Financial risk

Swiss Re’s central Financial Risk Management team oversees all activities that generate financial market or credit risk. Its mandate covers internally and externally managed assets, principal investments, treasury activities and the credit risks that derive from Swiss Re’s underwriting and retrocession activities, including structured transactions, credit insurance and surety business. The Head of Financial Risk Management reports to the Group CRO, with a secondary reporting line to the Group Chief Investment Officer.

Financial Risk Management oversees risk-taking and controls exposure accumulation for the primary financial market and credit risks identified in Swiss Re’s financial risk factor classification. In addition, Financial Risk Management is responsible for assurance activities related to asset valuation and financial risk models, as well as for reporting Swiss Re’s financial risks. These responsibilities are exercised through defined governance processes, including regular reviews by Swiss Re’s Senior Risk Council and other financial risk oversight bodies.

In addition, Swiss Re uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risks arising from investments and insurance liabilities. Interest rate risk from insurance liabilities is managed through investments in fixed-income instruments whose pricing is sensitive to changes in government yields, such as government bonds.

Financial market and credit risk stress tests

Financial market riskChange from 2015 99% tail VaR: –3%

Developments in 2016

Overall financial market risk decreased by 3% to USD 12.3 billion. The decrease is mainly driven by lower equity risk. Exposure from the acquisition of Guardian Financial Services was already included in 2015.

The table above shows Swiss Re’s sensitivity to various market scenarios. The decrease in equity risk resulted from asset management sales as well as a strengthening of the US dollar. Foreign exchange movements and asset management activities led to a lower sensitivity towards changes in credit spreads. This impact was, however, largely offset by assets assumed through a large block of in-force US term life business. The increase in real estate stress reflects new investments in particular in the US. The sensitivity to interest rates is minimal due to the well-matched duration position.

Management

Financial market risk is monitored and controlled by dedicated experts within the Group’s Financial Risk Management team.

All activities with financial market risk are subject to limits at various levels of the organisation (eg Group, Business Units, lines of business and legal entities). At the highest level, the Group Board of Directors sets a financial risk concentration limit which defines how much of the Group’s risk exposure can derive from financial risk factors. The Group EC then establishes limits for aggregate financial market and credit risk at Group and Business Unit level, with additional limits set for individual risk factors, business lines and portfolio managers. There are also limits set on a legal entity level. Risk limits may be expressed in terms of losses in a stress scenario, value at risk or linear sensitivities to a particular risk factor.

Group Financial Risk Management regularly reports on key financial market risks and risk aggregations, as well as on specific limits for internally and externally managed investment mandates. These reports track exposures, document limit usage and provide information on key risks that could affect the portfolio. The reports are presented and discussed with those responsible for the relevant business line at the weekly Financial Market Risk Committee. This process is complemented by regular risk discussions between Financial Risk Management, Asset Management and the Group’s external investment managers.

Credit riskChange from 2015 99% tail VaR: 0%

Developments in 2016

In 2016, Swiss Re’s credit risk – which includes default and migration (deterioration in credit rating) risk – remained stable at USD 3.4 billion. At the same time, the credit default stress test increased by 5%.

Credit tail VaR remained stable as the impact from higher credit underwriting exposure and credit quality deteriorations in credit and surety was offset by the strengthening of the US dollar and de-risking activities. The increase in credit stress test reflects the stronger impact of credit quality deteriorations, as the stress calculation does not benefit from diversification effects.

Management

Credit risk is monitored and controlled by dedicated credit risk management experts within the Group’s Financial Risk Management team.

The Group EC sets an aggregate credit limit at Group level, with additional limits assigned by Business Unit, corporate counterparty and country. These limits are based on multiple factors, including underlying credit exposures and a detailed assessment of the counterparty’s financial strength, industry position and other qualitative factors.

The Financial Risk Management unit monitors and reports credit exposure and limits for the Group and Business Units on a weekly basis. In addition, it is responsible for regularly monitoring corporate counterparty credit quality and exposures, and compiling watch lists of cases that merit close attention. The reporting process is supported by a Group-wide credit exposure information system that contains all relevant data, including counterparty details, ratings, credit risk exposures, credit limits and watch lists. Key credit practitioners across Swiss Re have access to this system, thus providing the necessary transparency to implement specific exposure management strategies for individual counterparties, industry sectors and geographic regions.

To take account of country risks other than from credit default, the Group’s Political Risk Management team prepares specific country ratings in addition to the sovereign ratings used by Swiss Re. These ratings are considered in the decision-making process and cover political, economic and security-related country risks.