Swiss (re)insurers are generally prohibited from conducting business not directly linked to the insurance business. The dispatch of the Swiss Federal Council on the partial revision of the Insurance Supervision Act states that the current prohibition of insurance companies to conduct non-insurance business will remain in place. At the same time, the partial revision of the Insurance Supervision Act aims to enhance the competitiveness of the Swiss insurance sector and to further innovative business models. To overcome this conflict of objectives, the authors argue for a narrow interpretation of the prohibition on the conduct of non-insurance business and outline ways for insurers to operate non-insurance business.

By Hansjürg Appenzeller / Kevin M. Hubacher (Reference: CapLaw-2021-31)

1) Overview

Disruptive technological developments, societal megatrends and the rise of new competitors (e.g., big data companies) challenge existing business models of direct insurers and reinsurers alike (in the following referred to as insurers or insurance companies only). Challenges create opportunities, though. New developments and trends hold great potential for growth initiatives and for more stable and resilient business cases. Insurers thus strive to develop customer-centric products and services, to increase the efficiency of their business processes and to monetize certain features of their value chain. However, regulated insurers and unregulated market players are not acting on a level playing field. The Insurance Supervision Act of 17 December 2014 (“ISA“) limits the activities that insurance companies may carry out. Pursuant to article 11 ISA, insurers are, in addition to the operation of their insurance business, only allowed to conduct business that is directly related to the insurance business. The same prohibition on the conduct of non-insurance business is also included in the European Directive on The Taking-Up and Pursuit of the Business of Insurance and Reinsurance (Solvency II) (Directive 2019/138/EC) and the Agreement of 10 October 1989 between the Swiss Confederation and the European Economic Community on Direct insurance other than Life Insurance. 

The prohibition on non-insurance business is to be seen in the broader context of the ultimate purpose of financial market supervision which is guided by the following five principles of protection: individual protection (Individualschutz), functional protection (Funktionsschutz), reputation protection (Reputationsschutz), trust protection (Vertrauensschutz) and system protection (Systemschutz). Hence, the rationale to prohibit the conduct of non-insurance business by insurers is to protect the insured persons from any non-supervised activities that may put their interests into jeopardy (cf., articles 1(2) and 11(2) ISA). Legal doctrine tends to suggest that non-insurance business poses a “contamination risk”. The Swiss Federal Supreme Court, for example, is of the view that the Swiss Financial Market Supervisory Authority FINMA (FINMA) would not be able to properly carry out its supervision duties in case an insurer also carries out non-insurance business (see BGE 94 I 616 et seqq., cons. 3). 

Article 11 ISA needs to be interpreted. Legal writing is scarce on the subject with the exception of a recently published dissertation thesis (see Jannick Koller, Der Begriff des versicherungsfremden Geschäfts im Versicherungsaufsichtsrecht, Diss. Zürich/St. Gallen 2020) and the Basler Kommentar on the ISA. In this paper, the authors call for a narrow interpretation of the prohibition to operate non-insurance business by pointing out a variety of relevant aspects that should be considered when interpreting article 11 ISA. In addition, this paper outlines different structuring options for insurers (and insurance groups) to operate non-insurance business. This is relevant given that the revised ISA is expected to hold on to the prohibition to operate non-insurance business. 

2) Relevant Changes under the Revised Insurance Supervision Act

On 21 October 2020, the Swiss Federal Council adopted the dispatch for a partial revision of the ISA together with the draft of the revised ISA (“D-ISA“) (BBl 2020 8967 et seqq.). The D-ISA has not loosened the prohibition of non-insurance business and continues to only allow insurers to conduct business that is directly related to insurance business (article 11(1)(a) D-ISA). As is currently the case, insurers may, with FINMA’s approval, to a limited extent provide services that are not directly related to the insurance business (article 11(1)(b) D-ISA). Details will be set forth in the implementing ordinance to be enacted by the Swiss Federal Council (article 11(2) D-ISA). In our view, the wording of article 11(1)(b) D-ISA would leave room for a legal basis that is more favorable to non-insurance business and, in particular, innovation as long as corresponding risks for insured persons are confined. 

In this context, it is worth noting that the partial revision of the ISA aims, among others, to enhance the competitiveness of the Swiss insurance sector and to encourage innovative business models. As an example, the dispatch on the partial revision of the ISA allows for small insurers to be excluded from insurance supervision as such (BBl 2020 8985 et seq.). This is because, in the view of the Swiss Federal Council, the development of innovative business models is hardly visible in the insurance sector, or only to a limited extent, compared to the banking sector. When setting the provisions of the implementing ordinance, the Swiss Federal Council intends to promote innovative business models but without undermining adequate protection of insured persons. It remains to be seen whether such commitment by the Swiss Federal Council will spill over to FINMA’s practice when it comes to the approval of non-insurance business operated by insurers.

3) On the Prohibition of Conducting Non-Insurance Business

The ISA stipulates that, in the absence of FINMA approval, insurers are permitted to only conduct insurance business and business that is directly related to the insurance business (article 11(1) ISA). Conducting non-insurance business is thus prohibited unless specifically authorized by FINMA. According to its established practice, FINMA is reluctant to grant such authorizations. 

The legislator distinguishes between insurance business (Versicherungsgeschäft), business directly related to insurance business (in the following, the term “insurance-related business” is used for the sake of readability) (Geschäfte, die in unmittelbarem Zusammenhang mit dem Versicherungsgeschäft stehen) and non-insurance business (versicherungsfremdes Geschäft). FINMA may authorize the operation of non-insurance business if such business does not jeopardize the interests of the insured persons (article 11(2) ISA).

The question is therefore how the terms “insurance business”, “insurance-related business” and “non-insurance business” are interpreted.

a) Insurance Business

The term “insurance business” consists of the two concepts of “insurance” and “business”. Neither the ISA nor the Insurance Contract Act of 2 April 1908 (ICA) defines the term insurance. The Swiss Federal Supreme Court defines the concept of insurance on the basis of the following five cumulative characteristics (see BGE 114 Ib 244 et seq., cons. 4a; 2C_410/2010, cons. 3): (i) Assumption or transfer of risks or hazards, (ii) payment by the insured (premium), (iii) performance of the insurer, (iv) self-sufficiency of the operation, and (v) compensation of risks according to the laws of statistics (structured business operations).

Neither the ISA nor the Insurance Supervision Ordinance of 9 November 2005 (“ISO“) defines the term “business” (Geschäft). According to conventional German dictionaries, the term “business” stands, among others, for “an undertaking aiming at profit”. In article 11(1) ISA, however, this term refers to the operation of a business (cf., article 181 of the Swiss Code of Obligations 30 March 1911 (“CO“)). Hence, an insurance business constitutes a unit organized under commercial law within the framework of which insurance and insurance-related activities are independently carried out with the purpose of generating income. This understanding of the term also corresponds to the concept of business used in both the ISA and the ISO (e.g., article 4(2) ISA, article 14(1) ISA, article 16(1) ISA, article 3(1) ISO). During the parliamentary deliberations on the predecessor legislation of today’s ISA, insurance business was described as the “planned performance of business activities in accordance with actuarial principles” (see Official Stenographic Bulletin of the Federal Assembly of 9 March 1977, 76.042 Insurance Supervision Act, 28 et seqq., 28).

To carry out insurance business in accordance with commercial principles, a wide variety of business processes are required. These are commonly divided into core functions and necessary support functions. Core functions are those business processes that are part of the value chain. They include product development, production, sales and distribution (e.g., advertising, deploying and using third-party services or applications to provide additional sales channels), underwriting (e.g., conducting risk assessments and pricing), portfolio management and claims management. The various core functions are part of the insurance business. Support functions are those business processes that are not directly part of the value chain of the insurance business but are required to ensure it. These include, for example, investment management, accounting, IT services and control processes such as compliance, risk management, or internal audit. The support functions are indispensable components of an insurance business and thus form part of the insurance business.

b) Insurance-Related Business

Insurance-related activities are those business activities that are directly related to the insurance business. The line between what constitutes a core function and a necessary support function is thin. An insurance-related activity may, for example, consist of offering services that aim to reduce the probability of the occurrence of an insured risk or to identify or reduce possible risk occurrences and dangers at an early stage. 

The term “direct connection” (unmittelbarer Zusammenhang) can be interpreted either operationally or functionally. While the operation-related interpretation only assumes a direct connection if the activity directly serves the insurance business of the concerned insurance company as such, the functional interpretation does not make such limitation and assumes a direct connection if the activity is linked to insurance business as such. The functional interpretation deserves priority in our view. For purposes of supervision, it is, in our view, decisive whether FINMA is able to assess potential risks arising out of the insurance-related activities regardless of whether or not they directly serve the insurance business of the concerned insurer. This view is in line with a ruling of the Swiss Federal Supreme Court, which points out that the prohibition to operate non-insurance business shall ensure that FINMA can sufficiently supervise the financial situation of an insurance company (cf., BGE 94 I 616 et seqq., cons. 3).

c) Non-Insurance Business

All business activities that do not represent core functions, necessary support functions and insurance-related activities qualify e contrario as non-insurance business. Having said that, the potentially high risk exposure of a specific insurance-related activity should not result in the qualification of such activity as non-insurance business merely because of such high risk exposure. 

In addition, it is important to note that an insurer which directly or indirectly holds a company that conducts non-insurance business does not itself carry out non-insurance business within the meaning of article 11(1) ISA (see Dispatch of the Swiss Federal Council on the Insurance Supervision Act and the Amendments to the Insurance Contract Act of 9 May 2003, BBl 2003 3789 et seqq., 3793). Therefore, the prohibition applies exclusively to insurers and not to their direct or indirect subsidiaries (that themselves are not insurers).

d) Business Operations

Article 11(1) ISA prohibits the “operation” (Betrieb) of non-insurance “business” (see Section 3)a) above). The law does not define the term “operation”. 

Parts of the doctrine (see Renato Degli Uomini/Hans-Peter Gschwind, Basler Kommentar Versicherungsaufsichtsgesetz, Basel 2013 [zit. BSK VAG], article 11 N 30 et seqq.) seem to assume that the prohibition also covers individual non-insurance transactions that are not carried out as part of a planned and permanent operation. In our opinion, however, neither the terms “operation” or “business” nor the purpose of the insurance supervision support such a broad interpretation. In addition, an overly restrictive interpretation restricts insurers unnecessarily in their freedom to act. 

Therefore, individual transactions are in our view not in scope of article 11(1) ISA unless such transactions pose a risk that is similar to the risk exposure of a planned and permanent non-insurance business operation. Whether or not a non-insurance business activity is offered for free is not decisive with regard to such activity’s qualification as an “operation”.

e) Offering Core Functions and Necessary Support Functions to Third Parties

A much disputed issue concerns the offering of parts of the core functions and the necessary support functions to third parties. Parts of the doctrine are of the view that the offering of core functions and necessary support functions does not constitute insurance business but might qualify as an insurance-related activity (see Degli Uomini/ Gschwind, BSK VAG, article 11 N 36). 

As stated above, we are of the view that these core functions and support functions form part of the insurance business. There is no legal requirement that any business operated by the insurer must in any case involve a risk transfer or a risk compensation in return for the payment of a premium and compensation for the risks in accordance with the laws of statistics. In addition, neither the offering of parts of the core functions to third parties nor making necessary support functions available to third parties will put FINMA’s supervision in jeopardy. Therefore, the offering of core functions and necessary support functions to third parties without a risk component or, respectively, an insurance as such (see with regard to the term Section 3)a) above) constitutes in our view insurance business.

4) Ways for Insurers to Operate Non-Insurance Business

As mentioned, it is crucial for insurers to leverage new opportunities and to build more stable and resilient business cases. Article 11 ISA does not per se prevent such activities, albeit it being applied too restrictively in practice. There are ways for insurers – some of them being explicitly supported by the legislator and FINMA (see Section 4)b) below) – to conduct non-insurance business in a permissible way.

a) Applying for an Exemption Permit

FINMA may authorize the operation of non-insurance business if it does not jeopardize the interests of insured persons (article 11(2) ISA). FINMA has discretion in assessing the application and usually grants a permit to conduct non-insurance business in exceptional cases only, i.e., where the risks are minor, the relevant business activities are of limited scope, no additional solvency risks occur, and the supervision of the non-insurance business is considered manageable. FINMA usually also asks for a plausible justification for operating the non-insurance business.

Non-insurance business does not per se jeopardize the interests of the insured persons. On the contrary, non-insurance business supports insurers in diversifying their revenue streams which leads to the diversification of traditional insurance business risks and cycles and helps to bolster the insurer’s capital base. In addition, non-insurance business can be less risky than the insurance business as such given that it does not intrinsically give rise to potential future claims. Furthermore, potential claims arising out of non-insurance business activities may even be better manageable than those arising out of insurance business which bases on fortuity. Thus, non-insurance business does not necessarily have a negative impact on the Swiss Solvency Test (SST), but rather helps to increase the relevant SST ratio due to diversification and non-risk revenue streams. We are of the view that FINMA should include these considerations when assessing an insurer’s application to operate non-insurance business.

This approach would also be in line with the intention of the Swiss Federal Council to promote innovative business models and to thereby enhance the future competitiveness of the Swiss insurance sector.

b) Non-Insurance Business Operated by a Subsidiary

The (direct or indirect) holding of companies that solely conduct non-insurance business is not subject to article 11(1) ISA. Consequently, a direct or indirect subsidiary of an insurer can conduct non-insurance business without FINMA approval (see Dispatch of the Swiss Federal Council on the Insurance Supervision Act and the Amendments to the Insurance Contract Act of 9 May 2003, BBl 2003 3789 et seqq., 3793). Based on the individual case, a notification on participating interests according to article 21(1) ISA may need to be filed (see Section 5)b) below).

In exceptional cases, the operation of non-insurance business by a subsidiary of an insurer might be problematic. This would be the case if an insurer transfers the non-insurance business to the (direct or indirect) subsidiary only for appearance’s sake and in fact conducts the non-insurance business itself. In such a constellation, it may be considered that the insurer violates article 11(1) ISA. Thus, the insurer would need to apply for an exemption permit to operate non-insurance business (see Section 4)a) above). However, in our view, such a circumvention of article 11(1) ISA cannot be easily assumed. To the contrary, specific facts would need to exist proving that the insurer is in fact operating the non-insurance business itself.

c) Non-Insurance Business Operated by a Company of an Insurance Group

Article 11 ISA only applies to insurers. Group companies that do not engage in either direct insurance or reinsurance may conduct non-insurance business without FINMA’s approval. Should an insurer transfer the non-insurance business to a group company (which is not a subsidiary) but in fact continues to conduct the non-insurance business, said insurer may be deemed to circumvent and, thus, violate article 11(1) ISA.

5) Reporting Requirements and FINMA’s Intervention Possibilities

a) Filing of Amendments to the Insurer’s Business Plan

In case the insurer wishes to either directly operate non-insurance business (and to apply for a respective FINMA approval) or have a subsidiary operating it, such insurer must assess whether an amendment to its business plan has to be filed with FINMA. 

A potential need to make such a filing may arise out of a necessary change of the articles of association if they do not reflect that the insurer may operate non-insurance business or hold shareholdings in companies operating non-insurance business (cf., article 5(1) ISA in conjunction with article 4(2) lit. a ISA). In addition, it would need to be assessed whether the insurer needs to adjust its organization as a result of directly or indirectly operating non-insurance business (e.g., making changes to the duties of the management, compliance officers or risk management officers) (cf., article 4(2) lit. b ISA). Effectively, this leads to a double approval requirement whereby FINMA has to approve the conduct of the relevant activity as well as the change in the business plan deriving from the conduct of such activity.

b) Notification Duty According to Article 21(1) ISA

If the insurer wishes to conduct non-insurance business through a subsidiary and, to this end, intends to establish a corresponding company or to acquire an interest in or take over a company, the insurer must notify FINMA if the participation reaches or exceeds 10, 20, 33 or 50 percent of the capital or voting rights of such company (article 21(1) ISA). FINMA may prohibit a participation or attach conditions to such participation if the nature and extent of the participation may endanger the insurer or jeopardize the interests of insured persons (article 21(4) ISA). FINMA will usually conduct a prudential examination and review the capital implications, technical provisions and risk management.

In an insurance group context, FINMA would have to be notified of the intent to create or acquire a significant – determined by FINMA on a group-by-group basis – participation by one of the group companies (article 192(2) ISO).

c) FINMA’s Intervention Instruments

FINMA has extensive powers of intervention under the ISA and may take measures if it deems the interests of the insured persons to be at risk (article 51(1) ISA). FINMA may take measures in individual cases even if the non-insurance business is operated by a subsidiary of an insurer and FINMA reaches the conclusion that such subsidiary poses risks to the insurer and the insured persons. However, in our opinion, FINMA should generally abstain from intervening in connection with non-insurance business operated by subsidiaries of insurers. Article 51(1) ISA is not a backdoor for a de facto ban on the indirect operation of non-insurance business.

In addition, group supervision does not provide FINMA with any instruments to intervene directly with the relevant group company.

6) Conclusion

Although contested and in some ways overly restrictive, current indicators point to the fact that the revised Insurance Supervision Act will continue to prohibit the operation of non-insurance business by insurers in the future. Insurers do not act in a protected bubble, but are facing the challenges of our time to the same extent – or even to a greater extent – as all other market players. Societal megatrends, technological developments and new competitors force insurers to reinvent themselves and to diversify their revenue streams. In addition, insurers will continue to digitize their value chain and to provide digital services and solutions to their customers (e.g., website platforms, mobile device applications). Therefore, it is in our view important to create a level playing field with respect to innovative business models for both regulated and non-regulated market players such as technology companies (e.g., Alibaba, Alphabet, Microsoft). Furthermore, the current regulatory approach pursued in practice tends to push insurers into dependency with technology companies. 

While FINMA as regulator should guarantee a stable and well-functioning insurance market, it should at the same time also support insurers in adapting to the aforementioned new realities. One way to facilitate such support is to interpret article 11(1) ISA less restrictively by taking on a broader view considering the principle of the solvency- and risk-based, proportional insurance supervision. Another way to support the insurers would be to more generously grant exemption permits, a change which might come along with the revised ISA. 

The risks associated with innovative business models not constituting traditional insurance business may in certain cases be comparable to risks which an insurer already or likely very soon will be exposed to in connection with the digitalization of its business processes. Hence, FINMA will have to become familiar with those kinds of risks any way, which in turn means that FINMA will also be capable of supervising risks arising out of innovative non-insurance business models. As a result, it could no longer be argued that innovative non-insurance business models can in fact not be properly assessed and supervised by FINMA. 

This more liberal approach would also be in line with the Swiss Federal Council’s explicit desire to promote the competitiveness of the Swiss insurance sector. Albeit it being expected that insurers will be restricted to operate non-insurance business in the future, it is important for them to know that there are ways to structure the operation of non-insurance business in a legally permissible manner and to thereby support them in their efforts to maintain future competitiveness.

Hansjürg Appenzeller (hansjuerg.appenzeller@homburger.ch)
Kevin M. Hubacher (kevin.hubacher@homburger.ch)