Other risks

Operational risk

The Basel II framework defines operational risk as the expected and unexpected economic impact of inadequate or failed internal processes, people or systems risks or external events, including compliance risks. The definition also includes financial reporting risk, where a material misstatement by the Group causes significant reputational damage.

Swiss Re mitigates these risks based on a three lines of defence principle, beginning with the day-to-day risk management activities of the individual risk takers in the business units, corporate and enabling functions. The second line of defence comprises the independent oversight functions of Risk Management, Compliance and the Group Security Office. The third line of defence performs independent audits of processes and procedures carried out by Group Internal Audit.

The purpose at every stage is to identify and manage cost-effectively those operational events with the potential to cause large financial loss or significant reputational damage.

Members of Swiss Re’s Group Management Board and Executive Committee are required to assess and certify the effectiveness of the internal control system for their particular business unit, corporate, or enabling function on a quarterly basis.

Strategic risk

Strategic risk for Swiss Re represents the risk that poor strategic decision-making, execution, or response to industry changes or competitor actions could harm Swiss Re’s competitive position and consequently franchise value.

The responsibility for managing strategic risk lies with the Board of Directors. It is 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. The operational risks of implementing the strategy are reviewed through our integrated assurance framework comprising business management, risk management and independent internal audits.

Regulatory risk

Regulatory risk includes the potential impact of changes in the regulatory and supervisory regimes of the countries in which we operate. In 2012, reinsurers were confronted with an increasing number of regulatory reforms, particularly in the US and Europe.

A further delay of the Solvency II Directive, due to ongoing discussions on the treatment of long-term guarantee products, raises concerns about the fragmentation of the solvency regime in Europe. The possible uncoordinated national introduction of parts of Solvency II before the overall implementation may lead to a lack of harmonised supervision.

The first list of globally systemically important insurers is expected to be released in early 2013. To the degree to which this list introduces policy measures governing large global reinsurance groups, Swiss Re will aim to improve the recognition of risk mitigating solutions (eg, reinsurance under risk-based solvency regimes), gain clarity in supervisory behaviour (eg, Supervisory Colleges and crisis management measures), and remove discriminatory requirements.

Swiss Re remained fully engaged in the regulatory debate during 2012, striving to mitigate potentially negative impacts while supporting those reforms that could generate convergence of regulatory standards and business opportunities.

Reputational risk

Swiss Re’s continued business success depends on maintaining our reputation with clients, investors, employees and other stakeholders. Environmental, socio-economic and related ethical risks to reputation may arise from individual business transactions; our reputation could also be impacted by operational failures.

We have a long-standing commitment to sustainable business practices, active corporate citizenship and good governance. We mitigate potential damage to our reputation through clear corporate values, robust internal controls and active dialogue with external stakeholders. All our employees are required to commit to and comply with the values and rules of behaviour defined in the Group Code of Conduct. We support these values with processes that enable us to identify potential problems early.

We have a formal framework to manage environmental, socio-economic, and related ethical risks that may be inherent in some of our business transactions. Currently, this framework contains eight policies for sectors or issues, each with pre-defined exclusions, criteria and quality standards. Transactions that could potentially compromise these standards need to be submitted to our Sensitive Business Risks process for review by our sustainability experts. We also consider the potential impact on Swiss Re’s reputation when assessing and controlling operational risk.

In addition, Swiss Re has been actively contributing over the years to the development of the UN Principles for Sustainable Insurance (UN PSI) and was a founding signatory at its launch on 19 June 2012 as part of the UN Conference on Sustainable Development in Rio de Janeiro (Rio+20).

In 2012, for the fifth year running, Swiss Re was named the insurance “Super Sector Leader” by SAM in their annual review for the Dow Jones Sustainability Indexes (DJSI).

Emerging risks

Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to enterprise risk management. We encourage pre-emptive thinking on risk in all areas of our business, combining our broad claims experience and risk expertise with a structured horizon-scanning process. The key objectives are to reduce uncertainty and help diminish the volatility of the Group’s results, but also to identify new business opportunities and raise awareness both within the Group and across the industry.

Our internal SONAR system gives Swiss Re employees a forum to raise ideas on emerging risks and report early signals using an interactive platform. This information is complemented with insights from collaboration with think tanks, academic networks and international organisations and institutions. Findings are reported at semi-annual intervals to senior management and other internal stakeholders, providing them with a prioritised overview of newly identified emerging risks and an estimate of their potential impact on Swiss Re’s business.

To further advance risk awareness across the industry and beyond, Swiss Re actively participates in strategic risk initiatives such as the World Economic Forum’s Risk Response Network, the International Risk Governance Council and the CRO Forum’s Emerging Risk Initiative. We contributed to several publications on emerging risk topics in 2012, including the World Economic Forum’s annual Global Risks Report and a CRO Forum position paper on endocrine disruptors.