Implications of the VAG/AVO/AVO-FINMA revision

Swiss Insurance Regulation in Transition: Consequences of the Amendments to the Insurance Supervision Ordinance & revised Insurance Supervision Act.

On 2 June 2023, the Swiss Federal Council adopted the amendments to the Insurance Supervisory Ordinance (AVO) in the field of private insurance and implemented the revised Insurance Supervision Act (VAG) together with the revised AVO, effective 1 January 2024, with certain transitional periods. This partial revision of the VAG, which was previously adopted by the Parliament on 18 March 2022, aims at further strengthening policyholder protection as well as the competitiveness and innovation capabilities of the Swiss insurance industry. The revised AVO implements the new legal requirements.

Following the revised AVO, the regulator will also revise AVO-FINMA. In this regard, FINMA has divided the topics of the FINMA follow-up regulation into eleven areas: 

Thomas Schneider

Partner, Sector Head Insurance

KPMG Switzerland

William Southwell

Partner, Head of Actuarial and Insurance Risk

KPMG Switzerland

Whilst there are changes to the regulation in all of these areas, many changes are simply a restructuring of the current regulation between the different levels of legislation (AVO, AVO-FINMA and circulars).

However, we have identified three core topics that we believe will have a significant impact on insurance companies: tied assets , insurance brokers and code of conduct as well as qualitative risk management including cyber risks .

1. Tied assets

The new requirements for tied assets pose challenges for insurance companies to adjust their investment strategy and risk management accordingly.

The most important change in this regard is the introduction of the Prudent Person principle, which provides more flexibility for companies but also sets higher governance requirements and necessitates a revision of existing internal investment guidelines.

For example, assets held to cover technical provisions must now be invested in a manner appropriate to the nature and term of the company's insurance obligations.

Insurers must also decide whether they want to operate with the standard list of investments according to the new AVO in the future or have their own list of permissible investment instruments approved by FINMA.

2. Brokers and Code of Conduct

The VAG/AVO revision creates the prerequisites for a new distribution supervision, which FINMA will further develop within the framework of its delegated powers in the AVO-FINMA.

In essence, insurance intermediaries must now register and meet certain requirements.

We recommend that insurance companies analyze whether there is an effective control environment in place for the tied and independent brokers acting on behalf of the company and evaluate whether it meets the new requirements.

In particular, in the area of life insurance, there are also conduct rules regarding disclosure obligations and suitability assessments that must be implemented both in direct sales and brokerage business.

3. Qualitative risk management including cyber risks

In the course of the AVO revision, the guidelines regarding qualitative risk management have been further specified. There is an increased focus on early risk detection and a greater emphasis on the company's own risk-bearing capacity.

In today's digital world, insurance companies are increasingly exposed to cyber risks. Ensuring a robust IT infrastructure, preventing cyber-attacks, and effectively responding to security incidents are of crucial importance.

While the legislation remains vague in this regard in the context of the VAG/AVO revision, we are currently observing a growing focus on cyber risks by regulatory authorities in the market. 

It is important to note that both the revised VAG and the revised AVO provide for transitional periods in various areas. This offers insurance companies the opportunity to adapt to the new requirements and adjust their business models accordingly. 

Our Insurance Consulting team would be delighted to assist you with understanding the changes in regulation and the impact on your business. Please reach out to us or your KPMG contact if you have any questions or if you wish to discuss this topic further.