The Swiss Insurance Industry and Annuities

One of the most important financial sectors of the Swiss economy is the insurance industry. Like Swiss banks, insurance companies are conservative and provide excellent safety for investors. In the past 130 years, not a single insurance company has failed; this is a record that even Swiss banks envy.

The insurance industry in Switzerland benefits from both unique tax advantages and knowledgeable and conservative management. The combination leads to solid and surprisingly productive investment opportunities. Some people equate a conservative approach to investments with low or marginal returns, but this is not the case with Swiss insurance companies. The returns from these companies are quite high, because the companies seldom have to deduct losses on bad investments which decrease the yield. Without losses it is possible to maintain a conservative approach to investment with high returns.

Switzerland has only about 20 insurance companies. All of them are very solid and well managed. Swiss insurance companies do not engage in rate competition, and instead focus their energies on maintaining their strength. Because the insurance industry is somewhat concentrated, it is, on the whole, stronger, and easier to supervise than the insurance industry in the United States where there are thousands of companies to regulate.

The Swiss Federal Bureau of Private Insurance regulates the insurance industry in Switzerland. It has the reputation as being a strict regulator. A clause in the Swiss federal constitution in 1885 established the regulation of private insurance companies.

Because the Swiss government regulates the insurance industry tightly -- as it does with all of the finance industry -- investments in any of the products offered by Swiss insurance companies carry an extremely low risk. Indeed, the risk level has been described by some as being no risk at all. For example, liquidity and valuation of investments are ultra-conservative. A maximum of 30% of investible funds may be put in real estate. This is a very low percentage, especially in a country where real estate has always held high values. Consequently, exposure to any downturn in real estate prices is limited.

During the eighties and into the early nineties, undoubtedly many American banks and insurance companies have been sorry they did not follow a real estate investment policy like their Swiss counterparts. And if the banks and insurance companies aren't wishing it, certainly their policyholders are, because when the value of real estate dropped virtually throughout America, the values of many investments dropped accordingly. Some portfolios that were over-extended in real estate were ruined.

The Swiss insurance companies go a step further in the effort of protecting their investors. Often they carry their real estate holdings at less than half of the holdings' present market value. This wide margin allows for a significant downward spiral in prices and value in real estate before the safety of investments is affected.

The Swiss also handle their accounting in a conservative manner. Unlike many American companies that tend to overvalue assets in order to achieve high prices in the stock market, Swiss insurance companies frequently have hidden reserves of millions of dollars.

Swiss insurance companies offer a variety of investment opportunities. Many offer more products than do Swiss banks. Perhaps one of the best products offered by Swiss insurance companies is the annuity.

Although most investors have heard of annuities, many do not realize the excellent opportunities for growth that annuities, particularly Swiss annuities, offer. An annuity is an investment vehicle that enables the investor to set money aside for retirement, or other objectives in a tax-advantaged plan. One of their most important benefits of annuities is that they permit the investor to defer taxes on his or her savings, thereby building assets faster than can be done in other investments. While annuities can be used to put money aside for various purposes, most often they are associated with retirement accounts.

This is not a coincidence. Several features of annuities make them especially attractive for a retirement plan, including:

Annuities may not be the most exciting investments, but they are one of the financial industry's fastest growing products. Although annuities have been available since the early 1970s, the last few years have witnessed an explosion in the growth of annuity sales.

In the U.S. for instance, sales of domestic annuities are approximately $50 billion per year. As the American population ages, they are realizing that it is necessary to plan for retirement. One of the best investment alternatives available is the annuity. Many people perceive annuities as an investment that can help them to remain self-sufficient throughout their retirement years.

Sometimes people confuse an annuity with a mutual fund. There is an important difference. An annuity can offer investment growth similar to a mutual fund, but it defers taxes until retirement. A mutual fund does not. The annuity plans, of which there are many, can be structured so that, once the investor begins to draw on the funds, they make regular payments for life.

Although the investor doesn't own the investments the annuity makes, he benefits from their investment. Since the insurance company owns the investment, the investor's savings can grow, with all the gains being tax-deferred. This is an advantage that owners of most mutual funds are prevented from taking. When an investor buys a mutual fund, at the end of the year he or she pays a capital gains distribution. Even if the investor reinvests the gains, this is a taxable event. With an annuity, however, any profit made that is left in the annuity continues to grow in a tax-deferred state.

Since annuities are products of insurance companies, the fees paid by the investor are different than the fees paid for mutual funds. For most annuities, there are no front-end load fees or commissions. Instead there are "surrender" charges for investors who withdraw funds early in an American annuity. Surrender charges apply usually during the first five or six years. It should be noted that this is not the case in Swiss annuities, which will be discussed later in this book.

When annuities are compared to other investment alternatives, especially when one is looking for an investment through which to accumulate savings for retirement, annuities clearly become the product of choice. Annuities, without question, are safe, solid investments.