Fu­ture-proof in­sur­ance reg­u­la­tion

Parliament is currently addressing the partial revision of insurance supervision law. Monica Mächler, member of the Board of Directors at Zurich Insurance Group AG, and Nina Arquint, Chief Risk Officer Corporate Solutions at Swiss Re, talk about the requirements for future-proof insurance regulation.

What should future-proof insurance regulation achieve?

Monica Mächler: Just like the market as a whole, insurance supervision is facing huge challenges. We are still operating in a low interest rate environment with an upward trend. In this context, it is important to stay resilient in terms of capital and liquidity resources and qualitative requirements. We also need to develop balanced methods to deal with technological advances in order to enable innovation but limit risk. We also have to define the appropriate method of handling the effects of climate change. And, last but not least, it is important to focus on the essentials and increase the efficiency of regulation and supervision.

Nina Arquint: In addition, future-proof insurance regulation should allow for rapid adaptation to change, which is why a principle-based regulatory system is an advantage. It is also desirable that Swiss insurance regulation is recognised internationally. This is a prerequisite if Swiss reinsurance and primary insurance companies with international operations are to benefit from the most efficient group supervision possible.

Must Switzerland be guided by the regulatory systems of other countries?

NA: If Switzerland wants to remain one of the world’s leading financial centres in the future and support insurance companies with international operations, then I believe there is no getting around this. Ideally, Switzerland should not only be guided by international regulations, but should also play an active role in shaping them.

MM: With international standard setting in particular, it is crucial that the Swiss authorities make an active contribution. In addition, Swiss and foreign regulations – particularly in neighbouring countries – should be compared on a regular basis, because in the longer term the regulations need to move in a similar corridor to prevent undesirable arbitrage effects.

How can regulation guarantee security while enabling innovation at the same time?

MM: Realistic goals are to welcome and encourage innovation, to optimise security and to prevent adverse effects on the insured as a consequence of failure. As a result, supervisors should not restrict or hinder the freedom to make use of new techniques, but should ensure that insurance companies have the necessary risk management structures in place.

NA: I expect that ‘insurance’ as a service will change a lot over the next few years. Insurance will be increasingly needs-based and embedded in other products and services. Security is primarily the responsibility of the insurance company itself – policyholder trust is a precious asset for every insurer. Insurance regulation should support the responsibility of insurance companies.

And how can appropriate capital requirements be determined?

NA: When defining regulatory capital requirements, it is important to strike the right balance between protecting policyholders and ensuring competitiveness. Overall, the Swiss Solvency Test has proven to be an effective concept.

MM: Risk sensitivity in determining capital requirements is a major achievement of the Swiss Solvency Test, Solvency II and the International Capital Standard (ICS) developed by the International Association of Insurance Supervisors (IAIS). This should be maintained as a baseline. The pandemic has shown very clearly that capital buffers are extremely valuable.

What are the benefits of differentiating between varying degrees of customer protection?

MM: It is crucial to offer sufficient protection to those who need it. But certain protective mechanisms can be dispensed with for customers with a higher risk tolerance; for example, in reinsurance and corporate business. This allows products to be offered more efficiently and on more cost-effective terms.

NA: If distinctions are made between customer protection requirements, regulation and supervision becomes more risk-based. The elimination of tied assets for professional policyholders will also increase insurers’ international competitiveness.

Is that why less stringent supervision should apply to reinsurance?

NA: In the partial revision of the Insurance Supervision Act (ISA), the SIA is working to ensure that reinsurers pay more attention to the lower need for protection and the special features of the global business model. These calls make sense, since reinsurance customers are primary insurers that are on an equal footing with the reinsurer.

MM: As a business among experienced parties, reinsurance does not require the same level of regulation. But a solid basic framework is needed, and, in my opinion, to an appropriate extent one for branches of foreign reinsurers in Switzerland as well. 

NA: I agree. I also believe that less stringent supervision should be possible if the parent company abroad is subject to adequate supervision, as in the Solvency II system.

Why is the issue of corporate restructuring important?

MM: If an insurance company runs into financial difficulties, the aim is to find the
best solution for the insured.

NA: These are currently no restructuring options for insurance companies. Restructuring law offers an alternative to insolvency, provided that the insured persons and creditors are not put in a worse position as a result.

MM: For example, restructuring would allow life insurance policies or supplementary insurance to social health insurance policies to be continued – provided that sufficient funds or partners can be mobilised. This approach is often preferable to insolvency with cancellation of insurance policies.