Swiss Solvency Test – Our Experience

Swiss Re has been reporting since 2008 under the Swiss Solvency Test (SST): like the forthcoming Solvency II rules in Europe, it is an economic-based regulatory approach that takes an all-risks view of the (re)insurer’s business. By the time Solvency II is implemented in 2013, Swiss Re will have years of experience with SST’s similar requirements. Clients could well benefit from the expertise Swiss Re has gained as well as our strong capital position under SST.

At the highest level, the basic concepts of SST and Solvency II are similar. The Swiss regime is also based on a three-pillar approach that includes quantitative, qualitative and disclosure aspects; both value assets and liabilities on a market consistent basis; both take an all-risks approach and fully acknowledge the benefits of diversification that reinsurance provides.

The SST applies to all Swiss-based companies. It obliges groups, conglomerates and reinsurers to use an internal model to calculate their solvency requirements. Additionally, groups and conglomerates must report their available and required capital twice a year to the Swiss regulator FINMA. Swiss Re has therefore gained practical experience with modern regimes.

“There is no substitute for real experience,” said Swiss Re’s Chief Financial Officer George Quinn at a recent investor event in London. “We understand the issues of Solvency II well and this means we can build it into our discussions with clients.”

Well-tested internal model

For more than a decade now, Swiss Re has been using a proprietary and integrated economic, risk-based capital adequacy model for the Group. It is used throughout the whole performance management cycle: risk capital figures generated by the model are used for steering our business, for planning, for costing and for performance measurement. Swiss Re now has practical experience in adapting the model to the circumstances that prevail under SST. As part of the preparation efforts, the company has enhanced model validation, calibration and documentation, particularly in modelling legal entities and intra-group transactions. Swiss Re’s internal model will now be further modified for use in Solvency II.

With the Swiss Solvency Test and Solvency II, regulatory requirements are increasingly aligned with Swiss Re’s internal risk and capital steering, a very important step for Swiss Re. “One of the difficulties experienced in steering companies over the past 18 months has been the contradictory information that various capital measures generate,” said Quinn. “A consistent approach would be a huge benefit to companies like Swiss Re.”

An important next step for Swiss Re will be the recognition of equivalence between Solvency II and the Swiss solvency regime. The Swiss regulator, FINMA, is in active discussions with the CEIOPS and European Commission on this issue.

Client benefits

Swiss Re’s experience with the SST has shown that clients need to focus on risk and capital. The economic effects of reinsurance will have a more immediate impact on their solvency capital requirement under Solvency II than they have in the past. As a result, there will be a clear need to assess current reinsurance programmes under SST or the Solvency II regime and restructure, if necessary, to make them more efficient. 

“The value of the SST from a client perspective is that we have some experience with it and that experience will put us in a good place to discuss Solvency II with clients and what its impact will be,” said Quinn. “There will be some opportunity that emerges from the implementation of Solvency II in Europe and the experience that we have, in particular in the application of the internal model, should put us in a good position to support our clients.”

Published 22 June 2010

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