Management of other significant risks
Risk Management is responsible for monitoring and controlling operational risks based on a centrally coordinated methodology. Members of the Group Executive Committee 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 (first line of control), 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 risk culture built on the 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 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 a combination of the quantitative and qualitative impact as well as the probability of loss. The residual risk – the risk after mitigation – is assessed and reported on a quarterly basis to executive management and Boards of Directors at Group and legal entity level.
All operational events and issues are recorded and managed in a central Operational Risk Management system in order to address the identified problems and avoid the recurrence of similar events.
In 2017, Swiss Re has evolved its operational risk framework and refined the Group’s integrated Internal Control System. As a result, a centrally governed global operational risk register with a global control catalogue provide a sound basis for the quarterly risk and control self-assessments and reporting. Throughout 2017, Swiss Re focused on further improvements on data analytics and visualisation as well as a software solution to better manage end-user applications.
Group Operational Risk Management 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, which establishes Swiss Re’s overall strategy. The Boards 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 and interaction, 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 executive management and the Board at Group and legal entity level.
The regulatory environment of the insurance industry continues to evolve on the national, regional and international level. 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.
In 2017, Swiss Re was again not designated as Global Systemically Important Insurer (G-SII). The non-designation confirms that the international supervisory community continues to assess Swiss Re as neither causing nor amplifying systemic risk.
While prudential regulation in most regions is developing towards more risk-sensitive and economic-based capital regimes, regulatory fragmentation is increasing. Regulators show declining appetite for globally aligned policy reforms. 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. Uncoordinated regulatory approaches will be less effective in promoting financial stability and could undermine re/insurers’ ability to support economic activity and closing the protection gap.
Growing national protectionism restricts the free flow of risk and capital. Swiss Re is advocating for the 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 and 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 Geneva Center for Security Policy, or 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.
The timing and consequences of the Brexit are not clear yet and depend on the outcome of the negotiations between the EU and the UK. Swiss Re operates in the UK through branches of our Luxembourg entities and some UK-domiciled entities. We are thus closely monitoring developments and are actively engaging with the relevant UK and EEA regulators in defining and aligning our Brexit contingency plans.
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. 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.
Swiss Re’s model governance is based on Group-wide standards for model validation and model changes. These standards seek to ensure that each material model has a clear scope, is based on sound mathematical and scientific concepts, has been implemented correctly and produces appropriate results given the stated purpose. Furthermore, the calibration of model parameters (and the data on which calibration relies) must be trustworthy, while expert judgments are required to be sensible, documented and evidenced.
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. This requires the appropriateness of models to be assessed in an independent end-to-end validation process that includes specification, algorithms, calibration, implementation, results and testing. Material models used for costing, valuation of reserves and assets as well as Swiss Re’s internal risk model are validated by dedicated teams within Risk Management. These teams provide independent assurance that the framework has been adhered to, and also conduct independent validations. Swiss Re’s risk model 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 executive management and the Board 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. The team performs 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 and the Board at Group and legal entity level. 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) as well as for Actuarial Control. The framework ensures that there is independent assurance on the data, assumptions, models and processes used for valuation purposes; for all property and casualty business and selected life and health portfolios, it also includes an independent valuation of coverage provided to ensure that reserves are within an adequate range. Regular deep-dive investigations are performed into selected portfolios in order to review the appropriateness of both the reserves and the applied reserving approach.
In 2017, Actuarial Control extended the independent valuation of coverage provided to ensure that reserves are within an adequate range to segments of life and health business.
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 2017 edition has been published together with the 2017 Financial Report.
In June 2017, Swiss Re decided to develop a carbon risk steering mechanism that will help guide our business towards a low-carbon world and support our clients in their transition. The first part of the carbon steering mechanism will take form of a thermal coal policy, which will be integrated in the Sustainability Risk Framework by mid-2018. It will apply across all lines of business on direct, facultative and treaty side. This transition will take some time and constructive dialogue with clients.
Reflecting our strong overall commitment to corporate responsibility, Swiss Re continued to be included in leading sustainability indexes and rankings such as FTSE4Good, Euronext Vigeo World 120, Ethibel Excellence Global, oekom Prime Investment and the Dow Jones Sustainability Index. For more information on our sustainability practices, see also the Corporate Responsibility section as well as our 2017 Corporate Responsibility report.
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 for 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. This framework combines a bottom-up approach driven by employee input with central and regional experts on emerging risk. The resulting information is complemented with insights from external organisations such as think tanks, academic networks and international organisations, as well as from interaction with clients.
Findings are reported to management and internal stakeholders, including 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 (Swiss Re SONAR) to 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 CRO Forum’s Emerging Risk Initiative and the International Risk Governance Council.