Insurance Risk
Insurance (or underwriting) risk is the risk of incurring a financial loss from coverage provided for both property and casualty and life and health risks. Insurance risk management includes overseeing risk-taking activities, as well as ensuring that an appropriate risk governance framework is defined and applied.
Our Risk Management function is embedded in Swiss Re’s business processes and follows the business cycle. Before any business is written, Risk Management is involved in the Group-wide annual business planning; it also reviews underwriting standards, pricing models, and large individual transactions. Risk exposure is monitored against agreed risk limits.
Swiss Re’s Risk Management function monitors reserving levels; it provides information to the risk-taking functions on trends to ensure appropriate pricing. Underwriting systems across the Group provide timely information on risks assumed and capacity committed. Regular internal risk and issue reporting ensures transparency at all stages.
Insurance risk stress tests: Single event losses with a 200-year return period1
| Download |
Pre-tax impact on economic capital in USD billions, as of 31 December |
2014 |
2015 |
Change in % |
||
|
|||||
Natural catastrophes |
|
|
|
||
Atlantic hurricane |
–4.3 |
–5.6 |
31 |
||
Californian earthquake |
–4.0 |
–3.8 |
–4 |
||
European windstorm |
–3.1 |
–2.6 |
–17 |
||
Japanese earthquake |
–3.1 |
–3.2 |
2 |
||
|
|
|
|
||
Life insurance |
|
|
|
||
Lethal pandemic |
–2.4 |
–2.4 |
0 |
||
Property and casualty riskChange from 2014 99% tail VaR
Description
Property and casualty (P&C) insurance risk arises from the coverage that Swiss Re provides for property, liability, motor, and accident risks through its Reinsurance and Corporate Solutions Business Units, as well as for specialty risks such as engineering, aviation, and marine. We classify and model our property and casualty risks in three categories at Group and Business Unit level: natural catastrophes (eg, earthquakes and windstorms), man-made risks (eg, liability and fire), and geopolitical risks (eg, terrorism). We also monitor and manage underlying risks inherent in the business we underwrite, such as inflation or uncertainty in pricing and reserving.
Developments in 2015
Swiss Re’s overall property and casualty risk increased slightly by 4%, mainly driven by higher natural catastrophe risk resulting from our strategic decision to reduce external hedging as well as from new business. The increase was partly offset by foreign exchange developments.
The higher natural catastrophe risk can also be seen in the stress results above. The table shows Swiss Re’s exposure to a set of major natural catastrophe scenarios, net of retrocession and securitisation. These risk exposures take into account the fact that such a scenario will trigger claims in other lines of business in addition to the most affected property line.
While our exposure to Californian and Japanese earthquake remained broadly stable (–4% and +2%, respectively), our Atlantic hurricane exposure showed a significant increase (+31%). This is driven by business growth and a reduction in external hedges as mentioned above. Our exposure to European windstorm risk decreased (–17%) in 2015, mainly due to model enhancement and the US dollar appreciation against the euro, partly offset by growth in risk due to expiry of several external hedges.
Management
Swiss Re writes property and casualty business using the four-eye principle: every transaction must be reviewed by at least two authorised individuals. An exception to this procedure are single risk acceptances, which can be authorised by one underwriter whereby the four-eye principle is applied by spot checks after acceptance. Each underwriter is assigned an individual underwriting authority based on technical skills and experience; any business exceeding this authority triggers a defined escalation process.
Large and complex individual transactions that could materially affect the Group’s and Business Units’ risk exposure require independent review and sign-off by Risk Management before authorisation. This is part of our three-signature approval process (involving Swiss Re’s underwriting, client management and risk management functions) that establishes the accountability of each of the parties for significant transactions.
We monitor accumulated exposure to single risks or to an underlying risk factor (such as Californian earthquake) on a Group-wide basis. We further manage our risk by external retrocession, risk swaps, or transferring risk to capital markets through insurance-linked securities (such as the Successor and Mythen cat bond programmes).
Life and health riskChange from 2014 99% tail VaR
Description
Swiss Re’s life and health (L&H) insurance risk arises from the business we take on when providing mortality (death), longevity (annuity), and morbidity (illness and disability) coverage through both the Reinsurance Business Unit, and when acquiring run-off business through the Admin Re® (Life Capital since 1 January 2016) Business Unit. In addition to potential shock events, such as a severe pandemic, we monitor and manage underlying risks inherent in life and health contracts (eg, pricing and reserving risks) that arise when mortality, morbidity, or lapse experience deviates from expectations. The investment risk that is part of some life and health business is monitored and managed as financial market risk.
Developments in 2015
Swiss Re’s overall life and health risk decreased by 10% to USD 7.2 billion. The decrease was to a large extent driven by foreign exchange movements, as the depreciation of several currencies (in particular the Canadian dollar and Australian dollar) against the US dollar had a significant impact on the present value of our liabilities.
The decline in the overall L&H shortfall was further amplified by a large exposure decrease in mortality trend risk (death) mainly due to lower mortality assumptions and model improvements for several markets. This was partly offset by higher morbidity (illness and disability) and lethal pandemic risk, where we experienced more business. The inclusion of the Guardian Financial Services portfolio (see Overview) substantially increased our longevity exposure thus leading to a further decline in overall L&H shortfall, as longevity risk provides a natural hedge to some of the mortality trend risk (due to diversification).
The 200-year pandemic event shown in the table above remained stable at USD 2.4 billion.
Management
To control risk exposure, we have an aggregate Group limit governing the acceptance of all life and health risks, with separate individual limits for mortality, longevity and lethal pandemic risk.
At the Business Unit level, acceptance of life and health risks is governed by aggregated Business Unit limits. Local teams can write reinsurance within their allocated capacity and clearly defined boundaries.
Market exposure limits, which are regularly monitored, are in place for catastrophe and stop-loss business. We pay particular attention to accumulation risk in densely populated areas and apply limits for individual buildings.
As in property and casualty, all large, complex or unusual transactions are reviewed and require individual approval from Swiss Re’s underwriting, client management and risk management functions.
We further manage the risk exposure of Swiss Re’s life and health book by external retrocession and also issue insurance-linked securities to reduce peak exposures (eg, vita bond programme).