FINMA Guidance 06/2023 on the Prudent Person Principle

Starting Point

The current insurance supervision act (ISA) and the current supervision ordinance (ISO) do not provide for special rules governing the investment activities of insurers per se. However, special rules apply with respect to tied assets: For example, the ISA provides that the Federal Council shall issue regulations on the allocation, location, coverage, changes and control of tied assets (article 20 ISA). Assets that may be allocated to tied assets are defined in the ISO (article 79(1) ISO) and the Circular 2016/5 Investment Guidelines – Insurers. As of 1 January 2024, insurers must base their investment activities on the prudent person principle (PPP) (article 69(1) revised supervision ordinance (revISO)). Furthermore, the Federal Council bases the provisions on tied assets on the PPP (article 20 revised insurance supervision act (revISA); article 76(1) revISO). The detailed investment regulations (i.e., in particular, Circular 2016/5) will be abolished. In return, however, the FINMA insurance supervision ordinance (revISO-FINMA), which is currently in the draft stage, is to be significantly expanded and will provide for detailed rules on aspects of tied assets (cf. article 60 et seq. revISO-FINMA). 

New Investment Regime

Insurers must invest their assets in accordance with the PPP. Thereby, the legislator wishes to implement the requirement of the Insurance Core Principles, which stipulate that insurers make appropriate investments, taking into account the risks to which they are exposed (cf. para. 15 Insurance Core Principles). In particular, insurers may only invest in assets and instruments whose risks they can adequately assess, evaluate, monitor, manage and include in their reporting (article 69a(1) revISO). On an international level, the PPP is already well-known: the principle is applicable to insurers licenced in member countries of the European Union since the introduction of the solvency II framework directive. However, the PPP is subject to considerable interpretation and thus creates uncertainty. Little relief is provided by the catalogue of requirements which must be complied with in respect of the PPP (cf. article 69a(1) and (2) revISO). The practice in this regard has yet to develop in Switzerland. 

As of 1 January 2024, the allocation of assets to the tied assets will mandatorily have to adhere to the PPP (article 76(1) revISO). In addition, there is still a catalogue of categories of assets that may be allocated to the tied assets. In this respect, the insurer may choose whether to be subject to the standard list pursuant to article 79(2) revISO or to define an individually designed list of assets (individual investment list). The individual investment list must be approved by the Swiss Financial Market Supervisory Authority FINMA (FINMA) (article 79(1) revISO). The application for approval of the individual investment list can only be submitted as of 1 January 2024. In this regard, the three-year transition periods (article 216c(3) revISO) must be observed. If the standard list is followed, no approval is required from FINMA with regard to the allocation of assets specified in article 79(2) revISO to the tied assets. Finally, following the standard list reduces the reporting and auditing effort by the audit firms and/or FINMA. 

Unfortunately, the Guidance 06/2023 does not comment in more detail on the PPP, which would have been welcomed by the industry. FINMA is content to draw attention to the new investment regime in a general manner and to point out that compliance with the insurers’ investment regulations, particularly with regard to tied assets, will be monitored annually or in the event of special incidents. Furthermore, it is envisaged that FINMA will conduct more in-depth reviews. 

What to do?

For the purpose of implementing the new investment regime, insurers should do the following: 

• Review and adjust the investment strategy and principles in light of the PPP 
• Make disinvestments if the investments are no longer in line with the investment strategy and principles (note that the transitional periods pursuant to article 216c(3) revISO only apply to assets that have been or will be allocated to tied assets) 
• Ensure proper documentation of the investment strategy and principles 
• Define a framework for monitoring compliance with the investment strategy and principles 
• Review and decide on whether to follow the standard list for the allocation of assets to tied assets or to develop an individual investment list and to submit such individual investment list to FINMA for approval 
• Ensure that assets that do not fall under article 79(2) revISO remain allocated to the tied assets until 31 December 2026 only if these assets meet the requirements of article 76 revISO, the insurer has already invested in comparable assets to a permissible extent before 1 January 2024 or, if these assets are allocated to the tied assets after 1 January 2024, a corresponding application is made in accordance with article 79(1) revISO and has neither been withdrawn nor rejected by FINMA (cf. article 216c(3) revISO). 
• Verify and ensure that, when applying the standard list, investments in new types of funds reserved for qualified investors and allocated or intended to be allocated to tied assets are only made if they are deemed suitable for insurers or, if not, disinvestment is made 

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More Information

Further information on the revised insurance supervision law in general and the PPP in particular can be found via the following links: 

• Dispatch on the amendment of the Insurance Supervision Act (ISA) dated 21 October 2020, BBL 2020 8967 
• Text of final vote for the Federal Act on the Supervision of Insurance Undertakings (Insurance Supervision Act, ISA), BBl 2022 704 
• Ordinance on the Supervision of Private Insurance Companies (Supervision Ordinance, ISO) 
• Explanatory Notes on the Amendment to the Supervision Ordinance of 2 June 2023 
• Report on the results of the consultation procedure on the amendment of the Supervision Ordinance of 2 June 2023 
• FINMA Guidance 06/2023 dated 31 October 2023 
• Insurance Core Principles and Common Framework for the Supervision of Internationally Active Insurance Groups, Updated November 2019 
• Frequently asked questions about investment activity and tied assets with regard to the revised ISA and the revised ISO, respectively 

If you have any questions regarding the revised insurance supervision law and the PPP, MLL Legal’s Insurance Industry Group will be happy to assist you. 

This article does not constitute legal advice. It merely states the author’s current understanding of the legal issue under discussion, without regard to individual circumstances. Any liability for the content of this article is excluded. Furthermore, MLL Legal is under no obligation to inform the readers of this article about new case law, changes in practice or other changes.