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Annual Report 2016

Insurance risk

Insurance risk management involves identifying, assessing and controlling risks that Swiss Re takes through its underwriting activities, including related risks such as inflation or uncertainty in pricing and reserving.

The Risk Management function is embedded throughout Swiss Re’s business, with dedicated CROs and risk experts for each Business Unit, region and major insurance carrier. Risk Management also provides independent assurance throughout the business cycle, starting with the annual business planning process. It reviews underwriting standards, costing models and large transactions, and monitors exposures, reserves and limits. Regular internal reports ensure transparency across the Group, providing management with quantitative and qualitative risk assessments.

Swiss Re also manages and mitigates insurance risk through external retrocession, insurance risk swaps or by transferring risk to capital markets through insurance-linked securities, industry loss warranties or other derivatives. This provides protection against extreme catastrophic events, further diversifies risk, stabilises economic results and releases underwriting capacity.

Insurance risk stress tests: Single event losses with a 200-year return period1

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Pre-tax impact on economic capital in USD billions, as of 31 December

2015

2016

Change in %

1

Single event losses with a 200-year return preriod show for example that there is a 0.5% probability over the next year that the loss from a single Atlantic hurricane event could exceed USD 5.1 billion. The impact excludes earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.

Natural catastrophes

 

 

 

Atlantic hurricane

–5.6

–5.1

–10

Californian earthquake

–3.8

–3.4

–11

European windstorm

–2.6

–2.6

–2

Japanese earthquake

–3.2

–3.1

–4

 

 

 

 

Life insurance

 

 

 

Lethal pandemic

–2.4

–2.4

–1

Property and casualty riskChange from 2015 99% tail VaR: –1%

Developments in 2016

Property and casualty risk remained broadly stable at USD 9.4 billion after external hedging. Costing and reserving risk increased, mainly reflecting the impact of new large casualty transactions. This effect was offset by lower exposure to natural catastrophe risks, in particular Atlantic hurricane and California earthquake, due to challenging renewal conditions.

The decrease in natural catastrophe risk is reflected in the stress test figures 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.

In the context of a challenging market environment, major natural catastrophe scenarios show lower stress results. Atlantic hurricane and Californian earthquake scenarios show the most significant decreases with 10% and 11%, respectively. Japanese earthquake is down by 4% due to the reduction in exposure being partly offset by foreign exchange movements. European windstorm decreased by 2%.

Management

The CROs of Reinsurance and Corporate Solutions are responsible for overseeing all property and casualty exposures written in their area. In addition, Group Risk Management monitors and controls accumulated exposures across Swiss Re to ensure that they remain within defined risk tolerance level.

The first line of control for property and casualty risks lies within Swiss Re’s underwriting units. All transactions must be reviewed by at least two authorised individuals, and are subject to authority limits. Each underwriter is assigned an individual authority based on technical skills and experience, as well as allocated capacity limits for local teams; any business that exceeds this authority or is otherwise complex or unusual triggers an escalation process that extends up to the Group EC. As an exception, single risks can be authorised by an individual underwriter with the necessary authority – but these risks are subject to checks after acceptance.

Large transactions that could materially impact the risk at Group, Business Unit or legal entity level require independent review and sign-off by Risk Management before they are authorised. This is part of a three-signature principle, under which key transactions must be approved by Client Markets, Underwriting and Risk Management. For transactions of defined types and within defined limits, this may be applied through the approval of underwriting or pricing guidelines. For other transactions, the signatures must be secured through an individual review.

In addition to underwriting and capacity limits, Swiss Re’s limit framework includes aggregate Group limits for property and casualty risk as well as individual limits for major natural catastrophe scenarios – Atlantic hurricane, Californian earthquake, European windstorm and Japanese earthquake. These limits guard against exposure accumulations and ensure that risk-taking remains within Swiss Re’s risk tolerance.

Swiss Re further manages property and casualty risks through external retrocession, risk swaps or transferring risk to the capital markets through insurance-linked securities to reduce peak exposures.

Life and health riskChange from 2015 99% tail VaR: +2%

Developments in 2016

Swiss Re’s overall life and health risk is 2% higher at USD 7.4 billion. The increase resulted predominantly from the acquisition of a large block of in-force US term life business in the first quarter of 2016, which led to an increase in our mortality trend (death), lethal pandemic, and lapse exposure. It was partly offset by the impact of model enhancements – in particular the improvements made to the valuation of our US business.

The overall life and health risk increased further due to new business written in Asian markets, which together with the decrease in Japanese interest rates led to higher critical illness risk.

In addition to the US transaction, our lethal pandemic exposure also increased from new business written in several other markets including Asia as well as a reduction in our VITA bond programme. The increase in risk was largely offset by the depreciation of the British pound. As a result, the standalone lethal pandemic tail VaR as well as the lethal pandemic stress test shown in the table above remained broadly stable.

Management

The CROs of Reinsurance and Life Capital are responsible for overseeing all life and health exposures written in their respective area. Accumulated exposures across Swiss Re are monitored and controlled by Group Risk Management to ensure that they remain at an acceptable level for the Group.

Underwriters represent the first line of control for life and health risks. As in property and casualty business, all transactions that could materially change risk at Group, Business Unit or legal entity level require independent review and sign-off by Risk Management before they can be authorised. This is part of a three signature principle, under which key transactions must be approved by Client Markets, Underwriting, and Risk Management. For transactions of defined types and within defined limits, this may be applied through the approval of underwriting or pricing guidelines. For other transactions, the signatures must be secured through a review of the individual transaction.

In addition to underwriting and capacity limits, Swiss Re’s limit framework includes aggregate Group limits for life and health risk as well as separate limits for mortality, longevity and lethal pandemic risk. At the Business Unit level, acceptance of life and health risks is governed by aggregated limits. Market exposure limits are in place for catastrophe and stop loss business. Swiss Re pays particular attention to densely populated areas and applies limits for individual buildings to guard against risk exposure accumulations.

Swiss Re further manages life and health risks through external retrocession, risk swaps or transferring risk to the capital markets through insurance-linked securities to reduce peak exposures.