Swiss Re’s risk landscape
The risk categories shown in the table below are discussed on the following pages. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed in Liquidity management.
- Natural catastrophe
- Costing & reserving
- Claims inflation
- Lethal pandemic
- Mortality trend
- Critical illness
- Income protection
- Credit spread
- Foreign exchange
- FM inflation
- Interest rate
- Real estate
- Default risk
- Migration risk
Swiss Re is exposed to a broad landscape of risks. These include risks that are actively taken as part of insurance or asset management operations and are calculated in the internal risk model as part of the Group’s economic capital requirement as well as to allocate risk-taking capacity:
Property and casualty risk
Property and casualty insurance risk arises from coverage provided for property, liability, motor, and accident risks, as well as for specialty risks such as engineering, aviation, and marine; this includes underlying risks inherent in the business Swiss Re underwrites, such as inflation or uncertainty in pricing and reserving.
Life and health risk
Life and health insurance risk arises from coverage provided for mortality (death), longevity (annuity), and morbidity (illness and disability) as well as from acquiring closed books of business; in addition to potential shock events (such as a severe pandemic), this includes underlying risks inherent in life and health contracts that arise when mortality, morbidity, or lapse experience deviates from expectations.
Financial market risk
Financial market risk represents the potential impact on assets or liabilities that may arise from movements in financial market prices or rates, such as equity prices, interest rates, credit spreads, foreign exchange rates or real estate prices. Financial market risk originates from two main sources: investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations.
Credit risk reflects the potential financial loss that may arise due to diminished creditworthiness or default of counterparties of Swiss Re or of third parties; credit risk arises from investment and treasury activities, structured transactions and retrocession, as well as from liabilities underwritten by credit and surety insurance units.
The risk landscape also includes other risks that are not explicitly part of the Group’s economic capital requirement but are actively monitored and controlled due to their significance for Swiss Re:
Liquidity risk represents the possibility that Swiss Re will not be able to meet expected and unexpected cash flow and collateral needs without affecting either daily operations or Swiss Re’s financial condition.
Operational risk represents the potential economic, reputational or compliance impact of inadequate or failed internal processes, people and systems or from external events, including legal risk and the risk of a material misstatement in financial reporting.
Strategic risk represents the possibility 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.
Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the jurisdictions in which Swiss Re operates.
Political risk comprises the consequences of political events or actions that could have an adverse impact on Swiss Re’s business or operations.
Model risk reflects the potential impact of model errors or the inappropriate use of model outputs. It may arise from data errors or limitations, operational or simulation errors, or limitations in model specification, calibration or implementation; model risk may also be caused by insufficient knowledge of the model and its limitations, in particular in management and other decision-makers.
Valuation risk represents uncertainty around the appropriate value of assets or liabilities. It may arise from product complexity, parameter uncertainty, quality and consistency of data, valuation methodology, or changes in market conditions and liquidity. Swiss Re is exposed to financial valuation risk from investment assets it holds as well as reserve valuation risk from insurance liabilities that result from the coverage it underwrites.
Sustainability risk comprises the environmental, social and ethical risks that may arise from individual business transactions or the way Swiss Re conducts its operations.
Swiss Re actively identifies emerging risks and threats across all categories as part of its risk identification process; this includes new risks as well as changes to previously known risks that could increase the potential exposure or interdependency between risks.
Some of these risks are reflected indirectly in the model, as their realisations may be contained in the historical data used to calibrate some of the risk factors. In addition, output from the risk model is used in measuring liquidity risk under stressed conditions. As separate risk categories, these risks are an integral part of Swiss Re’s risk landscape. They are monitored and managed within the Risk Management organisation, and included in risk reports to executive management and the Board of Directors at Group and Business Unit level as well as for selected major legal entities.
Reputational risk is not considered a separate risk category but rather represents a possible consequence of any risk type in addition to the potential financial and compliance impact.