Swiss Solvency Test

Switzerland faced the same question as the European Union — how much capital should an insurer hold to be safe? — but answered it a little differently, and a few years earlier. The Swiss Solvency Test (SST), introduced by the Swiss regulator FINMA in 2006, is a market-consistent, principles-based solvency regime. Its spirit is close to Solvency II's, but it makes two distinctive choices that are worth understanding because they show there is more than one reasonable way to measure 'safe enough.'

Two intuitions set the SST apart. First, the risk measure: where Solvency II's SCR is a 99.5% Value at Risk (the loss at the 1-in-200 cut-off), the SST uses a 99% Tail VaR / expected shortfall — the average loss across the worst 1% of outcomes. Because Tail VaR looks at the whole tail rather than a single point, the SST deliberately captures how bad the disaster is, not just where it begins. Second, the SST builds heavily on a 'target capital' concept and explicit, severe predefined scenarios that sit alongside the modelled distribution, so judgement and stress thinking are baked in rather than bolted on. Like Solvency II it values assets and liabilities at market-consistent terms and adds a risk margin.

The SST matters partly in its own right (Swiss insurers and reinsurers, some of the world's largest, are governed by it) and partly as a teaching example: comparing it with Solvency II shows that two careful regulators, both aiming at roughly the same safety level, chose different risk measures — and that the choice between a quantile (VaR) and a tail average (Tail VaR) is not academic but a real policy decision about how seriously to weight catastrophe. A caveat: the regimes are similar enough that headline ratios from the two are not directly comparable without care, precisely because the underlying measure and calibration differ.