Risk and capital management
Despite a challenging year, Swiss Re maintained a very strong capital position. Controlled risk-taking and active capital management underpin our financial strength.
Our capital strength enables us to respond to market developments.
Despite large industry losses, we remained strongly capitalised. This reflects our efficient capital allocation and effective risk governance and steering approach throughout the Group.
“Our capital position is very strong and we continue to have ample financial flexibility.”
Group Chief Financial Officer
“Our risk appetite framework forms the basis for controlled risk-taking and protects our financial strengths.”
Group Chief Risk Officer
Swiss Re maintained a very strong capital position during 2017 despite a challenging year. This allowed us to allocate capital to potential market opportunities while continuing to distribute excess capital to our shareholders. The Group’s Swiss Solvency Test ratio remains comfortably above Swiss Re’s respectability level of 220%. Rating agencies A.M. Best, Moody’s and Standard & Poor’s (S&P) rated Swiss Re’s financial strength ‘superior’, ‘excellent’ and ‘very strong’, respectively (see Capital management).
Our overall goal for capital management is to maintain a capital structure that operates efficiently within constraints imposed by regulators and requirements from rating agencies as well as maximises our financial flexibility. Our underwriting and investment decisions are steered to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 22.4 billion since 2012.
As part of the Group's target capital structure, Swiss Re created further financial flexibility by establishing a USD 750 million pre-funded truly perpetual subordinated debt facility that has a fixed credit spread for life (see Capital management).
Based on the Group’s capital strength, the Board of Directors proposes a 2017 regular dividend of CHF 5.00 per share. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion purchase value, commencing at the discretion of the Board of Directors after the AGM's approval.
Our core insurance and reinsurance operations generate liquidity primarily through premium income. Our exposure to liquidity risk stems mainly from two sources: the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. Based on these internal liquidity stress tests, we estimate that the Swiss Reinsurance Company Ltd liquidity pool, the primary liquidity pool of the Group, currently holds significant surplus liquidity.
Swiss Re also provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5, “Liquidity — Insurers”.
Group Risk Management is key to the controlled risk-taking that underpins our financial strength. Risk Management is mandated to ensure that the Group and the legal entities have the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it monitors and ensures adherence to applicable frameworks and also performs reserving and reporting activities.
Risk Management is embedded throughout our business. We have dedicated Chief Risk Officers and risk teams for all major legal entities and regions. These are closely aligned to Swiss Re’s business structure, in order to ensure effective risk oversight, but remain part of our Risk Management function under the Group CRO, thus ensuring their independence as well as a consistent Group-wide approach to overseeing and controlling risks. They are supported in this by central risk teams that provide specialised risk expertise and oversight.
The Group’s risk-taking is steered by our Risk Appetite Framework, which consists of two interlinked components: risk appetite and risk tolerance. The risk appetite statement facilitates discussions about where and how Swiss Re should deploy its capital, liquidity and other resources under a risk-return view, while the risk tolerance sets clear boundaries to risk-taking.
Our proprietary integrated risk model provides a meaningful assessment of the risks to which the Group is exposed and represents an important tool for managing our business. It determines the capital requirements for internal purposes and forms the basis for regulatory reporting under the Swiss Solvency Test (SST) and under Solvency II for our legal entities in continental Europe. With the approval of our internal model under FINMA’s revised process, we achieved a key milestone in 2017.
We continuously review and update our internal model and its parameters to reflect our experiences and changes in the risk environment and current best practice.
Swiss Re’s risk profile in 2017
During 2017, Swiss Re’s overall risk remained broadly stable at USD 19.7 billion (compared to USD 19.5 billion at the end of 2016), as an increase in insurance risk was largely offset by lower financial market and credit risk.
Property and casualty risk increased, mainly driven by the strengthening of major currencies against the US dollar as well as an increase in property reserves following the 2017 natural catastrophe events. Natural catastrophe exposures decreased overall as a result of the Group's active cycle management.
The increase in life and health risk was driven in particular by the appreciation of major currencies against the US dollar and lower interest rates, as well as higher lethal pandemic and critical illness exposure.
The decrease in financial risk was mainly driven by a lower credit spread and lower credit risk.