What are the regulatory frameworks within which insurers operate?
The Swiss Financial Market Supervisory Authority (FINMA) issues legislation with which insurance companies must comply in order to protect policyholders against the risk of insurers becoming insolvent. The law requires insurance companies to hold sufficient capital to ensure that they can cover policyholders’ claims.
Since 2011 the Swiss Solvency Test (SST) has been used to calculate insurers’ capital strength, which means that the SST is now the applicable solvency standard for Swiss insurance companies. A similarly modern solvency system is currently being introduced in the EU as Solvency II comes into effect. This will replace the previous Solvency I standard.
To enhance consumer protection and the information provided to investors and other stakeholders, the results of the solvency calculations are to be published in detail, together with detailed explanatory notes, both in the EU and Switzerland over the course of the coming years.
How is solvency calculated?
Both SST and Solvency II take into account the risks assumed by insurance companies to determine the amount of capital that they must hold, whereby the economic model for SST is based on a market-value balance sheet. This means that a company with a high level of financial or underwriting risk must have an equivalently high level of freely availably capital in order to guarantee sufficient cover for its policyholders.
Calculations of solvency in accordance with SST are based on two key metrics: risk-bearing capital and target capital. Risk-bearing capital corresponds to the amount of freely available capital and it factors in the market value of liabilities and investments. The target capital denotes the risks taken and corresponds to the capital loss that the insurance company would have to bear in the event of an extremely bad year caused, for example, by natural disasters or turbulent capital markets.
If the risk-bearing capital is larger or at least the same size as the target capital, then there would still be sufficient capital available to meet all anticipated contractual obligations to policyholders even after a year of heavy losses had occurred. The STT ratio describes the relationship between risk-bearing capital and target capital. Companies with a ratio of 100 per cent are therefore strongly capitalised and could even withstand extreme events without their policyholders suffering any adverse effects.
The SST places considerable demands on insurers in terms of their capitalisation. How is Baloise able to meet these requirements?
Baloise has a healthy balance sheet and is strongly capitalised. Its economic solvency – according to the stringent Swiss Solvency Test – is in the green zone (i.e. more than 100 per cent) despite the very low level of interest rates at present and the high volatility of SST results. As at 31 December 2016, its ratio according to the traditional Solvency I test was 351 per cent, which is one of the highest in Europe (B2).
In our non-life business, this healthy position is reflected in the coverage ratio, which has remained at a consistently high level for a number of years now (B3/B4). In our life business we have continually strengthened our reserves in recent years.
Another reason for our high degree of financial flexibility is the bonds that we have issued, which fall due according to a regular pattern and are then re-issued. This structure provides us with a convenient way of raising long-term funding. In addition, we maintain a regular dialogue with investment banks and the capital markets. This helps in case we need to raise equity or debt capital, for example for major acquisitions.