Financial market and credit risk

Group-wide financial market and credit risk management involves identifying, assessing, and controlling risks inherent in the financial and credit markets, while monitoring compliance with our risk management standards. Both risk categories are managed by our Financial Risk Management team.

Financial Risk Management oversees financial market activities, sets limits, provides quantitative risk assessment across financial risk factors, and monitors portfolio risk; it also develops tactical proposals for risk mitigation or risk reduction, reviews risk and valuation models, assesses asset valuations, and approves transactions and new products. These responsibilities are exercised through defined governance procedures, including monthly reviews by our Asset Management Senior Risk Committee, where the Head of Financial Risk Management is a voting member. Financial Risk Management is responsible for both internally managed assets and Swiss Re’s external investment mandates.

Financial market and credit risk stress tests


Pre-tax impact on economic capital in USD billions, as of 31 December



Change in %

Market scenarios




100bp increase in credit spreads




30% fall in global equity markets (incl. hedge funds)




15% fall in global real estate markets




100bp parallel increase in global yield curves








Credit stress test




Credit default stress




Financial market riskChange from 2012 99% Tail VaR


Financial market risk is the risk that Swiss Re’s assets or liabilities may be affected by movements in financial market prices or rates — such as equity prices, interest rates, credit spreads, foreign exchange rates, or real estate prices. Our financial market risk originates from two main sources: our own investment activities and the sensitivity of the economic value of liabilities to financial market fluctuations. Swiss Re actively manages the potential mismatch in financial market risk between its liabilities and the assets it holds.

Developments in 2013

In 2013, Swiss Re’s overall financial market Tail VaR increased by 27% (see table Insurance risk) as a result of the rebalancing of the Group’s investment portfolio, mainly due to additional investments in listed equities, exchange traded funds and corporate bonds and the implementation of a substantial short duration position during 2013.

The table above shows Swiss Re’s sensitivity to various market scenarios. Overall interest rate sensitivity rose substantially, driven by the short duration position implemented during 2013. The exposure to equity market risk significantly increased, as a result of additional investments, along with growth in the asset value of existing holdings. The equity scenario includes listed and private equities, hedge funds, equity derivatives, equity exposure embedded in insurance liabilities (eg guaranteed minimum death benefit products, including variable annuities), fee income related to equities in unit-linked business, and funding obligations from equity holdings in Swiss Re pension funds. The sensitivity to credit spread widening increased due to additional investments in credit products.


Financial market risks are subject to limits at various levels of the organisation (eg, Group, Business Units, lines of business and legal entities). Individual limits are expressed in terms of stress testing, VaR and risk factor sensitivities. Asset Management determines a more detailed set of risk limits for its portfolio mandates.

Financial Risk Management regularly reviews and updates the risk framework. The unit is also responsible for monitoring financial market risk in accordance with our risk management standards. Daily and weekly Group-level reports are provided on risks, and on specific limits for internally and externally managed investment mandates and for the Business Units. These reports track exposures, document limit usage (which is independently monitored by Financial Risk Management), and provide information on key risks that could affect the portfolio. Specific limits are assigned to line of business heads, who seek to optimise their portfolios within those limits. The reports are presented and discussed with those responsible for the relevant business line at the weekly Asset Management Risk Committee.

This process is complemented by regular risk discussions between Financial Risk Management, Asset Management and the Group’s external fund managers.

Credit riskChange from 2012 99% Tail VaR


Credit risk is primarily the risk of incurring a financial loss from the default of Swiss Re’s counterparties or of third parties. We also take account of the increase in risk from any deterioration in credit ratings. Credit risk arises directly from our investment activities as well as from liabilities underwritten by our Business Units and from retrocession.

Swiss Re distinguishes between three types of credit exposure: the risk of issuer default from instruments in which Swiss Re invests or trades, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as retrocession or over-the-counter derivatives; and risk assumed by Swiss Re through reinsurance contracts, such as trade credit and surety reinsurance business. Credit risk is viewed separately from credit spread risk, which is included under financial market risk.

Developments in 2013

In 2013 Swiss Re’s credit risk increased by 54%, mainly due to an increased amount of corporate bonds in the Group’s investment portfolio following the rebalancing, along with growth in our credit and surety re/insurance business. Both drivers also resulted in an increase in exposure to a defined credit default stress situation (see table above). This stress test is based on 20 years of historical corporate default data from Moody’s and assumes that a combination of the worst observed 12-month default frequencies for each credit rating category occurs in all of them in the same year.


Credit risk is managed and monitored by a dedicated Credit Risk Management team within our Financial Risk Management unit. In addition to the credit stress limit set by the Group Risk and Capital Committee, we assign aggregate credit limits by Business Unit, corporate counterparty, and country. These limits are based on a variety of factors, including the prevailing economic environment, the nature of the underlying credit exposures, and (in the case of corporate counterparties) a detailed internal assessment of a corporate entity’s financial strength, industry position, and other qualitative factors. Risk Management is also responsible for regularly monitoring corporate counterparty credit quality and exposures, and compiling watch lists of cases that merit close attention.

Risk Management monitors and reports credit exposure and limits for the Group and its Business Units on a weekly basis. The reporting process is supported by a Group-wide credit exposure information system that contains all relevant data, including corporate counterparty details, ratings, credit risk exposures, credit limits, and watch lists. All key credit practitioners in the Group and Business Units have access to this system, thus providing the necessary transparency to implement specific exposure management strategies for individual counterparties, industry sectors, and geographic regions.

To take account of country risks other than from credit default, Swiss Re’s Political and Sustainability Risk Management unit prepares specific country ratings in addition to the sovereign ratings used by the Group and the Business Units. These ratings are considered in the decision-making process, and cover political, economic and security-related country risks.