Optimized printing

Annual Report 2015

Other risks

Operational risk

Operational risk represents the potential economic, reputational or regulatory impact of inadequate or failed internal processes, people and systems, or from external events. Operational risks include legal and compliance risks and the risk of a material misstatement in Swiss Re’s financial reporting.

Operational risk is inherent within Swiss Re’s business processes. As the company does not receive an explicit financial return for such risks, the approach to managing operational risk differs from the approach applied to other risk classes. The purpose of operational risk management is not to eliminate operational risks but rather to identify and assess them, in order to cost-effectively manage risks that exceed Swiss Re’s tolerance for operational losses.

The Group’s framework for mitigating operational risk is based on its three lines of defence, assigning primary responsibility for identifying and managing risks to individual risk takers (first line of defence), with independent oversight and control by the second (Risk Management and Compliance) and third line of defence (Group Internal Audit). This approach is designed to achieve a strong, coherent and Group-wide operational risk culture built on the overriding principles of ownership and accountability.

Management is responsible for assessing operational risks based on a centrally coordinated methodology. Members of Swiss Re’s Group Executive Committee are required to assess and certify the effectiveness of the internal control system for their respective function or unit on a quarterly basis. All operational losses and incidents are reported and tracked in a central system to ensure that they are resolved as well as to avoid the recurrence of the same or similar events.

Strategic risk

Strategic risk represents the possibility that poor strategic decision-making, execution, or response to industry changes or competitor actions could harm Swiss Re’s competitive position and thus its franchise value.

Overall responsibility for managing strategic risk lies with Swiss Re’s Board of Directors, which establishes the Group’s overall strategy. The Board of Directors of the holding companies of the respective Business Units are responsible for the strategic risk inherent in their specific strategy development and execution.

Strategic risks are addressed by examining multi-year scenarios, considering the related risks, as well as monitoring the implementation of the chosen strategy year-by-year in terms of the annual business plan.

As part of their independent oversight role, Risk Management, Compliance and Group Internal Audit are responsible for controlling the risk-taking arising from the implementation of the strategy.

Regulatory risk

Regulatory risk represents the potential impact of changes in the regulatory and supervisory regimes of the jurisdictions, in which Swiss Re operates.

Swiss Re is strongly engaged in the regulatory debate, striving to mitigate potentially negative impacts while supporting reforms that could enhance the overall health of the sector, facilitate convergence of regulatory standards or generate business opportunities.

Regulatory developments and related risks that may affect Swiss Re and its Business Units are monitored as part of regular oversight activities and reported to the executive management and Board of Directors at Group, Business Unit and legal entity level in regular risk reports.

In 2015, the global regulatory agenda continued to accelerate. Governments and regulators rolled out new policies and conducted numerous consultations and field tests on regulations with direct impact on the insurance sector. Many reform proposals reflect the financial supervision agenda set by the G-20, which includes a focus on internationally active insurance groups (IAIGs) and global systemically important insurers (G-SIIs). Furthermore, regulators are increasing their work on compliance and market conduct issues.

Swiss Re is actively engaged in dialogue on these initiatives and supports regulatory convergence as well as increased application of economic and risk-based principles. At the same time, we share the broad concerns of the insurance industry around the cumulative and cross-sectoral impacts of the reforms. Some proposed regulations are more appropriate for the banking industry and do not adequately take into account the nature and benefits of insurance and reinsurance. Regulatory fragmentation is another key concern — particularly in Europe, with the challenges in introducing Solvency II, but also in the context of cross-border business and protectionist measures introduced in several growth and mature markets.

After more than ten years of development, Solvency II became effective across the European Economic Area on 1 January 2016. Swiss Re has been actively engaged in the implementation process, particularly in supporting the equivalence for the Swiss insurance supervisory system. The European Commission has recognised the Swiss system, including the SST, as fully equivalent. Switzerland and Bermuda are currently the only jurisdictions worldwide that have obtained this status. As a next step, industry-wide public disclosure of companies’ solvency and financial condition will become mandatory in 2017 for both Solvency II and the SST. Furthermore, in China the main rules of the new China Risk Oriented Solvency System (C-ROSS) were published in February 2015. With this, China undertakes an important step towards an economic, risk-based system, similar to SST and Solvency II.

Under the guidance of the Financial Stability Board, the International Association of Insurance Supervisors (IAIS) continues its work of refining the designation methodology for G-SIIs, and is elaborating corresponding policy measures, especially in the areas of international capital standards, including higher loss absorbency (HLA), recovery and resolution planning and enhanced group-wide supervision.

The IAIS decided to adjust its delivery process for ComFrame, the common framework for the supervision of IAIGs. ComFrame includes a global insurance capital standard (ICS), which will be adopted in 2019 — one year later than originally planned — leading to its implementation in 2020. Until the adoption, the IAIS might substantially revise the ICS.

Many countries impose restrictions on the transaction of reinsurance business. The Global Reinsurance Forum, which Swiss Re is currently chairing, actively promotes the advantages of open and competitive markets, in particular the greater choice of reinsurers, products and prices, as well as benefits from diversification through the spreading of risk and increased financial stability.

Political risk

Political risk comprises the consequences of political events or actions that could have an adverse impact on Swiss Re’s business or operations.

Political developments can threaten Swiss Re’s operating model but also open up opportunities for developing the business. The Group adopts a holistic view of political risk and analyses developments in individual markets and jurisdictions, as well as cross-border issues such as war, terrorism, energy-related issues and international trade controls.

A dedicated political risk team identifies, assesses and monitors political developments worldwide. Swiss Re’s political risk experts also exercise oversight and control functions for related risks, such as political risk insurance business; this includes monitoring political risk exposures, providing recommendations on particular transaction referrals, or risk reporting. They also provide specific country ratings that cover political, economic and security-related country risks; these ratings complement sovereign credit ratings and are used to support underwriting as well as other decision-making processes throughout the Group.

In 2015, key issues addressed by dedicated task forces included the potential impact on Swiss Re of the ongoing Eurozone crisis, the UK referendum on EU membership and the conflict between Russia and Ukraine.

Swiss Re seeks to raise awareness of political risk within the insurance industry and the broader public, and actively engages in dialogue with clients, media and other stakeholders. We also build relationships that expand our access to information and intelligence, and allow us to further enhance our methodologies and standards. For example, we participate in specialist events hosted by institutions such as the International Institute for Strategic Studies, the International Studies Association and the Risk Management Association, and maintain relationships with political risk specialists in other industries, think tanks and universities, as well as with governmental and non-governmental organisations.

Sustainability risk

Sustainability risk comprises current and emerging environmental, social and ethical risks that may arise from individual business transactions or the way Swiss Re conducts its operations and manages operational failures.

Swiss Re’s continued business success depends on the successful management of such risks, thus helping to maintain the trust of its stakeholders. The Group has a long-standing commitment to sustainable business practices, active corporate citizenship and good, transparent governance. All employees are required to commit to and comply with Swiss Re’s values and sustainability policies.

Potential sustainability risks are mitigated through clear corporate values and active dialogue and engagement with affected external stakeholders, as well as robust internal controls. These include a Group-wide Sustainability Risk Framework to identify and address sustainability risks across Swiss Re’s business activities. The framework comprises sustainability-related policies ‒ with pre-defined exclusions, underwriting criteria and quality standards ‒ as well as a central due diligence process for related transactional risks.

Sustainability risks are monitored and managed by dedicated experts in Swiss Re’s Group Sustainability Risk team, which is also responsible for maintaining the Sustainability Risk Framework. In addition, this unit supports Swiss Re’s risk management and business strategy through tailored risk assessments and risk portfolio reviews, fosters risk awareness through internal training, and facilitates development of innovative solutions to address sustainability issues. Finally, it represents and advocates Swiss Re’s position on selected sustainability risk topics to external stakeholders.

Swiss Re is a founding signatory to the UN Principles for Sustainable Insurance (UN PSI) and is currently a board member of this initiative. The UN PSI provide a global framework for managing environmental, social and governance challenges. Swiss Re has been actively contributing to the initiative for several years, co-chaired it from 2013 to 2015 and publicly reports progress against the principles in its annual Corporate Responsibility Report; the 2015 report is expected to be published in May 2016.

In 2015, Swiss Re was again recognised as “insurance industry sector leader” in the Dow Jones Sustainability Indices. This is the ninth time since 2004 that Swiss Re has led the insurance sector in these rankings. The award highlights Swiss Re’s long-term commitment to sustainable business and our efforts to further embed sustainability into key business processes and operations.

For more information on our sustainability practices, see also the Corporate Responsibility section.

Emerging risks

Anticipating possible developments in Swiss Re’s risk landscape is an important element of our integrated approach to Enterprise Risk Management. We encourage pre-emptive thinking on risk in all areas of our business, combining our broad claims experience and risk expertise with a structured horizon-scanning process. The key objectives are to reduce uncertainty and help diminish the volatility of the Group’s results, while also identifying new business opportunities and raising awareness of emerging risks, both within the Group and across the industry.

The Group’s risk identification processes are supported by a systematic framework that identifies and assesses emerging risks and opportunities across all risk categories, including potential surprise factors that could affect known loss potentials. This internal SONAR system gives Swiss Re employees a forum to raise ideas on emerging risks and report early signals using an interactive platform. This information is complemented with insights from collaboration with think tanks, academic networks and international organisations and institutions. Findings are shared with senior management and other internal stakeholders, providing them with a prioritised overview of newly identified emerging risks and an estimate of their potential impact on Swiss Re’s business.

We also publish an annual emerging risk report to share findings, raise awareness and initiate a risk dialogue with key external stakeholders.

To further advance risk awareness across the industry and beyond, Swiss Re continues to participate actively in strategic risk initiatives such as the International Risk Governance Council, and the CRO Forum’s Emerging Risk Initiative. Over the past year, we contributed to several publications on emerging risk topics, including the International Risk Governance Council guidelines for emerging risk governance and a CRO Forum position paper “The Smart Factory — Risk Management Perspectives”.