Swiss Re uses its internal risk model to measure the Group’s capital requirements, as well as for defining risk tolerance, risk limits and liquidity stress tests (see chapter Risk modelling and risk measures). According to the internal risk model, Swiss Re’s overall risk exposure based on 99% Tail VaR decreased to USD 16.6 billion in 2012, down 1% from USD 16.7 billion in 2011. Alternative risk measures are 99% and 99.5% VaR. On this basis our risk decreased 9% to USD 12.1 billion and 4 % to USD 14.4 billion, respectively.

The Group capital requirement table below shows 99% Tail VaR for each of Swiss Re’s core risk categories on a stand-alone basis:

• Property and casualty risk amounted to USD 7.8 billion, representing a minor increase of 1%;
• Life and health risk increased by 4% to USD 7.3 billion;
• Financial market risk fell by 2% to USD 10.5 billion, because of the sale of the Admin Re ^® US business as well as reduced interest rate and foreign exchange risk. These decreases were largely offset by the impacts of the new financial market risk model (see chapter Risk modelling and risk measures) and additional equity investments.
• Credit default and migration risk slightly increased to USD 1.9 billion.

Our internal risk model takes account of the accumulation and diversification between individual risks. The effect of diversification at the category level is demonstrated in the table below, which represents the difference between the Group 99% Tail VaR (shortfall) and the sum of standalone shortfalls for the risk categories. The extent of diversification is largely determined by the selected level of aggregation (the higher the aggregation level, the lower the diversification effect). Our model and its parameters are continuously refined and updated to reflect our experience, changes in the risk environment, and advances in current best practice.

Group capital requirement based on one-year 99% Tail VaR