Part 1 · The frame · 🟢 Easy · ~30 min
📖 Theory
The promise that outlives the premium
An insurer takes money now and promises to pay later. For a motor liability claim involving a young accident victim, "later" can mean forty years. Nothing about that promise is guaranteed by the premium alone: between the two lies the company's balance sheet.
Supervision exists because of the asymmetry. The policyholder cannot inspect the balance sheet, cannot diversify across insurers, and finds out the promise was hollow at exactly the moment they need it. So FINMA — the Swiss Financial Market Supervisory Authority — protects policyholders collectively, by making sure companies hold enough capital that the promise survives a bad year.
The Swiss Solvency Test is how "enough" is defined.
Three principles, and everything follows
FINMA states the SST on three principles:
- Market-consistent valuation. Every position, asset and liability, is valued at what it is worth today. Where a market price exists, it is used; where none exists, a model based on market prices is used. No book values, no historical cost.
- Risk-based capital. The requirement is derived from the risks the company actually runs — market, credit and insurance risk — not from a percentage of premium or reserves.
- The whole balance sheet. Assets and liabilities together, with their interdependencies, and nothing off-balance-sheet.
Principle 1 is the one that surprises people coming from statutory accounting. It means the liabilities are the best estimate — the expected value of the discounted future payments — not a prudently-loaded reserve. The prudence does not vanish; it moves. It becomes explicit capital instead of hidden margin, and that is precisely the point: a hidden margin cannot be measured, compared, or supervised.
The two quantities
Everything in the SST reduces to comparing two numbers.
Risk-bearing capital (RBC) — what the company has. On the market-consistent balance sheet, assets minus liabilities, in the form of core capital plus supplementary capital (Art. 32 of the Insurance Supervision Ordinance, the ISO). It is the buffer that a bad year eats into.
Target capital (TC) — what the SST says the company needs: enough that it would still be able to meet its obligations after a once-in-a-century adverse year.
The ratio, and the three bands
SST ratio = risk-bearing capital / target capital
That is Art. 39 ISO, in full. A ratio of 100% means the company holds exactly what the SST demands. Art. 39 also says something easy to overlook: if target capital is not positive, no ratio may be reported at all — not "infinity", not "very good". A number that cannot be computed is not a number.
Art. 51 ISO then defines exactly three supervisory bands, and each carries a different consequence:
| Band | SST ratio | What FINMA does |
|---|---|---|
| 🟢 Green | above 100% | Normal supervision. But note Art. 52: an action that would drop the company out of green — a dividend, a capital repayment, commuting a retrocession — needs FINMA's approval before it happens. |
| 🟡 Yellow | 100% down to 33% | FINMA may apply any protective measure it judges necessary — up to stopping new business and running the existing portfolio off in an orderly way. A measures plan is required. |
| 🔴 Red | below 33% | Unless the company can show immediate measures that visibly leave the red band quickly, it writes no new contracts and is wound up. FINMA may withdraw the licence. |
There is no band between 100% and 33%. A ratio of 95% and a ratio of 40% are in the same legal category — what differs is what FINMA judges proportionate.
Standard model or internal model
Companies use a standard model prescribed by FINMA. If a company's specific risk situation cannot be reflected accurately in a standard model, it must build its own internal model, which needs FINMA's approval.
For reinsurers, the non-life insurance risk standard model is StandRe — the subject of Lessons 2 to 6. It is deliberately not a formula: it is a structure, with prescribed parameters where a regulator can prescribe them and company-specific estimation everywhere else.
Where StandRe sits
The SST computes target capital across risk classes and aggregates them:
SST ratio = RBC / TC
│
┌────────────┬───────┴───────┬─────────────┐
Market risk Credit risk Insurance risk Scenarios
│
┌───────────┴──────────┐
Life insurance risk Non-life insurance risk
│
◀── StandRe's scope ──▶
StandRe produces one number for the aggregated model — the standalone one-year risk capital for non-life insurance risk — plus the market value margin. Lesson 6 hands both over.
⚡ Make it concrete
A reinsurer reports, in CHF million:
| Standalone non-life insurance risk capital | 420 |
| Standalone market risk capital | 260 |
| Standalone credit risk capital | 55 |
| Diversification effect | −180 |
| Target capital | 555 |
| Risk-bearing capital | 890 |
The ratio is 890 / 555 = 160% — green.
Notice the diversification effect is negative, and large. Market risk and insurance risk do not go wrong at the same time to the same degree, so holding capital for each separately would over-state the need. The SST recognises that explicitly, as its own line. Lesson 6 shows where a number like −180 comes from.
Notice too what is not in that table: the market value margin. Under the revised ordinance it is the Mindestbetrag of Art. 30 §4 — a liability on the SST balance sheet, so it is already deducted inside the 890. It appears on neither side of the ratio. Lesson 6 computes it, and this is why it never re-appears here.
✍️ Your turn
Three drills on the frame — start here.