Swiss insurance sector strongly capitalised with average SST coverage ratio of 238%

Written by Adam Cadle

25/04/2023

The Swiss insurance sector is strongly capitalised with an average SST coverage ratio of 238% at end-2021 (end-2020: 216%), according to Fitch Ratings.

Fitch expects the market average SST coverage ratio to have improved further at end-2022, driven by an increase in market interest rates partly offset by increased volatility in equity markets.

P&C and health insurers in particular are well-capitalised with coverage ratios of 264% and 394% at end-2021, respectively. Life insurers’ SST ratio significantly improved to 236% at end-2021 from 207% at end-2020 mainly due to the increased market interest rates.

Fitch said it expects the portion of high-quality fixed-income assets in new investments to increase, given their low cost of capital and high liquidity. However, asset allocation of total investments should remain stable in the short term.

Fitch considers the investments risk of Swiss insurance companies to be moderate, with a high portion of the assets invested in low-risk fixed-income instruments, but also a high share of investments in property. Fixed-income investments shaped about half of the total investments at end-2021, from which about a third was invested in corporate bonds with investment-grade ratings and the rest in government bonds.

Another major asset class for Swiss insurers is participations (end-2021: 15%), which are mainly investments in insurance affiliates.

Property investments represented about 9% of total insurance market investments at end-2021, significantly higher than the European average of 4%. Although Fitch considers these investments to be of high quality, there is an increasing risk of the value of the investments declining due to higher interest rates. Moreover, this investment strategy implies higher liquidity risks. Mortgages, including both residential and commercial mortgages, are the third-largest investment class after bonds and property investments for life insurers.

“We believe the increasing market interest rate can increase the credit risk of this asset class. As the interest rates on new mortgages rise, the risk of defaults can also increase. Additionally, the value of the real estate related to the mortgages in the existing portfolio can decline due to rising interest rates, further increasing the credit risk. About 90% of total investments of life insurers and 50% of total investments of non-life insurers relate to restricted assets, which are subject to stringent guidelines. Swiss life insurers are required to always hold restricted assets equalling at least 101% of their technical provisions. At end-2021, restricted assets covered 110% of life insurers’ technical provisions.”

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