Risk profile

The Company assumes all its business via intra-group transactions (IGTs) from other entities within the Group. The Company is exposed to insurance and financial risks, 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 life and health risk, which is mainly driven by lapse risk, mortality trend and lethal pandemic risk. The financial risk of the Company evolves from financial market risk, mainly driven by credit spread and foreign exchange 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 is broadly unchanged due to offsetting movements on individual risks:

• The increase in life and health risk results from growth in European open-book cedents as well as the implementation of the Canadian IGT that introduces additional mortality risk. These increases are partly offset by the run-off of the US closed-book business (mostly reflected in lapse risk).
• The decrease in financial market risk results mainly from a decrease in credit spread exposure due to the run-off of US closed-book business. In addition, an interest rate hedging strategy was implemented, further reducing financial market risk. These reductions are partly offset by an increase in foreign exchange exposure due to growth within the European open-book cedents and the Canadian dollar exposure resulting from the new Canadian IGT.
• The small increase in credit risk results from additional credit exposure relating to the Canadian IGT, partly offset by reduction in credit exposure due to the run-off of the US closed-book business.

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 lethal pandemic and lapse risk, stress calculations for credit default, as well as sensitivities to key financial market parameters.

The Company assesses potential annualised losses from insurance peak scenarios (lethal pandemic, lapse) 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.

• The Company’s largest potential annualised loss from an insurance peak scenario or a credit default event in SST 2018 derives from the lapse scenario.
• Among the financial market sensitivities mentioned above, the Company’s SST ratio is most sensitive to a 50-basis point increase in credit spreads.

Risk mitigation

The Company has limits in place to control its risk exposures and uses intra-group 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.