Swiss Re’s risk appetite framework
The risk appetite framework establishes the overall approach through which Swiss Re practices controlled risk-taking throughout the Group. The framework is set out in the Group Risk Policy and consists of two inter-linked components:
- Risk appetite outlines the Group’s principles on acceptable risks and provides key directions for risk-taking and risk controlling as part of implementing Swiss Re’s strategy: achieving targeted performance, providing liquidity and financial flexibility, managing capital adequacy, and protecting and growing franchise value.
- Risk tolerance describes the extent to which the Group Board of Directors has authorised executive management to assume risk. It represents the amount of risk that Swiss Re is willing to accept within the constraints imposed by its capital and liquidity resources, its strategy, and the regulatory and rating agency environment within which it operates.
The risk appetite framework plays a particularly important role in the context of business strategy and planning discussions: the risk appetite facilitates discussions about where and how the Group should deploy its capital, liquidity and other resources under a risk-return view, while the risk tolerance sets clear boundaries to risk-taking.
During strategic planning and target-setting, Risk Management provides an opinion on the proposed strategy and targets to the Group EC and ultimately the Group Board of Directors. The opinion focuses on the risk impact of the proposed strategy and the risks related to its implementation. The strategic plan, risk appetite and capital allocation ambition are expressed in a target portfolio for the Group’s assets and liabilities, which should ultimately deliver the Group’s targeted performance.
In the context of the annual planning process, ie during the phase of operational and financial planning, Risk Management reviews and challenges plan assumptions and assesses the risks and feasibility related to implementing the proposed plan. It provides transparency on the detailed risk implications of the plan and tests its adherence to risk appetite and risk tolerance.
In addition, Risk Management proposes risk capacity limits to ensure compliance with overall risk appetite and risk tolerance criteria. The risk capacity limits represent an aggregated constraint to risk-taking and seek to ensure that Group-wide accumulation risks remain within acceptable levels. They allow for risk monitoring and hence also for risk controlling during the execution of the plan. In addition to the risk capacity limits proposed by Risk Management, the Group EC also sets operational limits, which the business monitors and controls in day-to-day management.