Risk profile

The Company is exposed to insurance and financial risks that are calculated in its 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.

Property and casualty risk is mainly driven by natural catastrophe risks, such as Atlantic hurricanes, as well as underlying risks inherent in the business the Company underwrites, in particular non-life claims inflation and costing and reserving risks. The main drivers of life and health insurance risk are lethal pandemic, mortality trend, lapse and critical illness risk. The financial risk of the Company derives from financial market risk such as credit spread 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 by USD 641 million to USD 14.7 billion. The increase is mainly driven by higher insurance risks.

• The increase in property and casualty risk is to a large extent due to the strengthening of major currencies against the US dollar and higher property reserves following the natural catastrophe events in the second half of 2017. These effects are partly offset by a decrease in natural catastrophe exposures, particularly in the first half of 2017, as a result of active cycle management.
• Overall life and health risk increases mainly due to the strengthening of major currencies against the US dollar, lower US dollar and Canadian dollar interest rates for longer maturities, as well as a limited exposure increase.
• Financial market risk decreases mainly due to lower credit spread and equity risk. Credit spread risk decreases due to a simplified aggregation method for bond portfolios as well as lower risk factor volatilities. The lower equity risk is driven by the use of equity derivatives along with a reduction in private equity and exchange-traded fund exposure.
• Credit risk decreases mainly due to lower exposure partly reflecting the implementation of counterparty default hedges.

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 the Group’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.

Similarly to the Group, the Company assesses potential annualised losses from insurance peak scenarios (Atlantic hurricane, Californian earthquake, European windstorm, Japanese earthquake, lethal pandemic) 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 Atlantic hurricane scenario.
• Among the financial market sensitivities mentioned above, the Company’s SST ratio is most sensitive to a 50-basis point decrease in interest rates.

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.