Risk and capital management
In 2016, Swiss Re’s capitalisation remained very strong. Our profound risk knowledge enables us to efficiently allocate capital and pursue controlled risk-taking.
Overview
Strong capital position supported by controlled risk-taking.
In 2016 we continued to be very strongly capitalised and to apply our risk appetite framework, which establishes our approach for controlled risk-taking and efficient capital allocation throughout the Group.
“The Group continues to have superior capitalization and maintains significant financial flexibility.”
David Cole
Group Chief Financial Officer
“At Swiss Re, we live a strong risk culture to promote risk awareness, rigor and discipline.”
Patrick Raaflaub
Group Chief Risk Officer
Capitalisation
During 2016, Swiss Re surpassed its target of deleveraging USD 4 billion since 2012, further strengthened its capital base with the issuance of innovative capital instruments and continued to direct excess capital from its Business Units to the Group’s holding company, Swiss Re Ltd. The Group’s Swiss Solvency Test ratio remains comfortably above Swiss Re’s adjusted respectability level of 220%, reflecting recent changes implemented by the Swiss Financial Market Supervisory Authority FINMA. Rating agencies A.M. Best, Moody’s and Standard & Poor’s (S&P) rated Swiss Re’s financial strength ‘superior,’ ‘excellent’ and ‘very strong’, respectively (see Capital management).
Our overall goal for capital management is to maintain a capital structure that operates efficiently within the above constraints and maximises our financial flexibility. Our underwriting and investment decisions are steered to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid to the Group’s parent holding company, Swiss Re Ltd, totalled USD 18.8 billion since 2012.
Swiss Re established two further pre-funded subordinated debt facilities as part of the implementation of the target capital structure:
- a USD 400 million 15-year facility at an interest rate of 6.05%
- a USD 800 million 11-year facility at an interest rate of 5.625%.
Based on the Group’s capital strength, the Board of Directors propose a 2016 regular dividend of CHF 4.85 per share. In addition, the Board of Directors proposes a public share buy-back programme of up to CHF 1.0 billion purchase value, exercisable until the AGM in 2018.
Liquidity
Our core insurance and reinsurance operations generate 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.
The amount of liquidity held is largely determined by internal liquidity stress tests, which estimate the potential funding requirements stemming from extreme loss events. Based on these internal liquidity stress tests, we estimate that the Swiss Reinsurance Company Ltd liquidity pool, the primary liquidity pool of the Group, holds surplus liquidity.
Swiss Re also provides FINMA with a yearly report on its liquidity position, in accordance with FINMA’s circular 13/5, “Liquidity ‒ Insurers”.
Swiss Re’s risk profile in 2016
During 2016, Swiss Re’s overall risk remained stable at USD 19.5 billion (compared to USD 19.6 billion at the end of 2015), as a decrease in financial market risk was offset by higher life and health risk. Property and casualty risk and credit risk both remained broadly unchanged.
The decrease in financial market risk is mainly driven by lower equity risk. On the insurance risk side, our life and health risk increased due to the acquisition of a large block of in-force US term life business in the first quarter of 2016.
Risk Management
Swiss Re’s Risk Management function is an integral part of our business model and key to the controlled risk-taking that underpins our financial strength. Risk Management is mandated to ensure that the Group, its Business Units and the legal entities have the necessary expertise, frameworks and infrastructure to support good risk-taking. In addition, it monitors and ensures adherence to applicable frameworks and also performs reserving and reporting activities.
Risk Management is embedded throughout our business. For each Business Unit and major legal entities, we have dedicated Chief Risk Officers and other risk experts who analyse and challenge business decisions. They apply a consistent Enterprise Risk Management approach across the Group to ensure a fully integrated view of risk. The independence of the Business Unit CROs is maintained by a direct reporting line to the Group CRO.
Our proprietary integrated risk model provides a meaningful assessment of the risks to which the Group is exposed and represents an important tool for managing our business. It determines the capital requirements for internal purposes and forms the basis for regulatory reporting under the Swiss Solvency Test and under Solvency II for our legal entities in continental Europe.
We continuously review and update our internal model and its parameters to reflect our experiences and changes in the risk environment and current best practice.