Prudent person principle in Swiss insurance supervisory law

With the entry into force of the revised Insurance Supervision Act (ISA) and the revised Insurance Supervision Ordinance (ISO) on 1 January 2024, Switzerland has fundamentally modernised the regulatory framework for the investment of insurance companies. The core of this reform is the legal anchoring of the prudent person principle, which aligns the investment activities of insurance companies more strongly with a principles-based approach, increases their personal responsibility and at the same time considers the protection of insured persons. FINMA has addressed the key points on the implementation of the prudent person principle in FINMA Guidance 06/2023.

Situation before the revision

Until the end of 2023, investment activities and the safeguarding of insured persons' claims were mainly regulated by FINMA Circular 2016/5 "Investment guidelines – insurance companies", which specified the requirements of the ISA and the ISO. The FINMA circular defined general principles on investment strategy and regulations, organisation and control, custody of assets and reporting to FINMA, among other things. In addition, for each type of investment it has been defined, among other things, in which securities may (not) be invested, how the valuation is to be carried out, what limits apply and how the documentation should be structured. With the revision as of 1 January 2024, the central principles were transferred to the ISA and ISO. FINMA Circular 2016/5 was repealed as of 30 August 2024.

Prudent person principle: Definition and meaning

The prudent person principle obliges insurance companies to manage their assets in accordance with the principle of prudence and is newly laid down under the title "Principles of Investment" (Art. 69a ISO). The investment activities of the insurance company should be in accordance with the following principles:

The core elements of the prudent person principle are derived from the above principles:

Investments exclusively in assets and instruments whose risks the insurance company can adequately assess, evaluate, monitor and manage and which it can include in its reporting.
Investment of assets to ensure the safety, quality, liquidity, and profitability of the portfolio as a whole. The location of the assets must ensure availability.
Assets to cover technical provisions shall be invested in such a way that (i) they are appropriate to the nature and duration of the company's insurance obligations, (ii) are in the best interests of policyholders and beneficiaries, (iii) and consider the strategic objectives of the company.
In cases of conflicts of interest, it must be ensured that the investment is made in the interests of the policyholders and the beneficiaries.
Non-traded investments and assets that are not admitted to trading on a regulated financial market should be kept at a prudent level.
Investments must be mixed and diversified in an appropriate manner that avoids over-reliance on one asset class, asset, issuer, group of companies, market, geographic region, as well as excessive concentration of risk in the portfolio as a whole.
Derivatives are only permissible if they serve to reduce risks or to manage investments efficiently. Transactions in which there are no corresponding securities holdings (short selling) are not permitted.

The investment strategy and compliance with the investment principles must be documented and monitored by the insurance company in a comprehensible manner. The investment strategy must be determined by the management and approved by the board of directors.

In addition to the general principles, specific requirements are introduced regarding tied assets (Art. 70 et seq. ISO). The ISO imposes special requirements in this regard because security, liquidity and availability of assets are crucial for securing insurance claims.

Tied assets: Individual list vs. standard list

Insurance companies have two options for allocating assets to tied assets: either they apply to FINMA for a list of investments (option 1), or they use the legally defined catalogue of permitted investments (option 2).

Option 1: Individual list (Art. 79 para. 1 ISO)

At the request of an insurance company, FINMA can approve a list of assets that are suitable for allocation to tied assets. For each asset that the insurance company wishes to allocate to tied assets, it must provide information on the following points in the application:

type and place of custody, the permissibility of sub-custody and the liability regime in connection with sub-custody;
tradability, counterparty risk and collateralisation of the asset;
valuation of the asset (incl. valuation model if there is no market value);
type of investment (e.g. direct investment or investment via collective investment scheme);
investment limit per asset;
risk management related to the asset.

FINMA requires a high level of detail in the application: applications that are too general or too broad, which could also include unsuitable assets, will be rejected for improvement. In addition, the insurance company must submit its investment strategy as well as documentation that sets out how the investment principles are adhered to and quantitative limits are set. The approved list is company-specific and cannot be applied to other insurance companies.

The application must be submitted to FINMA via FINMA's survey and application platform (EHP).

Option 2: Standard list (Art. 79 para. 2 ISO):

If the insurance company does not have a list approved by FINMA, the following exhaustive assets can be assigned to the tied assets:

If the tied assets are invested only in the above-mentioned assets, there is no need to submit an application to FINMA.

Transition periods

Insurance companies that want to allocate values to tied assets that are not on the standard list from 1 January 2024 onwards must have a list of suitable assets approved by FINMA.

For assets that were permissibly assignable to tied assets before the entry into force of the revised ISA and ISO, Art. 216c para. 3 ISO applies: These assets may continue to be allocated to the tied assets for a transitional period of three years (expiry of the transitional period: 4 January 2027), provided that:

the requirements of the prudent person principle are met;
the insurance company had already made a comparable permissible investment in assets of this type before entry into force; and
the values were added to the tied assets after 1 January 2024 and the insurance company submitted an application for an individual list that included these values, and which was neither withdrawn nor rejected.

By the end of the transitional period at the latest, an application must be submitted to FINMA for the inclusion of all instruments covered by the transitional regulation in the individual list. This results in the following decision tree for insurance companies:

FINMA may extend the transitional periods if this is necessary to protect confidence in investment decisions made before entry into force.

Relief for professional policyholders

The revised Insurance Supervision Act provides for relief for transactions with professional policyholders. It is assumed that they can independently assess the solvency and counterparty risk of the insurance company and therefore do not need legally required protection by tied assets. The use of these relief measures requires prior approval by FINMA and is subject to obligations: before concluding the contract, the insurance company must clarify and document the professional status of the policyholders (clarification and documentation duty) and inform them of the legal consequences, in particular that their claims are not secured by tied assets (duty to provide information).

We are happy to help you

The implementation of the new requirements requires a comprehensive package of measures. As an experienced partner in insurance regulatory law and in advising asset management clients, we are happy to assist you with implementing the prudent person principle. We are happy to support you with:

reviewing the investment strategy and regulations;
the submission of an individual list to FINMA;
the review of the underlying documentation, risk management or corporate governance structure;
ensuring functioning reporting to FINMA and the audit firm; and
other legal and regulatory issues.

Contact us

Thomas Schwyter

Director, Legal, PwC Switzerland

+41 58 792 24 14

Email

Michael Boppart

Manager, Legal, PwC Switzerland

+41 58 792 15 95