Insurance companies are far better capitalised today than they were in the crisis years 2001 and 2002, and have a much lower proportion of stocks in their total investment portfolios, according to an analysis published this week by the Federal Office of Private Insurance (FOPI).

In the midst of market uncertainty, the investment guidelines issued by FOPI, as well as the introduction of the Swiss Solvency Test (SST) have proven their merit.

However, despite the current robustness, challenges still remain for both insurance companies and related supervisory activities.

For this reason, FOPI intends to continue to pursue the integrated supervision concept that it launched in 2007.

FOPI has been keeping a close eye on its supervised insurance companies ever since the financial turbulence began in mid-2007. The focus has been both on the asset side of insurance company balance sheets (i.e. the investment categories used to cover tied assets)and on the passive side (i.e. share capital and Solvency I criteria).

Solvency II and the Swiss Solvency Test (SST) have not yet been fully implemented, and therefore only give an idea of the overall trends as far as share capital and stress resistance are concerned.

In August and November 2007, FOPI conducted two surveys to determine the extent of insurance company investment exposure. These surveys showed that Swiss-based insurance companies were not directly exposed to subprime loans and mortgages.

Only a few insurance companies had indirect exposure due to their having taken sizeable positions in investments with underlying subprime loans and mortgages.

However, the average exposure that the supervised direct insurance companies in Switzerland had to these asset categories did not exceed 1% of tied assets.

In 2007, only reinsurance groups were deeply exposed to the subprime turbulence. The posted losses came from investments in credit derivatives.

FOPI conducted a survey of exposure to capital losses on the stock market in January 2008 and a follow-up survey in March and April.

These surveys show that the developments on financial markets have indeed had various impacts on insurance company share capital.

However, insurance companies continue to meet Solvency I criteria and tied assets remain fully covered. In particular, private insurance companies have maintained the required minimum reserve threshold of 100% for their fully reinsured pension capital.

The prevailing market uncertainty makes it impossible to predict whether current developments will accentuate further, forcing individual insurance companies to write down more of their investments, or whether there will be other consequences. FOPI will therefore continue to monitor the situation.

On the whole, Swiss insurance companies are much better capitalised today than they were in the crisis years 2001 and 2002, the FOPI statement reiterated, going on to explain that many companies are now reaping the benefits of previous-year share capital increases.

The resulting stronger financial position has enabled them to better handle market volatility. Insurance companies also took steps to reduce the portion of stocks in their overall investment portfolios.

Generally speaking, Swiss insurance companies have managed to maintain their required minimum reserve thresholds despite difficult market conditions. This also proves that the regulations introduced back in 2006 on investment of tied assets, which require insurance companies to maintain enough assets to cover their actuarial provisions, were on track, FOPI observed.

Despite the robustness observed thus far, Swiss insurance companies still face certain challenges, the Office stressed.

The economic climate and intensified competition, which are likely to pull down premiums, are two major factors. FOPI will therefore consistently follow up on the integrated supervision concept that it launched in early 2007.

The main focus will be on continued implementation of traditional supervisory aspects (Solvency I, actuarial provisions, tied capital etc.), quantitative supervisory aspects (SST) and qualitative supervisory aspects (requirements in the area of risk management, corporate governance, etc).

In order to ensure that data flows between insurance companies and the supervisory authority (FOPI) remain as open and flexible as possible, FOPI has developed a new IT tool based entirely on Web technology. The new IT tool is expected to be introduced starting next year.

As a concept, integrated supervision means ensuring that insurance companies remain solvent and that adequate check-and-balance mechanisms are in place to ensure responsible corporate decision-making. Within this context, regulation acts as a guardrail to protect solvency.

On the one hand, this prevents risky capital market transactions from eroding the reserves needed by insurance companies to cover their insurance obligations. On the other, it gives companies the freedom they need to innovate and grow.

This approach will also be used by the new Swiss Financial Market Supervisory Authority (FINMA). The varying effects of the current financial market turbulence in the individual financial market sectors and the various mechanisms set in place show that FINMA will need to apply proportionally a case-by-case approach.

A comprehensive report in our Intelligence Report series looking at offshore insurance is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report11.asp