New Regulatory Regime for Financially Distressed Insurance Companies

One of the key goals of the proposed revision of the Swiss Insurance Supervision Act is to insert provisions on restructuring into the Swiss insurance regulations that so far do not exist. Together with some related amendments, these provisions are designed to form a regulatory regime for financially distressed insurance undertakings. 

By Monica Mächler (Reference: CapLaw-2021-02)

On 21 October 2020, the Federal Council approved for the attention of Parliament the Dispatch on the Amendment of the Swiss Insurance Supervision Act (ISA, SR 961.01) (the Dispatch) along with a draft ISA (D-ISA; Federal Gazette (Switzerland), 2020, 8967 ff. and 9061 ff.). An overview of the legislative history and the key elements of D-ISA can be found under PETER CH. HSU, Insurance Supervision Act – Overview of the Ongoing Revision, CapLaw No. 1/2021, 2 ff. 

One of the key goals of the revision is to insert provisions on restructuring
(articles 52a-52m D-ISA) into the Swiss insurance regulations that so far do not exist. This comes contextually together with partially amended provisions on protective measures and measures in case of an insolvency risk as well as on liquidation (articles 51, 51a/b D-ISA and 52 ISA) and on bankruptcy (articles 53-54j D-ISA). Articles 55 and 56 ISA representing special provisions regarding the bankruptcy of life insurance companies are planned to be deleted. The remaining articles 57-59 ISA with additional protective measures for foreign insurance undertakings should, however, remain unchanged. It is further proposed that Swiss domiciled Group parent companies and companies domiciled in Switzerland performing essential functions for licensed activities be subject to FINMA’s jurisdiction regarding protective measures, restructuring and bankruptcy (article 2a D-ISA). Together, these provisions are designed to form a regulatory regime for financially distressed insurance companies. This article focuses on such proposed new rules and their interaction with already existing provisions. 

The present proposal should be read against responses to the financial crisis of 2007-2009 developed in the global standard setting arena. The most prominent sources are the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions of 2011/2014 (including its II-Annex 2: Resolution of Insurers; <>). They include principles of an effective resolution regime for systemically important financial institutions “without severe systemic disruption and without exposing taxpayers to loss, while protecting vital economic functions through mechanisms which make it possible for shareholders and unsecured and uninsured creditors to absorb losses in a manner that respects the hierarchy of claims in liquidation.” Of relevance is the translation of these Key Attributes and related aspects into the Insurance Core Principles and ComFrame (ICP, CF) of the International Association of Insurance Supervisors (>). It is particularly worth noting the entire ICP 12 (Exit from the Market and Resolution) and individual standards under ICP 6.4 (Portfolio Transfer), ICP 10 on preventive and corrective measures, ICP/CF 16.15 on recovery planning, ICP 17.4 on intervention thresholds and ICP/CF 25.7 as well as ICP 25.8 on cooperation in crisis situations. Importantly, the Key Attributes serve as signposts for national resolution regimes, even for non-systemically relevant institutions, be it in the banking, in the insurance and in other regulated sectors of the financial market. Thus, the present regulatory regime for financially distressed insurance companies in D-ISA goes in tandem with the evolution of similar regulations for financial institutions in general

1) Protective measures, measures in case of an insolvency
risk and liquidation

The renamed protective measures (“Schutzmassnahmen”, to date called “sichernde Massnahmen”) serve to restore compliance with the regulatory regime and to address threats to the interests of the insureds. They include, among others, potential measures to prohibit the disposal of assets, the transfer of portfolios and assets to another consenting insurance company as well as moratoria (article 51 D-ISA).

Measures in case of an insolvency risk provide an overview of the toolkit, namely protective measures, restructuring, and bankruptcy. Insolvency risks are defined as “reasoned concerns that the insurance undertaking is overindebted or suffers from serious liquidity problems” (article 51a(1) D-ISA). The identification of insolvency risks is informed by the accounting balance sheet (e.g. article 725(1) Swiss Code of Obligations; CO, SR 220) and the consequences attributed to it under the Swiss Debt Enforcement and Bankruptcy Act (DEBA, SR 281.1), whereas the economic balance sheet used for purposes of the Swiss Solvency Test is not “relevant” (Dispatch, p. 49). Some related provisions of the CO and of DEBA are, however, superseded by specific provisions of the D-ISA (article 51a(3) D-ISA). 

Pre-existing agreements regarding set-off, voluntary disposal of certain collateral and transfer of rights, obligations and collateral prevail over the regime on financially distressed insurance undertakings (article 51b D-ISA). No change is noted regarding the liquidation of an insurance undertaking from which FINMA withdraws the licence (article 52 ISA).

2) Restructuaring

In order to eliminate the risk of insolvency FINMA may initiate restructuring proceedings (articles 52a ff. D-ISA). 

a) Prerequisites and restructuring plan

Restructuring proceedings are conditioned upon reasonable prospects to achieve a successful restructuring of the insurance company or to continue select insurance services. FINMA will define the details and may nominate a restructuring delegate (article 52a D-ISA). The restructuring plan according to article 52b D-ISA is the master document of the restructuring process and sets out the measures to eliminate the risk of insolvency. It is subject to the approval of FINMA. 

b) Restructuring measures 

The possible measures relate to the following three areas.

i. Transfer of portfolios, assets and liabilities

The restructuring plan should address whether insurance portfolios in whole or in part or other assets and liabilities are to be transferred to another legal entity. The transfer of the entire portfolio of insurance contracts or parts of it to another insurance carrier follows the same logic as the portfolio transfer according to article 62 ISA. They are based on ISA, not on the Swiss Merger Act (SR 221.301). The acquiring company may benefit of some relaxations for a transition period if the interests of policyholders are safeguarded. In case of partial transfers, FINMA is supposed to provide for compensation between the entities involved (article 52c D-ISA).

ii. Actions impacting equity capital and receivables of third parties

The restructuring plan should also indicate whether and to what extent existing equity capital is to be reduced and new equity to be created; likewise, it should cover whether and how receivables of third parties are to be converted into equity or to be reduced (article 52d D-ISA). In case of issuing new equity, the subscription rights may be excluded. The conversion of debt into equity or the reduction of debt may only take place if, as a precondition, the share capital has been fully reduced and the risk-absorbing capital instruments (as defined under article 22a Swiss Insurance Supervisory Ordinance [ISO, SR 961.011], see Dispatch p. 55) have been fully reduced or converted into equity (article 52d(3)(a) and (b) D-ISA). Debt that is either subject to compensation mechanisms, or with collateral protection, or incurred under protective measures or in the context of a restructuring, or claims resulting from insurance contracts for which tied assets had to be established (to the extent they suffice) is not subject to conversion or reduction.

The conversion of debt to equity and the reduction of receivables affects first subordinated debt instruments, particularly those designed as bail-in instruments to absorb losses in the event of insolvency (article 52d(4)(a) D-ISA, where an explicit clarification of the interaction with the above-mentioned article 52d(3)(b) D-ISA might be helpful). The process then follows the (quasi-inverse) ranking of creditors according to article 219(4) DEBA. Insurance contracts for which no tied assets have to be established, are converted or reduced after exhaustion of other receivables of third parties in class 3 and before those in class 2. Lastly, those insurance contracts will be included in the conversion or reduction process for which tied assets are required, to the extent they do not suffice to secure the claims (see p. 55 f. of the Dispatch, evidencing that the wording of article 52d(4)(f) D-ISA is likely to be aligned accordingly).

iii. Adjustment of terms of insurance contracts

Similarly, the restructuring plan should indicate whether the terms of insurance contracts should be adjusted. The conditions and ranking mentioned before apply also (article 52e D-ISA). Insurance contracts of different categories may be modified in a differentiated manner if this is in the overall interest of the insured persons. Such an overall interest is seen in providing a more important contribution to the restructuring than in case of equal treatment of all insurance contracts. 

In case of any one of the above-mentioned three types of restructuring measures being put in place, insureds are notified within thirty days from the approval of the restructuring plan and are granted the right of termination within another three months with immediate effect. In case of a transfer of a portfolio, the insured may seek redress from the transferring insurance company (article 52f D-ISA).

If protective or insolvency measures are in place, FINMA may postpone the termination of contracts and the exercise of related rights for up to two days and the termination of reinsurance contracts or the exercise of related rights for up to four months (article 52g and 52h D-ISA).

c) Approval of the restructuring plan and effects

FINMA will approve the restructuring plan according to article 52j D-ISA after assessing, among other elements, whether the assets and liabilities and the financial needs for a successful restructuring are prudently valued, whether the creditors are not worse off than in an immediate bankruptcy (in application of the principle of “No creditor worse off than in liquidation, NCWOL”), and whether the creditors are treated more favourably than the owners. 

The owners do not have to consent or support the restructuring plan, but at least 50% of the known creditors are required to support it. In case more than 50% of the known creditors reject the plan, FINMA immediately proceeds to bankruptcy (article 52k D-ISA). 

Once the restructuring plan becomes effective, the insurance company (or creditors, if the insurance company is not permitted to do so) may seek frustration of certain transactions according to the rules of articles 285-292 DEBA (article 52m D-ISA). When the restructuring has been completed, the insurance company must in principle again comply with its licensing conditions and further legal requirements (insofar as the company will remain a going concern, articles 52b(2) and (3) D-ISA).

3) Bankruptcy

To the extent an insolvency risk exists and a restructuring is either not in reach or failed, FINMA will withdraw the license to do insurance business, declare bankruptcy and inform the public accordingly (articles 53 ff. D-ISA). 

The bankruptcy liquidator(s) nominated by and reporting to FINMA direct the bankruptcy proceedings. The bankruptcy proceedings follow in principle the article 197-270 DEBA, subject to ISA’s prevailing rules or FINMA issuing differing pronouncements (article 54 ISA). The articles 53-59 ISA are complemented by the Ordinance of FINMA on the bankruptcy of insurance companies of 17 October 2012 (SR 961.015.02). A representation of the creditors, if applicable with an executive committee, may be established to interact with the liquidator(s) (article 54b ISA).

Article 54a(1) D-ISA clarifies that claims of insureds are allocated to the priority class 2 according to article 219(4) DEBA. However, they will only be satisfied after the other claims in class 2 have been satisfied. Super-priority is given to the satisfaction of claims the insurance company has entered into based on protective measures or during the restructuring with the consent of FINMA (article 54bbis D-ISA). 

The proceeds of the sale of tied assets are primarily applied to satisfy the claims to be covered by tied assets. The surplus will be utilised to satisfy insurance claims for which separate pools of tied assets were formed but did not suffice. The remainder following these steps is allocated to the bankruptcy estate (article 54abis D-ISA). The proceeds are usually distributed at the end of procedure, but, under certain conditions, they can be paid out before the completion of the collocation proceedings (articles 54abis D-ISA and 54c ISA). 

Once all assets are liquidated and liabilities are established the liquidator(s) submit to FINMA the final distribution list and the definitive accounts. The approval of FINMA is publicly disclosed and creditors and owners are informed accordingly (article 54c ISA). 

4) Complaints 

Complaints can be brought by creditors and owners against the approval of the restructuring plan, the liquidation, the approval of the distribution list and the final accounts (article 54e D-ISA). In case of complaints against the restructuring plan, they can only claim relief that may be honoured in the form of shares or surrogates thereof (article 54d D-ISA). 

5) International coordination

Foreign bankruptcy decrees and insolvency measures may be recognized by FINMA (article 54i D-ISA). Domestic assets can be attributed to the foreign bankruptcy if the priority claims and insurance claims covered by tied assets of creditors domiciled in Switzerland are treated equivalently, and other claims of Swiss domiciled creditors are adequately being taken into account. Details follow the rules of the Federal Act on Private International Law (PIL, SR 291). In case of concurring proceedings, FINMA is expected to coordinate as much as possible with the foreign proceedings (article 54j D-ISA).

6) Conclusion

The proposed regime for insurance companies in financially distressed situations is not debated intensively (ISA Consultation – Results Report 2020, p. 5 f. <>). The draft mainly serves to close gaps regarding restructuring including bankruptcy, and, to a certain extent, align the insurance regulatory regime with the banking regulations. Therefore, in restructuring proceedings even those parts of the claims of insureds that should be covered by tied assets, but where the tied assets do not suffice are included in the regime of conversion or reduction of debt. This could have been handled differently by excluding insurance claims subject to tied assets requirements from the conversion and reduction mechanisms entirely. 

In the upcoming parliamentary process, some provisions may undergo select changes, but the substance seems to be reasonably stable. Given the parliamentary deliberations starting in 2021, the revised ISA might enter into force of law in the next few years.

Monica Mächler (