Switzerland: Insurance & Reinsurance 2021

1. BASIS OF INSURANCE AND REINSURANCE LAW

1.1 Sources of Insurance and Reinsurance Law

The Swiss legal framework for private insurance is based in particular on the laws and regulations set out below.

Federal Regulations

The Federal Insurance Contract Act (ICA) and, subsidiarily, the Swiss Code of Obligations (CO) govern the contractual relationship between insurer, policyholder and insured (Article 100 paragraph 1 ICA). The ICA applies to direct insurance contracts underwritten by insurance undertakings subject to supervision by the Swiss Financial Market Supervisory Authority FINMA (FINMA; Article 101 paragraph 1 No 2 e contrario ICA). Reinsurance contracts are outside the scope of the ICA and are consequently only subject to the general contract law provisions of the CO (Article 101 paragraph 1 No 1 ICA; see 6.6 Consumer Contacts or Reinsurance Contracts). The partial revision was adopted by Swiss parliament in summer 2020 (revICA; see 12 Recent and Forthcoming Legal Developments). The partially revised ICA will enter into force on 1 January 2022.

The Federal Insurance Supervision Act (ISA) sets out the regulatory requirements for insurance and reinsurance undertakings and insurance intermediaries (see 2 Regulation of Insurance and Reinsurance). On 21 October 2020, the Swiss Federal Council issued a dispatch along with a revised draft (Draft revISA) for deliberation in Swiss parliament (see 13 Other Developments in Insurance Law). The partial revision of the ISA might enter into force in 2022/2023 at the earliest.

Supplemental Ordinances

The ISA is supplemented by the following implementing ordinances:

• the Federal Ordinance on the Supervision of Private Insurance Companies (ISO);
• the FINMA-Ordinance on the Supervision of Private Insurance Companies (ISO-FINMA); and
• the FINMA-Ordinance on Insurance Bankruptcy.

Other Provisions

In addition to the core insurance laws and ordinances listed above, other bodies of law contain relevant provisions with regard to insurance and reinsurance, (eg, general consumer protection law, data protection law or the law against unfair competition). Furthermore, Switzerland is a party to three international treaties on direct insurance that supersede the ISA (see 3.1 Overseas-Based Insurers or Reinsurers):

• the Agreement of 10 October 1989 between the Swiss Confederation and the European Economic Community (now the EU) on Direct Insurance other than Life Insurance (EU Direct Insurance Treaty);
• the Agreement of 19 December 1996 between the Swiss Confederation and the Principality of Liechtenstein on Direct Insurance and Insurance Intermediaries (Liechtenstein Direct Insurance Treaty) that is supplemented by the agreement of 10 July 2015 on insurance against natural disasters by private insurance undertakings; and
• the Agreement of 25 January 2019 between the Swiss Confederation and the UK on Direct Insurance other than Life Insurance (UK Direct Insurance Treaty) (to enter into force once the EU Direct Insurance Treaty ceases to apply to the UK).

FINMA further specifies matters of insurance regulation in numerous circulars (not binding for Swiss courts; however, the courts in Switzerland often take the circulars into account when interpreting the laws and ordinances). In addition, FINMA publishes less formal guidance documents and FAQs on supervisory matters.

Switzerland is a civil law country, however, precedent cases of Swiss courts still play an important role in interpreting and developing the statutory law (Article 1 paragraph 2 Swiss Civil Code).

2. REGULATION OF INSURANCE AND REINSURANCE

2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance

General

Swiss insurance supervisory law is codified in the ISA and its implementing ordinances (see 1.1 Sources of Insurance and Reinsurance Law), FINMA being the overall competent licensing and supervisory authority. In general, the ISA applies to:

• Swiss-domiciled insurance and reinsurance undertakings;
• foreign-domiciled insurance undertakings engaging in insurance business in or from Switzerland (see 3.1 Overseas-Based Insurers and Reinsurers);
• insurance intermediaries (see 5 Distribution); and
• insurance groups and insurance conglomerates (see 2.2 The Writing of Insurance and Reinsurance; Article 2 paragraph 1 litterae a–d ISA).

Exemptions

Certain specific types of activities and undertakings are exempted from the scope of application of the ISA, namely (Article 2 paragraph 2 ISA):

• insurance undertakings domiciled abroad that only engage in reinsurance activities in Switzerland (see 3.1 Overseas-Based Insurers or Reinsurers);
• public insurance undertakings;
• private insurance undertakings that are regulated by special federal legislation;
• certain insurance co-operatives (Versicherungsgenossenschaften).

Other regulatory bodies exist – eg, in the area of mandatory health insurance (the Federal Office of Public Health), pension schemes (the Federal Occupational Pension Supervisory Commission) or certain cantonal building insurances (supervisory authority of the relevant Swiss canton).

2.2 The Writing of Insurance and Reinsurance

Insurance and reinsurance undertakings that are within the scope of application of the ISA must obtain an insurance licence from FINMA before engaging in any regulated activities – ie, writing insurance and reinsurance business (Article 3 paragraph 1 ISA). The main licence requirements are set out below.

Organisational Requirements

• Legal form as a company limited by shares (Aktiengesellschaft) or a co-operative (Genossenschaft; Article 7 ISA).
• Good standing and assurance of proper business conduct by the persons responsible for direction, supervision, control and management of the insurance undertaking (Article 14 ISA; Article 12 et seq ISO).
• Organisational structure allowing the recognition, limitation and monitoring of all significant risks (Article 22 ISA; Articles 96 to 98a ISO; FINMA-Circular 2017/2 Corporate Governance – Insurers).
• Appointment of a responsible actuary who has access to all business records (Article 23 ISA).
• Effective internal control system and an internal audit function which is independent from management (Article 27 ISA).
• Appointment of a licenced audit firm to review the conduct of business (Article 28 ISA).

Financial Requirements

• Minimum capital between CHF3 million and CHF20 million (Article 8 ISA; Articles 6 to 10 ISO).
• Sufficient solvency margin (Swiss Solvency Test (SST); Article 9 ISA and Articles 21 to 53a ISO).
• Maintenance of an organisational fund (Organisationsfonds) (Article 10 ISA; Article 11 ISO).
• Sufficient insurance-related reserves (versicherungstechnische Rückstellungen) for all business activities (Article 16 ISA; Article 54 et seq ISO).
• Claims based on insurance contracts have to be covered at all times by tied assets (gebundenes Vermögen; Article 17 et seq ISA; Article 1 ISO-FINMA).
• Maintenance of sufficient liquidity in order to be able to satisfy all of its payment obligations, even in stress scenarios (Article 98a ISO).

Other Requirements

Building on the basic regulatory requirements, certain additional requirements or reliefs apply depending on the specifics of the case or the business. These include:

• additional provisions (eg, regarding the scope of admissible activities or the preventive control of insurance tariffs) apply to specific classes and types of insurance only (Article 31 et seq ISA; Article 120 et seq ISO);
• additional requirements apply for foreign insurance undertakings (Article 15 ISA; see 3.1 Overseas-Based Insurers or Reinsurers); and
• companies, engaging in reinsurance business only, are exempt from certain regulatory requirements under the ISA, inter alia from the requirement to maintain tied assets (no).

Special provisions apply to the consolidated supervision of insurance groups, and insurance conglomerates (Articles 64 et seq and 72 et seq ISA; FINMA-Circular 2016/4 Insurance Groups and Conglomerates). FINMA may impose consolidated supervision on an insurance group or insurance conglomerate under certain conditions (Articles 65 and 73 ISA). Consolidated group supervision applies in addition to FINMA's individual supervision over the Swiss insurance undertakings (or other regulated Swiss entities; Articles 66 and 74 ISA).

2.3 The Taxation of Premium

Insurance premium payments are subject to stamp taxes if:

• the policy is part of a Swiss portfolio of an insurance undertaking subject to Swiss insurance supervision or of a Swiss insurance undertaking enjoying public law status; or
• a Swiss policyholder concluded the policy with a foreign insurance undertaking not subject to Swiss insurance supervision (Article 21 Federal Stamp Tax Act (STA)).

Several types of insurance are exempt from this tax, including, in particular, premiums on reinsurance policies (Article 22 STA). In principle, the stamp tax amounts to 5% of the cash premium, with the exception of life insurance policies, where it amounts to 2.5% (Article 24 STA).

Meanwhile, insurance and reinsurance turnovers are exempt from Swiss VAT (Article 21 paragraph 2 No 18 Value Added Tax Act).

3. OVERSEAS FIRMS DOING BUSINESS IN THE JURISDICTION

3.1 Overseas-Based Insurers or Reinsurers

General

Insurance undertakings with registered seat abroad engaging in insurance activities in or from Switzerland fall within the scope of the ISA (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance), unless an international treaty provides otherwise (see below) or an exemption under the ISA applies (eg, foreign insurance undertakings engaging only in reinsurance activities in Switzerland (Article 2 paragraph 2 littera a ISA), regardless if conducted cross-border or through a Swiss branch office; foreign insurance undertakings that have not established a branch office in Switzerland if their insurance activity in Switzerland exclusively covers (i) insurance risks in connection with ocean shipping, aviation and cross-border transports; (ii) risks located abroad; and/or (iii) war risks (Article 1 paragraph 2 ISO); de minimis exemption (Article 2 paragraph 3 ISA), however, rarely applies. In the Draft revISA, a new exemption for innovative business models has been proposed (see 13 Other Developments in Insurance Law).

An insurance activity is deemed to take place in Switzerland, irrespective of the place and circumstances of the conclusion of the contract, if:

• the policyholder or the insured is a natural person or a legal entity domiciled in Switzerland; or
• the insured goods are located in Switzerland (Article 1 paragraph 1 ISO).

Foreign insurance undertakings that fall within the scope of the ISA are required to obtain a licence from FINMA prior to taking up insurance activities in or out of Switzerland (Article 3 paragraph 1 ISA) and are subject to ongoing supervision by FINMA (Article 2 paragraph 1 littera b ISA; Article 3 littera a Federal Act on the Swiss Financial Market Supervisory Authority). Compared to a Swiss-domiciled insurance undertaking (see 2.1 Insurance and Reinsurance Regulatory Bodies and Legislative Guidance), a foreign insurance undertaking seeking to obtain a licence to be active in or from Switzerland has to fulfil additional regulatory requirements (subject to differing rules in international treaties; Article 15 paragraph 2 ISA). It is, in particular, required to establish a branch in Switzerland and appoint a general agent (Generalbevollmächtigter) for that branch (Article 15 paragraph 1 littera b ISA). The general agent has to be a Swiss resident and have the knowledge necessary to operate in the insurance business (Article 16 ISO). Furthermore, the foreign insurance undertaking has to comply with the additional licence requirements (see Article 15 ISA).

International Treaties

The EU Direct Insurance Treaty (Agreement of 10 October 1989) facilitates the access of EU insurance companies to the Swiss market. While it does not exempt them from a Swiss licence requirement in connection with the establishment of a Swiss insurance branch, relief is granted.

Under the Liechtenstein Direct Insurance Treaty (Agreement of 19 December 1996 ), insurance undertakings domiciled in Liechtenstein may engage in direct insurance business in Switzerland either on a pure cross border basis or through a Swiss branch office without requiring a FINMA licence.

Brexit

From the perspective of the EU Direct Insurance Treaty, the UK will – upon a potential Brexit – be deemed a third country. Switzerland and the UK concluded the UK Direct Insurance Treaty (Agreement of 25 January 2019) that guarantees freedom of establishment for insurance undertakings operating in the field of direct insurance by converting the content of the EU Direct Insurance Treaty to apply to the bilateral relationship between Switzerland and the UK post-Brexit. There are two scenarios for the entry into force of the UK Direct Insurance Treaty:

Deal scenario

If the treaty between the EU and the UK provides for a temporary continuation of certain EU third country treaties towards the UK, including the EU Direct Insurance Treaty, the EU Direct Insurance Treaty would remain applicable between Switzerland and the UK until the end of the relevant transitional period. This would, however, be formalised by way of a reciprocal notification between the EU and Switzerland. After the expiry of the transitional period, the UK Direct Insurance Treaty between Switzerland and UK would enter into force.

Hard Brexit/no-deal scenario

The UK Direct Insurance Treaty would enter into force on the day the UK formally leaves the EU in the event of "No Deal".

3.2 Fronting

In Switzerland, fronting is, in principle, permitted. Swiss law does not provide for a specific retention obligation on the part of the cedent in fronting arrangements.

4. TRANSACTION ACTIVITY

4.1 M&A Activities Relating to Insurance Companies

In recent years, transaction activity in Switzerland has been noticeably high. In particular, in the context of preparing themselves for Brexit, several insurance groups have restructured, consolidated and realigned their group operations. Further, a number of private equity investors have become very active buyers of insurance and reinsurance undertakings, including in particular businesses in run-off (and such buyers have become increasingly accepted by FINMA as qualified or controlling investors in insurance undertakings). Moreover, a certain consolidation in the Swiss insurance brokerage industry can be observed.

5. DISTRIBUTION

5.1 Distribution of Insurance and Reinsurance Products

General

In Switzerland, insurance and reinsurance products may be distributed directly (ie, by the insurance and reinsurance undertakings themselves) or through insurance intermediaries. Insurance intermediaries in the meaning of the law are persons who offer or conclude insurance contracts in the interest of insurance undertakings or other persons (Article 40 ISA). The law furthermore distinguishes between so-called tied and untied insurance intermediaries (regarding the distinction between brokers and agents see 6.3 Intermediary Involvement in an Insurance Contract).

Registration

Untied insurance intermediaries are insurance intermediaries that are neither legally, nor economically, nor in any other way tied to an insurance undertaking (obligation to register in the public register of insurance intermediaries maintained by FINMA). Tied insurance intermediaries are those that are, in a relevant manner, legally or economically tied to an insurance undertaking (they can, but are not obliged to register in the public register) (Article 43 ISA).

For an intermediary to be eligible for registration in the FINMA register, certain requirements must be fulfilled, including the demonstrable capacity to act (Handlungsfähigkeit), proof of appropriate professional qualifications and professional indemnity insurance (Article 44 ISA in conjunction with Article 184 ISO). In addition, insurance intermediaries (both tied and untied) are subject to information duties vis-à-vis the insured (see 6.1 Obligations of the Insured and Insurer).

Registered insurance intermediaries are not subject to ongoing prudential supervision by FINMA, but FINMA may examine them from time to time to verify their compliance with regulatory requirements. Furthermore, in case of any indication of irregularities, FINMA may take enforcement action.

Any intermediary activities in Switzerland for the benefit of insurance undertakings that fall within the scope of the ISA, but are not licensed by FINMA to carry out insurance activities in or from Switzerland are prohibited (Article 41 ISA).

6. MAKING AN INSURANCE CONTRACT

6.1 Obligations of the Insured and Insurer

When concluding an insurance contract, the policyholder has a duty of disclosure which is limited in its content and scope by the written questions provided by the insurer (Article 4 paragraph 1 ICA). The insurer has to proactively seek information as the policyholder need not disclose any facts which the insurer has not asked about. The policyholder must answer the questions and in this context inform the insurer in writing of all facts relevant to the assessment of the risk, to the extent and as they are known or should have been known to them when the contract was concluded. Facts are considered relevant for the risk assessment if they may potentially influence the insurer's decision to conclude the contract at all or on the agreed terms (Article 4 paragraph 2 ICA).

An insurer must inform the policyholder, prior to conclusion of the contract, of:

• the identity of the insurer; and
• the main content of the insurance contract (Article 3 paragraph 1 ICA).

It may delegate its information obligations (eg, to an insurance intermediary). However, in relation to third parties (including the policyholder) the insurer remains solely responsible for the performance of the information obligation as Article 3 ICA is mandatory and cannot be contractually modified to the disadvantage of the policyholder (Article 98 paragraph 1 ICA).

Furthermore, information duties apply to insurance intermediaries who must provide their clients with information on, for example, the intermediary's identity and address, its contractual relationships with the insurance undertakings on whose behalf it acts and the names of these insurance undertakings on a durable medium before taking up any intermediation activity (Article 45 ISA).

6.2 Failure to Comply with Obligations of an Insurance Contract

If the policyholder breaches its information duty pursuant to Article 4 ICA and misinforms or fails to inform the insurer of a material risk factor, the insurer may terminate the contract by written notice within four weeks after it becomes aware of the breach of the information duty (Article 6 ICA). The contract is terminated retroactively, and the insurer is not liable to pay any benefits under the insurance contract and may reclaim insurance benefits already paid together with default interest of 5%. Despite of a breach of the duty of disclosure by the policyholder, an insurer may not terminate the contract in circumstances described in Article 8 ICA – eg, if the insurer knew or should have known the incorrect or concealed fact or concluded the contract even though the policyholder did not answer a question (Article 8 ICA).

If the insurer fails to comply with its information duty pursuant to Article 3 ICA, the policyholder has the right to terminate the insurance contract by written notice (Article 3a ICA). This right of termination expires four weeks after the policyholder becomes aware of the breach of duty, but no later than one year after the breach of duty.

The information duties of the insurance intermediary are supervisory duties and their breach may expose the insurance intermediary to administrative and criminal sanctions, including punishment with a fine of up to CHF500,000 if the breach is committed intentionally, and up to CHF150,000 if committed negligently (Article 86 ISA). Furthermore, this breach may also result in civil liability for the intermediary.

6.3 Intermediary Involvement in an Insurance Contract

An insurance intermediary is either a tied intermediary or an untied intermediary (see 5 Distribution). In an untechnical sense, tied insurance intermediaries are often referred to as insurance agents and untied insurance intermediaries are often referred to as insurance brokers, indicating the typical set-up of the contractual relationship between the insurance intermediaries, the insurance undertakings and/or the policyholders. However, the contractual qualification pursuant to Swiss private law does not always correspond with the qualification pursuant to Swiss insurance supervisory law.

An insurance agent has a dominant contractual relationship with an insurance undertaking and primarily acts in its interest and/or on its behalf. The knowledge of the insurance agent is, in principle, attributed to the insurance undertaking (Article 34 ICA). The insurance undertaking pays the insurance agent the remuneration agreed in their contract.

An insurance broker is typically in a contractual relationship with both the insurance undertaking and the policyholder but acts primarily in the interest and/or on behalf of the policyholder, to whom it owes diligent advice on suitable insurance from an adequate spectrum of available products. The knowledge of an insurance broker is, in principle, attributed to the policyholder. However, the broker's remuneration/commission is typically paid by the insurance undertaking with which the policy is ultimately concluded.

The commission is typically priced into the insurance premiums the insured pays to the insurance undertaking. Consequently, from an economic perspective, it is the insured that ultimately pays the insurance broker. This regularly entails potential conflicts of interest which must be adequately mitigated by the broker; in this regard, the Draft revISA provides for new measures (Article 45a and 45b Draft revISA; see 13.1 Additional Market Developments).

6.4 Legal Requirements and Distinguishing Features of an Insurance Contract

Elements of an Insurance Contract

There is no specific statutory definition of the term insurance or contract of insurance. Based on precedent cases of the Swiss Federal Supreme Court, the following five elements characterise an insurance contract.

• Risk transfer – the insured person must have an interest which they protect against a certain risk through the economic performance of the insurers.
• Payment of a premium – the premium is, in principle, the price the insured (or the policyholder) pays in exchange for the performance by the insurer in the event that the insured risk materialises.
• Performance by the insurer/cover – the insurer must be under an obligation to perform to the insured or another beneficiary if the insured risk materialises.
• Independence of the operation – the insurance contract refers to an independent operation that is not an ancillary agreement or a mere feature or term of a non-insurance contract (eg, a warranty for a purchased good is usually not an insurance).
• Compensation of risks according to the laws of statistics (Systematic Business Activity)

The first three elements are generally considered to be the defining and essential elements of an insurance contract (essentialia negotii), while the last two are particularly relevant from a supervisory law perspective.

Form Requirements

The insurance contract, in principle, need not comply with any particular form requirements to be valid, with some exceptions (eg, a third person whose life is covered under the life insurance has to agree to the insurance in writing before the insurance contract is concluded (Article 74 paragraph 1 ICA)). Nevertheless, the application for an insurance policy and acceptance by the insurer are usually in writing. In addition, the insurer must issue a policy to the insured stating the rights and duties of the parties (Article 11 ICA) and on the insured's request and against reimbursement, the insurer must provide a copy or transcript of the insured's statements in the application, which were determining for the conclusion of the insurance contract (Article 11 paragraph 2 ICA).

Mandatory Provisions

A number of mandatory provisions (and provisions that are mandatory for the insurer only) in the ICA limit the freedom of content for insurance contracts (see Article 97 and 98 ICA). Furthermore, insurance-specific grounds for nullity (eg, the prohibition of retroactive insurance) (Article 9 ICA; will be changed in the context of the revised revICA, Article 10 revICA), as well as general restrictions on the freedom of content (eg, Article 20 CO) apply.

6.5 Multiple Insured or Potential Beneficiaries

Collective Insurance Contract

A collective insurance contract is generally described as a legally uniform contract that insures several persons or several independent objects (Article 3 paragraphs 3 and Articles 7, 31 and 87 ICA). It might be an indication of the existence of a collective insurance contract if – eg, the insured is not identical with the policyholder.

In principle, the same rules as for individual insurance contracts apply. However, there are certain provisions in the law that are specific to collective insurance, inter alia the following:

Information duties

If the collective insurance contract grants a direct entitlement to benefits to persons other than the policyholder, the policyholder is under an obligation to inform the insured about:

• the essential content of the agreement (needs to be determined on a case-by-case basis and is not identical with Article 3 paragraph 1 ICA);
• any amendments; and
• its termination, whereby the insurer has to provide the necessary information (Article 3 paragraph 3 ICA).

Breach of the information duty

If the information duty of the policyholder is only breached in respect of a part of the insured objects or persons, the insurance remains effective for the remaining part, provided that the insurer would have insured this part alone under the same conditions (Article 7 ICA).

Requirements for entering into the insurance contract

Some legal authors suggest that the requirement that the person whose life is covered by the life insurance has to agree in writing (Article 74 paragraph 1 ICA), is limited to individual life insurance and does not extend to collective life insurance.

Insurance for the Benefit of Third Parties

A policyholder may, in principle, appoint a third party as beneficiary without the consent of the insurance undertaking (Article 76 paragraph 1 ICA). Even if a third party is appointed as beneficiary, the policyholder may freely dispose of the entitlement; the right to revoke the appointment of the beneficiary only lapses if the policyholder has signed a written waiver of revocation in the policy and has handed the policy over to the beneficiary (Article 77 ICA). Unless the policyholder disposes otherwise, the beneficiary obtains a separate claim against the insurance undertaking (Article 78 ICA). There are also specific provisions on the attachment of an insurance claim and the opening of bankruptcy proceedings and for the interpretation of beneficiary clauses (Articles 79 et seq ICA).

6.6 Consumer Contracts or Reinsurance Contracts

Insurance contracts (including consumer contracts) are generally subject to the provisions of the ICA, eg, information duties of insurers and mandatory and semi-mandatory provisions that limit the contractual freedom of insurance undertakings (see 6.1 Obligations of the Insured and Insurer and 6.2 Failure to Comply with Obligations of an Insurance Contract).

Reinsurance contracts are excluded from the scope of the ICA (Article 101 ICA). In Switzerland, as in many other countries, there is no specific and distinct reinsurance contract law. Reinsurance contracts are governed by the general provisions of the CO and by generally (and often internationally) recognised reinsurance customs and standards.

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Originally published by Chambers Global Practice Guide - Insurance & Reinsurance 2021, Chambers and Partners, London 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.