Liquidity management
We actively manage liquidity risks to ensure that we can satisfy the financial obligations of the Group.
As a re/insurance group, our core business generates liquidity primarily through premium income. Our exposure to liquidity risk stems mainly from two sources: the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
To manage these risks, we have a range of liquidity policies and measures in place. In particular, we aim to ensure that:
- sufficient liquidity is held to meet funding requirements under current conditions as well as adverse circumstances;
- funding is charged and credited at an appropriate market rate through our internal transfer pricing;
- diversified sources are used to meet our residual funding needs; and
- long-term liquidity needs are taken into account, both in our planning process and in our management of financial market risk.
Liquidity risk management
Composition of one-year spot liquidity in the SRZ liquidity pool
as of 31 December 2016
(Total USD 13.4 billion)
Our core liquidity policy is to retain sufficient liquidity in the form of unencumbered liquid assets and cash to meet potential funding requirements arising from a range of possible stress events. To allow for regulatory restrictions on intra-Group funding, liquidity is managed within groups of entities known as liquidity pools. Swiss Re is served by four main liquidity pools representing the parent companies of the Group and each of the three Business Units. Each liquidity pool comprises the respective parent company and its unregulated subsidiaries whose funds are freely transferable to the parent company. The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. The funding requirements under stress include:
- cash and collateral outflows, as well as potential capital and funding support required by subsidiaries as a result of loss events;
- repayment or loss of all maturing unsecured debt and credit facilities;
- additional collateral requirements associated with a potential ratings downgrade;
- further contingent funding requirements related to asset downgrades; and
- other large committed payments, such as expenses, commissions and tax.
The stress tests also assume that funding from assets is subject to conservative haircuts, that intra-Group funding is not available if it is subject to regulatory approval, that no new unsecured funding is available, and that funding from new re/insurance business is reduced.
The primary liquidity stress test is based on a one-year time horizon, a loss event corresponding to 99% Tail Value at Risk (see Risk assessment), and a three-notch ratings downgrade.
Swiss Re’s liquidity stress tests are reviewed regularly and their main assumptions are approved by the Group Executive Committee. Swiss Re provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5,“Liquidity — Insurers.”
Liquidity position of the Swiss Reinsurance Company Ltd (SRZ) liquidity pool
The SRZ liquidity pool is the primary liquidity pool of the Group. The estimated total liquidity sources in the SRZ liquidity pool available within one year, after haircuts and net of short-term loans from Swiss Re Ltd and securities lending, amounted to USD 18.5 billion as of 31 December 2016, compared with USD 19.6 billion as of 31 December 2015. The 2016 total includes USD 13.4 billion of liquid assets and cash, referred to as “one-year spot liquidity”, compared with USD 13.7 billion in 2015. Based on the internal liquidity stress tests described above, we estimate that the SRZ liquidity pool holds surplus liquidity after dividends to Swiss Re Ltd.
In 2016, the amount of surplus liquidity reduced slightly. The reduction of liquidity due to the payment of the dividend for 2015 to Swiss Re Ltd and repayments of external debt was partially offset by positive operating cash flows and dividends from subsidiaries.