A raft of recent regulatory changes has helped turn Switzerland into a reinsurance force to be reckoned with. But for a country with such a saturated insurance market, can it support further growth? Nick Thorpe finds out.

With the largest per capita army for any Western democracy, Switzerland's famous neutrality and prosperous financial industry seems to be in safe hands. And now there is growing evidence that the Swiss Confederation, to use the country's proper name, looks as though it could become Europe's primary reinsurance centre. "Lloyd's wrote £5.26bn in non-life reinsurance premium in 2005, compared to the Swiss market's CHF21.63bn GWP (about £9bn)," said Robbie Klaus, CEO of Glacier Re. "On this evidence you could argue that Switzerland is already the leading Continental European reinsurance centre."

Growth prospects are limited though in a market that is largely saturated and highly competitive. Switzerland boasts the highest premiums per capita of anywhere in the world, $5,558 in 2005 compared to $4,599 in the UK, its next nearest competitor, according to Swiss Re (see figure 1). After the downturn in global markets in 2001 and 2002, however, the Swiss market suffered due to its vulnerable position in the global capital markets. Bottom lines were affected across the financial services industry and a premium reduction of 7% in 2004 in the life market caused many companies to reposition themselves.

But after several tough years, Swiss insurers and reinsurers are starting to show signs of improved earnings and capitalisation. "Extensive restructuring measures undertaken in portfolios and operational processes, stringent cost savings programmes, and sound risk-management and asset-liability management practices have started to bear fruit," said Standard & Poor's credit analyst Hiltrud Besgen.

Nevertheless, in 2005, the Swiss insurance market appeared stagnant in terms of premiums, recording a slight decrease of 0.2% compared with the previous year. This was driven by the life market, where premiums decreased yet again in 2005 by 1.5% to CHF29.8bn. Despite the possibility of regulatory changes in the future, Besgen still expects the saturated market to remain highly political. "Some companies, such as Generali, have simply exited the market," she commented. "Business models have diverged significantly between those players still offering full insurance cover." Non-life premiums continued to increase in 2005, growing 1.8% compared to the previous year's 4%, buoyed mainly by harder rates in accident lines.

Of the 200 or so insurance companies in Switzerland, the Federal Office of Private Insurers (FOPI) supervises 69 reinsurers, an increase of 14 since 2005. The Swiss insurance industry relies on 80 main companies to provide 95% of premium volume.

New entrants into the reinsurance market, such as Glacier Re, operate next to industry stalwarts such as Swiss Re and Converium. Earned premiums for the reinsurance industry were up 7% to CHF37.4bn in 2005 from CHF34.8bn the previous year, although non-life business was down slightly on 2004. Against the trend, however, Swiss Re reported that it had grown its non-life reinsurance portfolio by CHF1.3bn or 14% at the 1 January renewals this year which will easily absorb the EUR150m in claims the company expects as a result of Winterstorm Kyrill, which hit the continent on 18 January.

Converium also increased its non-life premium volume at the 1/1 renewals this year, writing $1.27bn or an increase of 3%, prompting an upbeat response from CEO Inga Beale: "We are very satisfied with this year's renewal. A number of clients and brokers have expanded or resumed their business relationships with Converium, encouraged by the completion of our turnaround in 2006." After announcing a net income of $57.1m for 2006, Converium was rewarded with the announcement that S&P was upgrading it back into the "A" ranks after a two-year hiatus. This also followed a hostile takeover bid by French reinsurer SCOR, which converium was continuing to reject at the time of going to press.

A mixed bag

The Swiss market is heavily reliant on life premiums, which accounted for 60% of total premiums in 2005. The remainder of the market is taken by property & casualty (23%), health insurance (12%) and accident insurance accounting for the remaining 5%. The relatively small size of the market and the saturation of the life market in particular has led many of the larger firms to build a substantial client base abroad. In fact, the foreign premium volume of CHF122.3 in 2005 was over double that of the domestic figure CHF53.5.

However, the insurance and reinsurance industry still appears to favour the Swiss regime, a fact that Albert Lauper, chairman of the Swiss Insurance Association (SIA), puts down to a number of factors. "There is a concentration of huge reinsurance knowledge in a small country, which also happens to be a very attractive place to do business," he said. "The most important locational factors contributing to Switzerland's success in my opinion include the political and macroeconomic stability, global financial networks and a transparent financial sector, the determined combating of the abuse of the financial system by criminals, and a competitive taxation system for companies and individuals." Inga Beale goes one step further: "Switzerland is a growing reinsurance centre. The lifestyle of the country is focused on the financial services industry and the professionalism of the Swiss people is a great asset."

The mature, slightly stagnant insurance market has led to speculation amongst analysts that Swiss insurers and reinsurers could attract foreign interest from buyers in search of market clout. The litmus test came in June 2006 when AXA made a surprise move for Swiss life and non-life insurer Winterthur, owned by the Credit Suisse Group. The deal, worth CHF12.3bn or $9.9bn, triggered a raft of takeover target rumours, ranging from Zurich Financial Services to Swiss Life Holdings, with buyers mooted from Allianz to St Paul Travelers, although, until SCOR's recent bid for Converium, the market had yet to see any further evidence of this. "Against the backdrop of AXA's takeover of Winterthur, S&P sees the possibility of the Swiss insurance market becoming attractive to other foreign global players for takeovers", an S&P report said at the time. There are signs that this prediction is ringing true as reinsurers flock to the country to establish significant subsidiaries, including XL, Arch Capital, Axis Capital, Partner Re and most recently Catlin, and rumbles behind the scenes of the London market suggest there is a growing fear that Switzerland is starting to win business that would have previously gone to London. "We cannot afford to simply quote from our glorious past or to relax after resolving problems," warned Lord Levene, chairman of Lloyd's. "The competition takes no prisoners."

One step ahead

With the EU moving towards the complete introduction of the Reinsurance Directive by the end of 2007, there has been speculation as to Switzerland's reaction in terms of parallel legislations. The Directive's objective is to effectively remove barriers to trade across the EU and eventually phase out collateral requirements. Adopted in 2004, the Insurance Supervision Law (ISL) was implemented by the FOPI, on 1 January 2006 with revisions that addressed various elements of the Reinsurance Directive. According to FOPI, which underwent a reorganisation following the stock market crashes in 2001 and 2002, the key points of debate were "the introduction and implementation of new solvency regulations, the calculation of target capital and the form that the new supervisory authority for insurance intermediaries would take."

Robbie Klaus points out that Switzerland has a legacy of implementing its own versions of European regulations despite having no obligation to do so. "Switzerland has transformed many European regulations on a voluntary basis into national legislation. In fact, the Swiss Solvency Test (SST) is a good example of Swiss legislation based on European standards. In this particular case you could even say it was ahead of its EU neighbours in this respect."

Albert Lauper was involved in discussions with FOPI throughout the revision process and is cautiously optimistic about the impact of the new law. "We are in a transition period - with the revision of the Insurance Supervisory Act, a new solvency regime has been implemented," he said. "The revised Swiss Insurance Supervisory Act has brought insurance intermediaries under the remit of the Federal Office of Private Insurers and defined their duties to provide information to the insured. This has come about as a result of consumer rights issues. In other fields, the revision has put into law what the insurance companies had already practised, for example the role and responsibilities of the accountable actuary."

Rene Schneiper, head of reinsurance at FOPI, points out that the act represents a much more stringent supervision of reinsurers than ever before. "The implementation of the new ISL is a momentous change: from a light supervision to a fully fledged solvency control of reinsurers. The act is a sophisticated risk-based and principles-based approach to solvency control." And, as according to FOPI the "the paradigm shift towards risk-based supervision is affecting the insurance sector during a favourable economic phase," the introduction so far seems to be progressing well.

Transparent solution

The introduction of the ISL means reinsurers will be regulated and supervised in a similar manner to primary insurers and applies to all reinsurers domiciled in Switzerland. The law is aimed at increasing security, improving insurers and reinsurers risk management and expanding corporate governance. According to S&P, "special emphasis has also been placed on reinforcing transparency and extending customer protection" with the introduction of changes to capital requirements, most importantly the SST.

The SST is a supervisory system featuring risk-based principles and aimed at building up the target capital required to cover the risks incurred. It also encourages a principles-based approach, promoting economic values and the use of internal models. "Models must be embedded within the company," said Schneiper. "The responsibility for the SST rests with the senior management."

Although many voiced concerns when the directive was first formulated, warning against restricting the freedom of activities of insurers and reinsurers, early indications are that the regime is having the desired positive effects. Lauper explains that, "since the enactment of the new solvency regime, three field tests have been conducted by FOPI in collaboration with 45 insurance companies. We observed an increase of quality of both data and results. All insurance companies are expected to run the SST as of (2008). Until today, no fundamental differences in risk-based solvency elements between the Swiss Solvency Test and Solvency II have been detected. Overall, the Swiss insurance industry is satisfied with the setup and the effects of the Swiss Solvency Test."

Robbie Klaus also points out the historical precedents in global financial services regulation the Swiss have set in the past, such as with Basel and Basel II. "The Swiss Solvency Test aims to go beyond the requirements of Solvency II as well as those of the FSA (UK Financial Services Authority) and NAIC (National Association of Insurance Commissioners in the US) in certain areas," he said. "While the SST follows similar risk-based elements as captured under Solvency II, the SST is more principles-based, which aids integration into the day-to-day risk management of reinsurance companies."

- Nick Thorpe is senior reporter of Global Reinsurance.