Risk profile

The Company is exposed to insurance and financial risks that are calculated in Swiss Re’s internal risk model, as well as other risks that are not explicitly part of the economic capital requirement but are actively monitored and controlled due to their significance for the entity. These include operational, liquidity, model, valuation, regulatory, political, strategic and sustainability risks.

On the insurance risk side, the Company is exposed to property and casualty risk, which is mainly driven by costing & reserving, generic liability, D&O & auditors’ professional indemnity, non-life claims inflation as well as natural catastrophe risks, such as Atlantic hurricanes. The financial risk of the Company evolves from financial market risk, mainly driven by credit spread, commodity, and equity risk as well as from credit risk.

Total risk

Total risk is based on 99% tail VaR and represents the average unexpected loss that occurs with an estimated frequency of less than once in 100 years over a one-year time horizon.

Total risk increases due to higher insurance risk partially offset by lower financial market risk:

• Property and casualty risk increases mainly due to higher property reserves exposures following the natural catastrophe events in the second half of 2017. This effect is partly offset by the decrease in natural catastrophe exposures due to the additional risk transfer from Corporate Solutions’ 2018 reinsurance programme. In particular, the Company purchased additional reinsurance protection from Swiss Reinsurance Company Ltd against the risk of multiple natural catastrophe events. This additional reinsurance programme effectively protects the Company’s net retention against a second and third event occurring within one year.
• The decrease in financial market risk results from active de-risking through the sales of equity positions. Credit spread risk decreases slightly reflecting a decrease in risk factor volatilities.
• Credit risk remains broadly stable.

Operational risk

The Company uses the Group-wide risk matrix methodology and Swiss Re’s Global Risk Register to capture operational risks which exceed or approach the entity’s risk tolerance limit. Adherence to risk tolerance is monitored and reported at least on a quarterly basis.

The Company has appropriate processes and procedures in place in order to identify and implement mitigation strategies, closely monitor their developments and, if required, act timely upon changes to these risks.

Other significant risks

For details on other significant risks, including liquidity, model, valuation, regulatory, political, strategic and sustainability risks, see Swiss Re’s 2017 Financial Report sections on Liquidity management on pages 73 and 74, Swiss Re’s risk landscape on pages 82 and 83, and Management of other significant risks on pages 88–91.

Risk concentration

The Company uses 99% tail VaR to measure its risk concentrations. Additionally, risk concentrations can also be measured via value at risk calculations for major natural catastrophe scenarios with a 200-year return period, stress calculations for credit default, as well as sensitivities to key financial market parameters.

The Company assesses potential annualised losses from insurance peak scenarios (Atlantic hurricane, Californian earthquake, European windstorm, Japanese earthquake) with a return period of 200 years as well as the annualised potential loss from a credit default event. The impacts of financial risk sensitivities (interest rates +/– 50 basis points, credit spreads +/– 50 basis points, equity values +/– 25 percent, real estate values +/– 25 percent) are assessed in terms of impact on SST ratio.

In SST 2018, the largest potential annualized loss from an insurance peak scenario (99.5% VaR) or a credit default event stems from the Atlantic hurricane scenario.

Among financial market sensitivities, the Company SST ratio is most sensitive to a 50-basis point increase in spreads.

Risk mitigation

The Company has limits in place to control its risk exposures and uses intra-group as well as external risk transfer to manage its risks and improve diversification within its portfolio.

These limits are part of an extended limit framework that is used to manage and control risks across Swiss Re. The Group employs internal retrocession and funding agreements to efficiently manage capital across Swiss Re and ensure that risk-taking in individual legal entities is well diversified. Within the Group, insurance risks are also mitigated through external retrocession, insurance risk swaps or transferring risk to capital markets. For financial risks, Swiss Re uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risk arising from investments and insurance liabilities.