Other significant risks
Risk Management is responsible for monitoring and controlling operational risks based on a centrally coordinated methodology. Members of the Group EC are required to certify the effectiveness of the internal control system for their respective area of responsibility on a quarterly basis.
The Group’s framework for mitigating operational risk is based on its three lines of control, assigning primary responsibility for identifying and managing risks to individual risk takers, with independent oversight and control by the Risk Management and Compliance functions (second line of control) as well as Group Internal Audit (third line of control). This approach is designed to achieve a strong, coherent and Group-wide operational risk culture built on the overriding principles of ownership and accountability.
Operational risk is inherent within Swiss Re’s business processes. As the company does not receive an explicit financial return for such risks, the approach to managing operational risk differs from the approach applied to other risk categories. The purpose of operational risk management is not to eliminate risks but rather to identify and cost-effectively mitigate operational risks that approach or exceed Swiss Re’s tolerance.
Swiss Re’s operational risk tolerance limits are based on the quantitative and qualitative impact as well as the probability of loss. The residual risk – the risk after mitigating controls – is assessed and reported on a quarterly basis to the management at Group, Business Unit and legal entity level.
All operational losses, incidents and issues are reported and monitored in a central Operational Risk Management system to ensure that they are resolved as well as to avoid the recurrence of similar events.
Recent efforts in operational risk management have focused on further evolving Swiss Re’s risk framework and refining the Group’s integrated Internal Control System. As a result, a centrally governed global risk register and a global control catalogue have been implemented that form an improved basis for quarterly risk and control self-assessments.
Swiss Re is a founding member of the insurance sector within the Operational Riskdata eXchange Association (ORX). ORX is a forum for sharing information on operational losses, scenarios and benchmarking dedicated to advancing the measurement and management of operational risk within the insurance industry. Swiss Re actively participates in various research projects on topics such as risk boundaries, scenario analysis and cyber risk.
Overall responsibility for managing strategic risk lies with the Group Board of Directors, which establishes Swiss Re’s overall strategy. The Boards of Directors of legal entities are responsible for the strategic risk inherent in their specific strategy development and execution. Strategic risks are 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.
As part of their independent oversight role, Risk Management, Compliance and Group Internal Audit are responsible for controlling the risk-taking arising from the implementation of the strategy.
Swiss Re is strongly engaged in the regulatory debate, striving to mitigate potentially negative impacts while supporting reforms that could enhance the overall health of the sector, facilitate convergence of regulatory standards or generate business opportunities.
Regulatory developments and related risks that may affect Swiss Re and its subsidiaries are identified, assessed and monitored as part of regular oversight activities. Periodic reports and recommendations on regulatory issues are provided to the executive management and Boards of Directors at Group, Business Unit and legal entity level.
In 2016, the International Association of Insurance Supervisors (IAIS) introduced a new designation methodology for Global Systemically Important Insurers (G-SIIs), with a particular focus on reinsurance. Under the new methodology, Swiss Re was not designated as G-SII. The non-designation confirms that Swiss Re is assessed by the international supervisory community as neither causing nor amplifying systemic risk.
While Solvency II took effect in 2016 and applies across the European Economic Area, national discretions and different supervisory interpretations (eg, the recognition of reinsurance) distort a level playing field. The European Commission will review Solvency II in 2018, in part to address such inconsistencies. Additionally, the European Insurance and Occupational Pensions Authority intends to add a macro-prudential framework for insurance in Solvency II, to regulate systemic risks across the insurance industry.
The regulatory environment of the insurance industry continues to evolve on the national, regional and international level, with re/insurers facing a multitude of new or modified regulations that affect their business model. While some regulatory changes create new business opportunities, others come with significant costs and business restrictions. Growing regulatory complexity, increased national protectionism and a fragile global economy are persistent themes affecting regulation and the way Swiss Re operates worldwide.
While prudential regulation is developing towards more risk-sensitive and economic-based capital regimes, regulatory fragmentation remains high. Local capitalisation rules often fail to fully recognise the benefits of risk mitigation and diversification. In addition, there are moves to limit the use of internal models influenced by post-crisis banking regulation. Swiss Re strongly supports the use of internal models, full recognition of risk mitigation and diversification, appropriate consideration of counterparty default and concentration risk, and efficient application of eligible capital instruments.
National protectionism restricts the free flow of risk and capital. The outcome of the Brexit negotiations between the UK and the EU could potentially limit the ability to benefit from the free movement of services, including reinsurance. Swiss Re is advocating for removal or reduction of market access barriers, so that policyholders, governments, taxpayers, and national economies can fully benefit from international diversification and therefore reliable, quality, and affordable risk cover.
Political developments can threaten Swiss Re’s operating model but also open up opportunities for developing the business. The Group adopts a holistic view of political risk and analyses developments in individual markets and jurisdictions, as well as cross-border issues such as war, terrorism, energy-related issues and international trade controls.
A dedicated Political Risk team identifies, assesses and monitors political developments worldwide. Swiss Re’s political risk experts exercise oversight and control functions for named political risks, such as in the political risk insurance business; this includes monitoring political risk exposures, providing recommendations on particular transaction referrals, or risk reporting. In addition, the Political Risk team provides specific country ratings that cover political, economic and security-related country risks; these ratings complement sovereign credit ratings and are used to support risk control activities and inform underwriting or other decision-making processes throughout the Group.
Swiss Re seeks to raise awareness of political risk within the insurance industry and the broader public, and actively engages in dialogue with clients, media and other stakeholders. We also build relationships that expand our access to information and intelligence, and allow us to further enhance our methodologies and standards. For example, we participate in specialist events hosted by institutions such as the International Institute of Strategic Studies, the International Studies Association and the Risk Management Association, and maintain relationships with political risk specialists in other industries, think tanks and universities, as well as with governmental and non-governmental organisations.
Swiss Re uses models throughout its business processes and operations, in particular to price insurance products, value financial assets and liabilities, assess reserves and portfolio cash flows, and estimate risk and capital requirements. Analytical or financial models that are used for costing, valuation and risk capital calculations are governed by Swiss Re’s Model and Tool Assurance Framework. Model owners have primary responsibility for model-related risks and are required to adhere to a robust tool development process, including testing, peer review, documentation and sign-off. A similar process also applies to model maintenance. The goal is to ensure that each material model has a clear scope, is based on sound mathematical and scientific concepts, has been implemented correctly and produces accurate results given the stated purpose.
Under Swiss Re’s framework, the appropriateness of models is assessed in an independent end-to-end validation process that includes specification, algorithms, calibration, implementation, results and testing. Material models used for costing and valuation of reserves and assets are validated by dedicated teams within Risk Management. These teams provide independent assurance that the framework has been adhered to as well as conduct independent validations. Swiss Re’s Group Risk Model, which is owned by Risk Management, is subject to independent validation by experts within and outside Swiss Re. It is also subject to regulatory scrutiny.
Model-related incidents are captured within Swiss Re’s operational risk framework. In addition, material model developments, incidents and risks are reported in regular risk updates to management and boards at Group and legal entity level.
Swiss Re works closely with industry peers to develop and share best practices for assessing and managing model-related risks. In this context, we are actively participating in a CRO Forum working group that provides a platform for such exchanges and is working on frameworks for model risk.
Financial valuation risk is managed by a dedicated team within Financial Risk Management, who perform independent price verification for financial risk positions to confirm that valuations are reasonable and ensure there are no material misstatements of fair value in Swiss Re’s financial reports. The results of the independent price verification process are reviewed by the Asset Valuation Committee. Summary results are regularly reported to executive management as well as to the Board. In addition, Swiss Re’s external auditor conducts quarterly reviews as well as a comprehensive year-end audit of controls, methodology and results.
Reserve valuation risk is managed by Swiss Re’s Actuarial Control function, with dedicated teams for property and casualty, and life and health valuation. These teams ensure that Swiss Re’s reserve setting process uses an appropriate governance framework, including defined accountabilities and decision-making processes for risk takers (as the first line of control) and for Actuarial Control. The framework ensures that there is independent assurance on the data, assumptions, models and processes used for valuation purposes; for property and casualty business it also includes an independent valuation of coverage provided to ensure that reserves remain within an adequate range.
Actuarial Control regularly performs deep dive investigations into selected portfolios in order to review the appropriateness of both the reserves and the applied reserving approach. In 2016, Actuarial Control further refined its internal governance to establish common standards throughout the entire reserving process.
Swiss Re’s continued business success depends on the successful management of sustainability risks, thus helping to maintain the trust of its stakeholders. The Group has a long-standing commitment to sustainable business practices, active corporate citizenship, as well as good, transparent governance. All employees are required to commit to and comply with Swiss Re’s values and sustainability policies.
Potential sustainability risks are mitigated through clear corporate values, active dialogue and engagement with affected external stakeholders, and robust internal controls. These include a Group-wide Sustainability Risk Framework to identify and address sustainability risks across Swiss Re’s business activities. The framework comprises sustainability-related policies – with pre-defined exclusions, underwriting criteria and quality standards – as well as a central due diligence process for related transactional risks.
Sustainability risks are monitored and managed by dedicated experts in Swiss Re’s Group Sustainability Risk team, which is also responsible for maintaining the Sustainability Risk Framework. In addition, this unit supports Swiss Re’s risk management and business strategy through tailored risk assessments and risk portfolio reviews. It fosters risk awareness through internal training, and facilitates development of innovative solutions to address sustainability issues. Finally, it represents and advocates Swiss Re’s position on selected sustainability risk topics to external stakeholders.
Swiss Re is a founding signatory to the UN Principles for Sustainable Insurance (UN PSI) and is currently a board member of this initiative. The UN PSI provide a global framework for managing environmental, social and governance challenges. Swiss Re has been actively contributing to the initiative for several years, co-chaired it from 2013 to 2015 and publicly reports progress against the principles in its annual Corporate Responsibility Report; the 2016 report has been published together with the 2016 Financial Report.
In 2016, Swiss Re was again recognised as “insurance industry sector leader” in the Dow Jones Sustainability Indices. This is the tenth time since 2004 that Swiss Re has led the insurance sector in these rankings. The award highlights Swiss Re’s long-term commitment to sustainable business and our efforts to further embed sustainability into key business processes and operations.
For more information on our Sustainability practices, see also the Corporate Responsibility section.
Anticipating possible developments in the risk landscape is a central element of Enterprise Risk Management. Swiss Re promotes pre-emptive thinking on risk in all areas of the business in order to reduce uncertainty and diminish the volatility of the Group’s results, while also identifying new business opportunities and raising awareness of emerging risks.
For this purpose, Swiss Re’s risk identification processes are supported by a systematic framework that identifies, assesses and monitors emerging risks and opportunities across all areas of Swiss Re’s risk landscape, including potential surprise factors that could affect known loss potentials. A core element of emerging risk management is the SONAR system, which provides an interactive platform for every Swiss Re employee to suggest possible emerging risks and report early signals. This crowdsourcing bottom-up approach is combined with regional emerging risk capabilities in order to also reflect the regional picture. This information is complemented with insights from collaboration with external organisations such as think tanks, academic networks, international organisations and institutions, as well as from interaction with clients.
Findings are reported to senior management and other internal stakeholders through various channels, including reports that provide a prioritised overview of newly identified emerging risks and an estimate of their potential impact on Swiss Re’s business. Swiss Re also publishes an annual emerging risk report to share findings, raise awareness within the Group and across the industry, and initiate a risk dialogue with key external stakeholders.
To further advance risk awareness across the industry and beyond, Swiss Re continues to participate actively in strategic risk initiatives such as the International Risk Governance Council, and the CRO Forum’s Emerging Risk Initiative.