The Swiss regulator talks to private insurers about more solvency tests. Rising interest rates are but one of the concerns.
The Swiss Financial Market Supervisory Authority (Finma) has been informing private insurers about its 2022 Swiss Solvency Test. In an announcement, it also indicated that it will introduce additional stress tests in 2022 for a select number of insurance companies.
That is going to make more than a few people sit up and take notice as a turning point in interest rates appears imminent, with the Federal Reserve expected to raise its rates in March, and that may force insurers to take their red pens to their investments, particularly fixed-income ones.
Insurers tend to book investments at the prevailing market prices on balance sheet closing dates, and don't mark them to market, which can result in a timing mismatch that can prompt significant write-downs during times of market dislocation, or when interest rates reverse course.
Early Warning
finews.ch asked Finma about the unusual guidance it was giving insurers. In response, the regulator said such tests had served as a supervisory early warning system for the past two years, with the largest insurers having to undertake them annually. The Finma did not want to divulge the specific insurers needing to undertake the stress tests, saying the decisions were made based on how large and systemically important they were.
But the regulator does now have the tools in place to see any negative developments early and institute appropriate countermeasures. It hopes that general risk management for Swiss finance as a whole will improve as a result of these tests.
Libor Scandal
But what does this all have to do with the document specifically sent to the insurers about the tests, which finews.ch has on hand?
Finma said performing the SST is usually time-critical, which is why those responsible for making the technical calculations are informed in advance.
That is not the only change foreseen. From the document, it is also clear that some new parameters are being set given most Libor rates have been or are being discontinued. In Switzerland, at the end of 2021, the Saron rate replaced Libor, which had fallen into disrepute after a widespread, international fixing scandal in the years after the financial crisis.
No Real Alternative
But the SST interest rate curve for the euro and the dollar is still based on Libor and Euribor data, as those markets are still more liquid than their alternatives, given a market for them is not yet broad enough. For sterling, the data was switched to so-alled Soina swaps given that the market is already liquid enough.
The Swiss regulators also indicated that they will continue to watch liquidity developments in interest rate markets and make adjustments for the dollar and the euro when it becomes feasible to do so. That means further change for the insurance sector ahead.
