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:

• Financial market risk rose by 27% to USD 13.3 billion in 2013, reflecting the re-balancing of Swiss Re’s investment portfolio (see Group investments).
• Credit (default and migration) risk increased by 54% to USD 3.0 billion due to the re-balancing of the investment portfolio and the growth in credit and surety re/insurance business.
• Property and casualty risk rose by 17% to USD 9.1 billion reflecting growth in natural catastrophe business and the expiry of a major quota share retrocession agreement.
• Life and health risk decreased by 10% to USD 6.6 billion primarily as a result of increased long-term interest rates.

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.

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