insurance regulation. In essence, the ISA has brought Swiss law to the level of the third generation insurance directives of the EU. However, it does neither establish freedom of cross- border services, nor does it permit the recognition of the EU passport.
Insurance undertakings with registered office in Switzerland or foreign insurance undertakings operating insurance business in or from Switzerland are subject to the supervision by FINMA. The supervision by FINMA is focused on insurance risk and solvency. Prior to operating insurance business in or from Switzerland, the insurance undertaking shall seek from FINMA a license. The license is granted for one for more insurance lines.
According to Annex 1 to the Ordinance of 9 November 2005 on Insurance Supervision (“ISO”), the following insurance lines are available in Switzerland and may be authorized by FINMA:
|A1||Collective life-insurance in the context of pension plans.||B1||Complementary Accident.||C1||Reinsurance underwritten by Reinsurer (no direct insurance).|
|A2||Life insurance linked to investment funds’ units.||B2||Complementary Health.||C2||Reinsurance for Direct Insurer.|
|A2.1||Capital insurance linked to investment funds’ units, with payment on death or in case of disability.||B3||Automobile (with or without engine) (Property)||C3||Intra-Group Reinsurance (Captive).|
|A2.2||Capital insurance linked to investment funds’ units, with payment on death or in case of disability and guarantee on survival.||B4||Train (Property).|
|A2.3||Annuities linked to investment funds’ units.||B5||Aircraft (Property).|
|A2.4||Life insurance linked to internal funds or to some other reference values, with payment on death or in case of disability.||B6||Marine (Property).|
|A2.5||Life insurance linked to internal funds or to some other reference values, with payment on death or in case of disability and guarantee on survival.||B7||Goods in Transit.|
|A2.6||Annuities linked to internal funds or to some other reference values.||B8||Fire and Natural Disaster.|
|A3||Other life insurances.||B9||Other Property Damages.|
|A3.1||Individual capital insurance on survival and on death.||B10||Automobile (Casualty).|
|A3.2||Individual annuities.||B11||Aircraft (Casualty).|
|A3.3||Other individual life insurances.||B12||Marine (Casualty).|
|A3.4||Collective insurance on survival outside the scope of pension.||B13||Casualty (General).|
|A4||Insurance against death and disability resulting from accidents.||B14||Credit.|
|A5||Insurance against death and disability resulting from sickness||B15||Bail.|
|A6||Capital redemption operations||B16||Financial Loss (miscellaneous).|
The following are exempt from the supervision by FINMA, (i) insurance undertakings with their registered office outside Switzerland if they only operate reinsurance in Switzerland, (ii) insurance intermediaries standing in a relationship of dependence to a policy holder, where these pursue exclusively the interests of the policy holder and the companies he/she controls, (iii) insurance undertakings with their registered office outside Switzerland and no branch in Switzerland if they operate in Switzerland only insurance coverage relating to ocean navigation, air navigation and international transportation, insurance coverage for risk only located outside Switzerland and war risk.
Provision of Services
Establishing a Swiss Insurance Undertaking
Any insurance undertaking, with registered office in Switzerland, conducting insurance operations in or from Switzerland shall be licensed by FINMA prior to underwriting insurance business. The conditions for the issuance of the license are set forth in the ISA and depend upon the type of insurance lines the insurer intends to underwrite.
An insurance undertaking seeking approval to carry out insurance activities shall submit an application to FINMA, together with a business plan. The business plan must contain a certain number of corporate and financial information including, without limitation, details of the insurer’s organisational structure and range of activities to be carried out in Switzerland including if appropriate details of the insurance group or insurance conglomerate to which the insurance undertaking belongs; the contemplated insurance lines; calculation of the tied assets and technical provision; information on the corporate governance and auditing structure; a forward-looking balance sheets and statements of income for the first three financial years; information on the tariffs and general insurance conditions to be used in Switzerland.
The legal form of an insurance undertaking must be a stock company or a co-operative. Depending upon the insurance lines, FINMA will require that the insurance undertaking has a capital of a minimum of CHF 3,000,000 up to CHF 20,000,000. In addition to the minimum capital requirements, the insurance undertaking shall also establish an organisational fund with the purpose to cover set-up and incorporation costs, including the development and extraordinary business expansion costs and charges. FINMA specifies the required amount to be held in the organizational fund on a case-to-case basis. For business set-up purposes, FINMA usually requires between 20% to 50% in value of the minimum capital.
As part of the approval process, the insurance undertaking needs to file with FINMA its insurance tariffs for the insurance lines approved by FINMA. FINMA will investigate whether the method of calculation of the proposed tariffs warrants the solvency of the insurance undertaking, on the one hand, and protects the insured parties from abuses, on the other hand. For life insurance, the method of calculation shall rely on biometric bases and the mortality table.
Every insurance undertaking shall appoint an actuary who can be held accountable and grant him/her access to all commercial and financial documents and paperwork. The actuary is responsible for ensuring that the solvency margin is calculated correctly and tied assets are in line with the regulatory requirements, that the proper accounting principles are used and that adequate technical reserves are established.
Insurance undertakings shall establish adequate reserves to guarantee their liabilities under the insurance policies and to cover their overall insurance activities. The details of calculation of the technical reserves and tied assets are set forth in the law and in specific circulars enacted by FINMA. Insurance undertakings must also have adequate and unencumbered capital at their disposal for their activities (solvency margin requirements). Calculations on the required own capital takes place according to two methods; first, based on the volume of business (Solvency I) and second, based on the risks to which the insurance undertaking is exposed (Swiss Solvency Test) (see below).
Additional specifics requirements are set out for the following insurance lines: accident, fire and natural disaster, automobile (casualty), credit and legal services.
FINMA will charge a fee for the issuance of the license amounting between CHF 2,000 to 15,000.
Acquiring a Swiss insurance company
Any persons or companies intending to acquire a direct or indirect equity holding in an insurance undertaking with registered office in Switzerland shall notify FINMA if the holding equals or exceeds 10, 20, 33 or 50% of the capital or voting rights. A notification must also be filed if the equity holding is reduced to below 10, 20, 33 or 50% of the capital or voting rights or if the insurance undertaking ceases to be an affiliate. Where necessary, FINMA may refuse the acquisition or subject it to conditions in order to protect the interests of the insurance undertaking and its policy holders.
Foreign insurance undertakings with registered office outside Switzerland are also subject to FINMA’s regulatory supervision, and thus need a license, for their insurance activities in or from Switzerland.
A condition for the issuance of the license is that the foreign insurer registers a branch in Switzerland.
In addition to the requirements applicable for Swiss insurers, the foreign insurer must also evidence that it is duly licensed to operate in its country of registration. It will need to appoint a general agent (“mandataire général”) to be in charge of the branch with power to bind the branch and represent it towards third parties, Swiss authorities and during legal proceedings. It will need to provide conclusive evidence that its capital and solvency margin in its country of registration meets the Swiss requirements. The foreign insurer will also be requested to establish in Switzerland an organisational fund and to lodge a surety in Switzerland equal to a specified percentage of the solvency margin accruing to the business in Switzerland. FINMA will determine this percentage and its method of calculation and the assets allowable for this purpose.
Switzerland has entered into a Bilateral Treaty with the EEA dated 10 October 1989 regarding direct non-life insurance, as amended by the Directive 1/2001 of the Insurance Committee EU/Switzerland. Pursuant to this treaty, the financial requirements are facilitated for EEA insurance undertakings intending to operate direct non-life insurance business in or from Switzerland. In this case, no security needs to be lodged in Switzerland and the foreign insurer will only need to file a solvency certificate from its home regulator.
Effective 1 January 2006, insurance intermediaries are newly subject to the supervision by FINMA. Swiss law does not make a clear distinction between the activity as an “insurance broker” and “insurance agent” as it is the case in the EU directive 2002/92/CE. From a regulatory standpoint, both activities are subject to the same set of rules and are referred to as “insurance intermediation”. The Federal Law of 2 April 1908 on Insurance Contract is currently under revision. The draft bill of the new law distinguishes the two activities. However, this is an early stage project which is not expected to enter into force within the next three to five years.
Any and all persons or entities acting for insurance undertakings or any other person with the aim of concluding an insurance policy is deemed to be an insurance intermediary. The law makes a distinction between “tied” and “non- tied” insurance intermediaries. An insurance intermediary is considered to be “tied” to an insurance undertaking if it is in a relation of financial or management dependency with the insurance undertaking (or vice-versa).
Insurance intermediaries tied to an insurance undertaking have no obligation, but may elect to register with FINMA. Other independent insurance intermediaries (non-tied) are obligated to register with FINMA. The register is only open to those with adequate professional qualifications and with professional liability insurance or who have provided a financial surety of equivalent value.
At their first meeting, the insurance intermediary shall provide the client in writing with at least the following information:
- The insurance intermediary’s address and identity;
- Whether the insurance coverage offered by the insurance intermediary relates to one or more insurance undertakings and the identity of these insurance undertakings;
- The business arrangement and relationship between the insurance intermediary and the insurance undertaking for which he or she is active and the identity of these insurance undertakings;
- The person who might be held liable in case of negligence of, or wrong advice by, the insurance intermediary; and
- How the clients’ data will be treated and
The insurance intermediary has a duty to update the information above during the term of the policy.
FINMA has removed from the definition of insurance intermediary, the activity of “address provider” (“indicateur d’adresse”). An address provider is not considered as an insurance intermediary if his or her activity is strictly limited to the provision of contact details to an insurance undertaking of a person desirous to enter into an insurance policy.
Insurance Groups and Conglomerates
FINMA may subject to its supervision insurance conglomerates (i.e. a group predominantly active in insurance but also active in other financial businesses such as banking) and insurance groups (i.e. typically a group consisting of various insurance undertakings) if they are managed (i) from Switzerland or (ii) from abroad but not subject to an adequate conglomerate or group supervision in their home jurisdiction. The ISA permits the FINMA to enter into arrangements with foreign regulators in order to coordinate the supervision of insurance conglomerates and insurance groups. The ISA also provides for supervisory activities of FINMA abroad (notably with regard to the foreign activities of insurance conglomerates or groups supervised by FINMA) and of foreign authorities in Switzerland. It sets a framework that ensures that non-public information is treated confidentially and used only for supervisory purposes. The cross-border supervisory activities are subject to reciprocity.
Post-License and Business requirements for Swiss Insurance Undertakings
An insurance undertaking not only has to put in place an efficient internal control system but also an internal audit department (internal inspectorate). The internal audit department must be independent from the management and produce a report to the external auditors at least once per year. Upon request, FINMA may decide to waive the requirement to appoint an internal audit where the risks assumed by the insurer are limited. The external auditors must be licensed by FINMA. They must be independent from the insurance undertaking and assure a proper audit.
Their duties encompass the review not only of the annual accounts but also of the compliance with supervisory legislation, including the proper business conduct requirement. The external auditors must immediately report to FINMA any serious violations of supervisory law by the insurance undertaking and any facts that could jeopardize the solvency of the insurance undertaking or the interests of the assured. FINMA has the right to entrust the external auditors with additional tasks and order special investigations, at the insurance undertaking’s cost.
The insurance undertaking shall provide FINMA no later than 30 April of each year with an annual management report and the annual supervisory reports for the previous financial year. The annual report shall include the annual accounts, the annual report of the board of directors and the annual management report. If an insurance undertaking is part of an insurance group or an insurance conglomerate, the submission of consolidated accounts is mandatory.
Insurance undertakings are considered as financial intermediaries and shall therefore register with, and thus be subject to the anti-money laundering supervision of, FINMA or of a self-regulated body, such as the Self-Regulated Body of the Swiss Insurance Association.
Material amendments to the business plan require the prior approval by FINMA. This includes, without limitation, amendments to the articles of association, appointment of a new actuary, change of auditors, underwriting of new insurance lines or change in the insurance lines currently offered, or change in the tariffs. Other lesser material amendments must only be notified to FINMA.
Insurance undertakings that provide direct individual or group life insurance and are required to execute life insurance contracts with capital excess shall also compile an annual statement on capital excess. In this context, a capital excess fund shall be set up with the purpose to reallocate to policy holders part of the excess bonus realized during an annual exercise.
Life Insurance Linked to Investment Funds’ Units
An insurance undertaking which underwrites life insurance policies linked to collective investment schemes does, in principle, not need a license as a fund distributor from FINMA, provided that the collective investment schemes (as underlying assets) are authorised by the FINMA for public distribution in Switzerland. If such collective investment schemes are not authorized, the marketing and underwriting of the life insurance in Switzerland are illegal (even if the insurer/distributor is licensed as a fund distributor by the FINMA).
There is no precedent as to whether a life insurer could benefit from a private placement exemption. If this were possible and the life insurer had obtained a private placement exception, it would be allowed to underwrite in Switzerland life-insurance policies with unauthorised funds as underlyings if the underwriting was made to qualified investors only (including, without limitation, high net worth individuals who confirm in writing that they own more than CHF 2 million in financial wealth). There should also be no issue with the Life-Policy is linked to a managed account.
Financial Status and Investment Restrictions
In order to ensure permanent solvency, insurance undertakings must maintain an adequate relationship between their equity and their total liabilities. Two solvency tests are applied to insurance undertakings: Solvency I and the Swiss Solvency Test.
Solvency I is essentially a business volume-based approach of solvency supervision. By contrast, the Swiss Solvency Test is based on the discussion in the EU on Solvency II, which is in essence a risk-based capital model.
Investment Restrictions and Tied Assets
As a general principle, insurance undertakings are obliged to apply the following principles when investing their assets: security, profitability, diversification and liquidity. Insurance undertakings (must accumulate sufficient assets to secure their performance under the insurance policies. These assets are segregated from the remaining assets of the insurer and are referred to as “tied assets”; the provisions of the ISA relating to tied assets do not apply to reinsurers. At the time of incorporation of the insurance undertaking the tied assets shall amount to at least CHF 750,000 for life-insurers and CHF 100,000 for non-life insurers. The tied assets are subject to detailed investment restrictions. Mandatory thresholds ensure a diversified placement of the tied assets for risk monitoring purposes. Separate tied assets must be constituted for the pension insurance line, the savings part in the insurance lines linked to fund units (lines A2.1, A2.2 and A2.3) and for the savings part in the insurance lines linked to internal funds or to some other reference values (line A2.4, A2.5 and A2.6).
There are no specific rules applicable to the marketing of insurance policies in Switzerland. However, an insurer or any of its intermediaries are prohibited to use unfair marketing practice. The Federal Law of 19 December 1986 against Unfair Competition prohibits the use of any conduct, business practice or misleading information which violates the principle of good faith dealing or which affect the relationship between competitors and consumers.
Further, insurers are obligated by law to provide a certain amount of information to a policy holder prior to entering into an insurance policy. Policy holders must be informed on the risk insured, the scope of the insurance coverage, the amount of premium to be paid and any other obligations to be performed by the policy holder, the duration of the policy, the method of calculation and allocation of the excess fund (if applicable), the redemption price of the policy and how personal data will be processed.
Choice of law
FINMA generally takes the position that Swiss law must govern all policies covering insurance operations in Switzerland. However, there is no statutory basis for this position, and FINMA has no defined practice for more complex cross border scenarios. There is also no court precedent on the question.
Switzerland has not entered into a bilateral or international treaty which sets forth rule of choice of law issue for international life insurance contracts. Therefore, the choice of law of an insurance contract entered into in a cross border relation should be subject to the provisions of the Federal Act on International Private Law (“IPL”). Some authors believe that insurance contracts should benefit from freedom of contract and that, accordingly, a choice of law clause electing foreign law would be valid and binding towards a policy holder domiciled in Switzerland. However, the actual trend is to consider policy holders as consumers. The choice of law election would therefore be limited by mandatory provisions applying to consumers. In this respect, section 120 para. 2 IPL sets forth that contracts entered into with consumers shall be subject to the laws of the country of domicile of the consumer if (a) the supplier received the order in the country of domicile of the policy holder; (b) if the conclusion of the contract was preceded in the country of domicile of the policy holder by an offer or an advertisement and the consumer performed there the necessary acts to conclude the contracts; or (c) if the consumer was induced by the supplier/insurer to go abroad to place his order there. This means that in most cases, an insurance policy entered into with a Swiss resident as policy holder will be governed by Swiss law. Of course, if the policy holder is a sophisticated person, the consumer protection should not apply.
Whatever law is applicable, the insurer operating in or from Switzerland will still be subject to Swiss regulatory requirements which may affect the terms of the policy (for instance, calculation of the premium).
The Insurance Contract Law
The Federal Law of 2 April 1908 (as amended from time to time) on Insurance Contract (“ICL”), is divided into three parts, i.e. general provisions applicable to all insurance contracts, specific provisions for property coverage, and the last part applies to life, health and accident coverage. The ICL sets forth a number of provisions which are mandatory for both the insurer and the insured. However, most of the provisions may be modified to the advantage of the insured.
The ICL is currently under revision. The preliminary draft prepared by a group of experts commissioned by the federal government is now available. It is expected that the consultation period will begin by the end of 2008. This consultation procedure will give interested persons the possibility to submit comments prior to finalizing the draft law. However, the new ICL is not expected to enter into force before 3 to 5 years.
Switzerland has a federal tax system and the overall corporate tax rates vary from at about 14 to 25 per cent, depending on the Canton where a company is located. Furthermore, a capital tax of at about 1 to 3 per mille of the net equity is levied. These regular tax rates also apply to insurance companies. However, insurance companies are subject to the following additional tax regulations.
Swiss Insurance Undertakings
A Swiss insurance company is taxed on its net profits and on its net equity. The statutory net profits and net equity which is computed by applying the Swiss accounting is basically also relevant for Swiss tax purposes. Consequently, the Swiss accounting principles foreseen for insurance companies are of major importance. Technical reserves belong to the most significant liabilities in the balance sheet and, at least to a considerable amount, have to be estimated or calculated according to empirical values.
A stamp duty is levied on insurance premiums and has to be paid by the insurance company. The stamp duty amounts to 5 per cent of the cash premium respectively to 2.5 per cent of the cash premium in case of life insurance. However, certain exceptions apply and not all kinds of insurance premiums are subject to this stamp duty.
Foreign Insurance Undertakings
The Swiss branch of a foreign insurance undertaking qualifies as a “permanent establishment” of a foreign company and will generally be taxed according to the same principles as domestic companies. Swiss tax treaties with other states normally contain a definition of ‘permanent establishment’ that is similar – but not identical – to that provided by the Organization for Economic Cooperation and Development (OECD) Model Tax Treaty.
A foreign insurance company conducting business in Switzerland through a branch will also be taxed at the ordinary corporation tax rate of at about 14 to 25 per cent. The taxable income is basically assessed in the same way as for Swiss insurance companies. For the international tax allocation, the Swiss permanent establishment will in principle be regarded as if it were an own company.
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