Operational risk is defined as the expected and unexpected economic impact of inadequate or failed internal processes, from people and systems, or from external events. The definition includes legal and regulatory risks (see also Regulatory risk below), as well as financial reporting risk, defined as the risk that a material misstatement is made by the Group in its financial statements, causing significant reputational damage.
Swiss Re mitigates these risks using an approach based on three lines of defence. The first is the day-to-day risk management activities of the individual risk takers in the Business Units and corporate and enabling functions. The second line of defence comprises the independent oversight functions of Risk Management and Compliance. The third consists of independent audits of processes and procedures carried out by Group Internal Audit.
The purpose at every stage is to identify and manage cost-effectively those operational events with the potential to cause large financial loss or significant reputational damage.
Members of Swiss Re’s Group Management Board and Executive Committee are required to assess and certify the effectiveness of the internal control system for their particular Business Unit or Corporate or Enabling Function on a quarterly basis.
Strategic risk for Swiss Re represents the risk that poor strategic decision-making, execution, or response to industry changes or competitor actions could harm Swiss Re’s competitive position and thus its franchise value.
The responsibility for managing strategic risk lies with the Board of Directors. It is addressed by examining multi-year scenarios, considering the related risks, as well as monitoring the implementation of the chosen strategy year-by-year in terms of the annual business plan. The operational risks of implementing the strategy are reviewed through our integrated assurance framework comprising business management, risk management and independent internal audits.
Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the countries in which we operate. The global regulatory agenda continued to accelerate in 2013. Governments and regulators rolled out new policies and conducted numerous consultations on rules and regulations with direct impact on the insurance sector. Many reform proposals reflect the financial supervision agenda set by the G20, which includes a focus on internationally active insurers and systemically important companies.
Swiss Re is actively engaged in the regulatory dialogue and supports reform to achieve regulatory convergence and increased application of economic and risk-based principles. However, the insurance industry, together with Swiss Re, remains concerned about the cumulative and cross-sectorial impacts of the reforms. Regulatory fragmentation is a key threat — particularly in Europe, with the challenges in introducing Solvency II, but also in the context of transatlantic dialogue and the protectionist measures introduced in some growth markets. All these trends threaten to reverse progress toward a more coordinated global system.
There are also concerns that the design and implementation of regulatory reforms may increase procyclicality, which would exacerbate the effects of short-term market volatility. In 2013, Swiss Re participated in various consultations with the Financial Stability Board (FSB), OECD, the European Insurance and Occupational Pensions Authority (EIOPA) and the European Commission on the implications of regulatory reforms on long-term finance. In Solvency II, the institutions agreed to address the concerns regarding excessive volatility on long-term guarantee products.
In July, the FSB and the International Association of Insurance Supervisors (IAIS) published their first list of companies designated as globally systemically important insurers (G-SIIs). The designation of reinsurers as G-SIIs has been delayed until July or November 2014. Systemically important insurers will be subject to higher capital requirements; for this purpose, the FSB and IAIS announced the introduction of a basic capital requirement applicable to G-SIIs. In October, the IAIS confirmed its commitment to developing a global insurance capital standard (ICS), which will be applicable to large insurance groups, including Swiss Re, as part of ComFrame, the IAIS common framework for international group supervision.
Swiss Re remained fully engaged in the regulatory debate during 2013, striving to mitigate potentially negative impacts while supporting reforms that could facilitate convergence of regulatory standards and generate business opportunities.
Swiss Re’s continued business success depends on maintaining our reputation with clients, investors, employees, and other stakeholders. Environmental, socio-economic and related ethical risks to reputation may arise from individual business transactions; our reputation could also be damaged by operational failures.
We have a long-standing commitment to sustainable business practices, active corporate citizenship, and good governance. We mitigate potential damage to our reputation through clear corporate values, robust internal controls, and active dialogue with external stakeholders. All our employees are required to commit to and comply with the values and rules of behaviour defined in the Group Code of Conduct and further internal Swiss Re policies and guidelines. We support these values with processes that enable us to identify potential problems early.
We have a formal framework to manage environmental, socio-economic, and related ethical risks that may be inherent in some of our business transactions. Currently, this framework contains eight policies for sectors or issues, each with pre-defined exclusions, criteria and quality standards. Transactions that could potentially compromise these standards need to be submitted to our Sensitive Business Risks process for review by our sustainability experts. We also consider the potential impact on Swiss Re’s reputation when assessing and controlling operational risk.
In addition, Swiss Re has been actively contributing over the years to the development of the UN Principles for Sustainable Insurance (UN PSI) and is currently co-chairing this initiative. As a founding signatory at the UN Conference on Sustainable Development in Rio de Janeiro in 2012, Swiss Re reported progress against the UN principles for the first time in its Corporate Responsibility report in June 2013.
In 2013, Swiss Re was, for the seventh consecutive year, awarded the “RobecoSAM Gold Class distinction” for superior sustainability performance in the Dow Jones Sustainability Index (DJSI).
Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to enterprise risk management. We encourage pre-emptive thinking on risk in all areas of our business, combining our broad claims experience and risk expertise with a structured horizon-scanning process. The key objectives are to reduce uncertainty and help diminish the volatility of the Group’s results, while also identifying new business opportunities and raising awareness both within the Group and across the industry.
Our internal SONAR (Systematic Observation of Notions Associated with Risk) system gives Swiss Re employees a forum to raise ideas on emerging risks and report early signals using an interactive platform. This information is complemented with insights from collaboration with think tanks, academic networks, and international organisations and institutions. Findings are reported at annual intervals to senior management and other internal stakeholders, providing them with a prioritised overview of newly identified emerging risks, along with an estimate of their potential impact on Swiss Re’s business and recommendations for risk mitigation.
To further advance risk awareness across the industry and beyond, Swiss Re continues to participate actively in strategic risk initiatives such as the World Economic Forum’s Risk Response Network, the International Risk Governance Council, and the CRO Forum’s Emerging Risk Initiative. We contributed to several publications on emerging risk topics in 2013, including the World Economic Forum’s annual Global Risks Report and a CRO Forum position paper, “Food and its impact on the risk landscape.”