Equalization Reserves for Reinsurance and Non-Life Undertakings in Switzerland

Equalization reserves is an insurance liability with features of own capital. By law, Swiss reinsurance and non-life undertakings must hold equalization reserves within their statutory accounts. Regarding Swiss solvency modeling, the equalization reserves are set to zero. Swiss reinsurance and non-life undertakings define the upper limit and the corresponding transfer rule to the equalization reserves; however, this information is not disclosed. The goal of the study is to find a relationship between the equalization reserves and the publicly available technical account items, applying a generalized additive model (GAM). Thereafter, we transform the continuous variables into discrete ones, and we apply a generalized linear model (GLM). The study is based on published data from 1997 to 2018, whereby we restate the implicitly published equalization reserves. For reinsurance undertakings, the GAM model captures the relationship better than the GLM one; for non-life undertakings, the GLM model performs better. For reinsurance undertakings, the equalization reserves depend on the equalization reserves of the previous year, on the calendar year, on the legal form, on the technical result, on the administration and commission costs and on other costs. For non-life undertakings, the equalization reserves depend on the net claims payments, on the equalization reserves of the previous year, on the net change in claims reserves without change in equalization reserves, on the calendar year and on the net earned premium. Furthermore, we look at the need for equalization reserves: do the undertakings accumulate and release the equalization reserves? Further, the impact of taxes on the equalization reserves is looked at. The concept of equalization reserves avoids the misuse of tax optimization. We conclude that the discussion about disclosure of equalization reserves will restart. In addition, the definition of the upper limit of the equalization reserves could be widened by linking the equalization reserves to the insurance/reserving risk from the capital modeling.