Standard & Poor's non-life insurance rating outlook

Standard & Poor's non-life insurance rating outlook
Standard & Poor's establishes a stable outlook for the Swiss non-life market

The stable outlook reflects the industry's very strong capitalisation supported by conservative reserve practices, strong underlying operating performance and a benign regulatory and tax environment.

Based on publicly available information, Switzerland does not seem to be as profitable as some European markets. However, this is largely due to companies' very conservative reserve levels, making it difficult to assess economic performance. As part of the interactive process, Standard & Poor's has always looked behind published figures to evaluate the underlying performance of companies. Based purely on public information, the rating process is a significantly more challenging exercise given the limited amount of information available. A higher degree of conservatism therefore needs to be factored into public information ratings when assessing companies' reserve and capital strength.

Despite the Swiss market's stable outlook, Standard and Poor's warns that insurers will continue to experience heightened levels of competition over the medium- to long-term.

The business climate may become difficult for small and medium-sized companies as the dominant market players, such as Zurich and Winterthur, will accelerate their own cost-cutting efforts to take advantage of inherent economies of scale, thereby further enhancing their ability to price business more competitively.

Apart from the very large groups, the majority of companies have a strong domestic focus. Given the limited growth prospects of the Swiss non-life market, they will find it increasingly difficult to generate new revenue streams.

Increased competition is, nevertheless, unlikely to result in any Swiss companies having their existing ratings downgraded. Many of the smaller and medium-sized companies will consider a wider range of strategic alternatives to strengthen their business profile, from aspirations to become full financial service providers to becoming niche insurers or engaging in strategic alliances. Significant internal restructuring and the merging of back offices to streamline operations will be another consequence. However, strong capital levels and a very protective regulatory regime provide the majority of companies with a strong cushion against potential investment and insurance risks.

The insurance market
The Swiss people are among the most heavily insured in the world and, on average, Swiss residents spend more than SFr7,729 (£3,180) on insurance every year. Nevertheless, Swiss insurers now rely on foreign business for approximately 62% of their premium income. The relatively small size of the country forced insurers to be first into other European markets, while the larger companies also act on the global stage.

The major Swiss insurance/reinsurance groups have built up global market shares far in excess of their participations in the domestic market.

At the end of September 2000, there were 173 active insurance and reinsurance companies (this figure excludes foreign reinsurers who are exempt from supervision) operating in the Swiss market (in September 1999, there were 170). This number includes 101 Swiss insurers, 37 foreign insurers and 35 Swiss reinsurers.

Out of the 138 direct companies, 32 wrote life business (two foreign-domiciled) and 106 non-life (35 foreign-domiciled).

Following its merger with the financial services arm of BAT Industries Group in September

1998, Zurich Financial Services Group was formed and is one of the top ten insurance groups in Europe. The group's largest markets are the US (where it is the third largest non-life insurer), followed by the UK (where it is among the top ten) and Switzerland. The group operates on a global basis through branches and subsidiaries. In March 2001, the group announced the de-merger of its US, German and Swiss reinsurance operations and it is likely that these will be sold in due course.

Winterthur has been owned by the Credit Suisse banking group since 1997. During 1998, it sold its reinsurance activities and, in July 2001, it sold its international commercial lines division, Winterthur International, to XL Capital of Bermuda. The group now focuses on its core direct life and non-life insurance business.

Schweizerische Mobiliar is the oldest private insurer in Switzerland. It is set up as a co-operative company and, in October 1998, joined the pan-European Eureko partnership. Life business is written through the subsidiary, Providentia Swiss Life Insurance Co.

The holding company of Helvetia Schweizerische is quoted on the stock exchange. The group also has operations in Spain, Austria, Italy and Germany.

Baloise is a major player in both the life and non-life markets in Switzerland and the group is owned by Baloise Holding, a quoted company. Other core European markets are Belgium, Germany and Austria. In 1999, Zurich Group took a 10% stake in the group.

Elvia is the Allianz Group's main operating vehicle in Switzerland, although Allianz also operates through the Berner Group and Allianz Versicherung (Schweiz). Elvia is owned via RAS Group of Italy, and has important positions in both the Swiss life and non-life markets.

Schweizerische National is also active in France, Belgium, Italy, Denmark, Germany and Spain. The company announced it was to merge with Coop Life in 2001.

Market features
End of tariffs
Switzerland has a heavily regulated and, until recently, tariffed market. These factors contributed greatly to the fact that no Swiss insurer has ever become insolvent. Cartel practices and artificially high tariffs were viewed by the supervisors as a particularly effective method of maintaining the health of insurance operations.

However, recent liberalisation of the market as a whole has led to the virtual abolition of all cartel tariffs.

Deregulation history:
January 1, 1989: Removal of a cartel used by property insurers to set minimum premium rates.

January 1, 1993: Removal of the obligation to obtain approval for rates and conditions for large risk property and casualty business.

October 1, 1993: Almost complete abolition of the obligation to obtain approval for rates and conditions for almost all classes of non-life insurance.

October 1, 1993: Removal of standard tariffs in individual life assurance.

January 1, 1996: The removal of third-party motor liability tariffs.

The abolition of motor tariffs resulted in some price reductions for third-party motor business and precipitated the formation of direct selling insurance operations. Zuritel was formed during 1994 by the Zurich group and Swissline, a subsidiary of the Winterthur group, was formed in January 1996. However, the market remains characterised by price stability across virtually all classes of business.

Prior to deregulation, 80% of all insurance payments were subject to state regulation through tariff setting on old age and survivors' insurance, disability insurance, occupational pension funds and motor third-party liability insurance. The remaining 20% were subject to state control via tariffs set by private insurers. However, the tariffs existed only as guidelines.

Compulsory insurance
Minimum coverage for third-party motor liability business remains compulsory under law. All insurers have to register with a national bureau and contribute to a guarantee fund (based on 0.6% of premium income). Foreign companies with a Swiss subsidiary also have to contribute to the fund. Environmental law now incorporates a clause covering damaging organisms, while at the same time introducing a strict liability for environmental risks.

General agents dominate commercial domestic business, accounting for 80% of the market, with 20% being broker-generated. For international business, the converse is true, with brokers providing 80% of the business.

The Swiss Accident Insurance Agency (SUVA) and the league of 19 cantonal fire insurance offices (Vereinigung Kantonaler Feuerversicherungen) control the state monopolies still in existence. The SUVA collects instalments due under the federal law of 1981, relating to compulsory employee accident cover. The cantonal fire monopolies are the oldest insurance companies in Switzerland and can be either independent or part of the state. Where they operate, an individual may not take out fire protection from the private sector. Policy coverage varies from canton to canton but typically a policy will include fire, storm, hail, avalanche and flood protection, but exclude earthquake cover. In addition to acting as insurers, the monopolies also have a “health and safety” supervisory role in building construction. In seven cantons, private insurers are allowed to offer fire insurance for buildings.

Insurance pools exist for natural catastrophes, aviation, earthquakes, dams and barrages and nuclear risks.

In addition to SUVA, Switzerland also has a national association: the Swiss Insurance Association (SVV) (Schweizerische Versicherungsverband/Association Suisse d'Assurances). Prior to the abolition of tariffs, these associations acted as intermediaries between the supervisory authority and the insurance companies. The associations would lay down their uniform products and minimum tariffs, which were presented to the supervisory authority for approval. Since the abolition of tariffs, only the common statistics established by the VPL, relating to life and health assurance, remain in use.

Insurance regulation and supervision
Insurance companies wishing to commence trading require authorisation by the Federal Department of Justice and Police. Permanent supervision is carried out by the Federal Office for Private Insurance (Bundesamt für Privatversicherungen (BPV)/Office Fédéral des Assurances Privées (OFAP)), which has existed for more than 100 years:

Bundesamt für Privatversicherungen
Gutenbergstrasse 50
3003 Bern

The principal legislation is the Federal Statute on the Supervision of Private Insurers of 1978, which codified and revised previous legislation. With effect from January 1, 1993, Switzerland brought its insurance legislation partly in line with that of the EU, by implementing the first and part of the second generation of EU non-life insurance directives.

The primary role of the supervisor is the protection of policyholders, through avoidance of insurer insolvencies and by protecting against inadequate or excessive premiums. The primary indicator used to monitor the health of a company is the solvency level and supervisors have the right to carry out extensive inspections. There are minimum capital requirements.

Insurance companies have to submit on official forms, which are not available for public use, a business report to the supervisor by the end of June. These include detailed information of all aspects of a company's business activities and serve first of all as basic documents for evaluating its solvency. A subset of this information is published in the official annual Report on the Private Insurance Companies in Switzerland.

Foreign reinsurance companies that have exclusively foreign customers require no authorisation and are exempt from federal supervision.

Life and non-life insurance cannot be offered by one single company and each can only be operated by a legally independent company. This is to ensure that each segment is a self-supporting unit and to make it impossible to balance out losses in one segment by transferring profits from the other. Broking operations are currently completely unregulated. However, there are intentions to formally lay down rules to govern insurance brokers in the near future by keeping a register.

Insurance companies are not allowed to carry out non-insurance-related business, either directly or through subsidiary companies. Larger investments of insurers (more than 20% for non-life companies and more than 10% for life companies) in non-insurance operations are not expressly forbidden, but are subject to regulatory approval.

Switzerland has a population of 7.3 million. It is a federation of 26 cantons covering a land area of just over 41,000 km2. The capital is Bern, and Zurich and Basel are the main insurance centres. Insurance is one of Switzerland's largest industries, contributing about one tenth of GDP. The currency is the Swiss franc (SFr). £1 = SFr2.43, as at August 8, 2001.

Switzerland is a parliamentary democracy and there has been a stable coalition of the country's four strongest parties since 1959. The Liberal Radical Democrats, the Centrist Christian Democrats, the Social Democrats and the Conservative Swiss People's Party (SVP) together control the Federal Council and, by way of the “Magic Formula”, apportion the seven government ministerial jobs between them. However, the last federal election in October 1999 brought a change to the political landscape, with a surge in support for the SVP, now the second largest after the Social Democrats, having formerly been the smallest of the four. The SVP stands for “Switzerland first” and has a hostile attitude towards asylum seekers and the European Union.

To date, Switzerland has refused to join both the European Union (EU) and the European Economic Area (EEA) and, following its shift to the right, is becoming increasingly isolated. Prior to this, there had been signs that the Swiss were warming to the idea of an integrated Europe and a small majority were apparently in favour of EU and EEA membership. Opposition remains rooted in the German-speaking rural cantons.

However, in May 2000, the Swiss voted by a majority of 67% to accept a series of bilateral treaties with the EU.

Switzerland's credit rating will continue to be supported by its strong net creditor position, low inflation, and conservative fiscal policies.

Over the medium term, Switzerland remains fully equipped to manage almost all reasonable economic, political, and financial risks, even in its current position outside of EU. While the government does have substantial fiscal flexibility, and has made its commitment toward further fiscal consolidation clear, policymakers must, over the longer term, continue to address the issue of Switzerland's ageing population in order to prevent related expenditures exerting undue pressure on public finances.

Switzerland insurance analyst contacts:
Jonathan Bint London 020 7847 7071
Karin Clemens Frankfurt +49 (0)69 138709 7356
Ashley Gill London 020 7847 7077