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Risk assessment

In 2012, Swiss Re’s overall risk slightly decreased by 1%, reflecting lower financial market risk, mainly due to the sale of the Admin Re® US business.

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.

 

Categorisation of Swiss Re’s risk landscape

 

 

 

 

Core risks

Operational risks

Other risks

 

 

Insurance

People

Liquidity

 

 

Property and casualty

Processes

Strategic

 

Life and health

 

Financial market

Systems

Regulatory

 

 

Credit spread

External

Reputational

Equity market

 

Foreign exchange

 

 

 

Interest rate

 

 

 

Real estate

 

 

 

 

 

 

Credit

 

 

 

 

 

 

Credit default

 

 

 

Credit migration

 

 

 

 

 

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

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USD billions, as of 31 December

2011

2012

Change in %

1

Credit comprises credit default and credit migration risk.

Property and casualty

7.7

7.8

1

Life and health

7.0

7.3

4

Financial market

10.7

10.5

–2

Credit1

1.8

1.9

7

Simple sum

27.2

27.5

1

Diversification effect

–10.5

–10.9

 

Swiss Re Group

16.7

16.6

–1

Swiss Re’s risk landscape

The risk categories set out in the table on the left are defined in the following sections. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed in chapter Liquidity management.