Risk assessment

Higher overall risk in 2013 results from the re-balancing of our investment portfolio and increased exposure to natural catastrophe risks.

In 2013, Swiss Re’s overall risk increased by 21%, predominantly driven by higher financial market and credit risk, which reflects the re-balancing of the investment portfolio.

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 Risk modelling and risk measures). According to the internal risk model, Swiss Re’s overall risk exposure based on 99% Tail VaR (expected shortfall) increased to USD 20.0 billion in 2013, up 21% from USD 16.6 billion in 2012. Alternative risk measures — 99% and 99.5% VaR — showed our risk increasing by 22% to USD 14.7 billion and by 23% to USD 17.7 billion, respectively.

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

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 and the sum of standalone Tail VaRs 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 and regulatory 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

 

 

 

Inflation

 

 

 

Real estate

 

 

 

 

 

 

Credit

 

 

 

 

 

 

Credit default

 

 

 

Credit migration

 

 

 

 

 

Swiss Re’s risk landscape

The risk categories set out in the table above 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 Liquidity management.

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

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USD billions, as of 31 December

2012

2013

Change in %

cross reference information

1

Credit comprises credit default and credit migration risk.

Property and casualty

7.8

9.1

17

see Insurance risk

Life and health

7.3

6.6

–10

see Insurance risk

Financial market

10.5

13.3

27

see Financial market and credit risk

Credit1

1.9

3.0

54

see Financial market and credit risk

Simple sum

27.5

31.9

16

 

Diversification effect

–10.9

–12.0

 

 

Swiss Re Group

16.6

20.0

21