Risk and capital management
In 2018, Swiss Re maintained its strong capitalisation despite large natural catastrophes and man-made events. Our long-term sustainable capital generation and controlled risk-taking support our attractive capital management actions.
Our sustainable capital generation allows us to continue returning excess capital to shareholders.
Despite the fourth-costliest year for the insurance industry, our Group SST ratio of 251% remains comfortably above the 220% target. This is supported by our diversified business model and disciplined risk-taking.
“Large losses keep reminding us of the importance of maintaining a robust capital position.”
Group Chief Financial Officer
“Risk Management enables sound risk-taking and makes us a reliable partner to our clients.”
Group Chief Risk Officer
Swiss Re maintained a market-leading capital position during 2018 despite natural catastrophes and large man-made losses. The Group’s Swiss Solvency Test (SST) ratio of 251% remains comfortably above Swiss Re’s target capitalisation of 220%. 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. This capital strength enables Swiss Re to support its clients in difficult times while continuously returning capital to shareholders.
Swiss Re’s overarching target is to maintain a very strong capital position that operates efficiently within constraints imposed by regulators and requirements from rating agencies while giving the company maximum financial flexibility. Swiss Re’s capital allocation 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 by our Business Units to the Group’s parent holding company, Swiss Re Ltd, have amounted to USD 17.2 billion since 2013.
As part of the ongoing maintenance of the Group’s target capital structure, Swiss Re further enhanced its financial flexibility by issuing a USD 500 million non-dilutive senior exchangeable bond with anytime issuer stock settlement.
Based on the Group’s capital strength, the Board of Directors proposes a 2018 regular dividend of CHF 5.60 per share. In addition, the Board of Directors proposes a further public share buyback programme at the discretion of the Board of Directors and subject to obtaining all necessary legal and regulatory approvals.
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 Swiss Reinsurance Company Ltd, the most important legal entity of the Group from a liquidity perspective, currently holds significant surplus liquidity.
Swiss Re also provides FINMA with a yearly report on its liquidity position, in accordance with FINMA Circular 13/5, “Liquidity — Insurers”.
Group Risk Management is key to the controlled risk-taking that underpins Swiss Re’s financial strength. Risk Management is mandated to ensure that the Group and its 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 Swiss Re’s business. The Group has dedicated Chief Risk Officers and risk teams for all major legal entities and regions. These are closely aligned to Swiss Re’s business structure, in order to ensure effective risk oversight, but remain part of the Risk Management function under the Group CRO, thus ensuring their independence as well as a consistent Group-wide approach to overseeing and controlling risks. They are supported in this by central risk teams that provide specialised risk expertise and oversight.
The Group’s risk-taking is steered by Swiss Re’s Risk Appetite Framework, which consists of two interlinked components: risk appetite and risk tolerance. The risk appetite statement facilitates discussions about where and how Swiss Re should deploy its capital, liquidity and other resources under a risk/return view. The risk tolerance sets clear boundaries to risk-taking.
Swiss Re’s 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 SST and under Solvency II for our legal entities in the EEA.
Swiss Re continuously reviews and updates its internal model and parameters to reflect the Group’s experiences and changes in the risk environment and current best practice.
Swiss Re’s risk profile
In SST 2019, Swiss Re’s overall risk remains broadly stable at USD 19.7 billion (compared to USD 19.9 billion in SST 2018), as higher underwriting and credit risks are more than offset by a decrease in financial market risk.
Property and casualty risk increases due to growth in property business in 2018 and the 1 January 2019 renewals which leads to higher natural catastrophe and terrorism exposure. These effects are partly offset by lower costing and reserving risk.
Life and health risk increases due to business growth in Asian markets increasing critical illness and lethal pandemic exposure. Mortality trend risk also increases reflecting an update on external retrocession cashflow. The increase is further driven by the introduction of an improved health model.
Financial market risk decreases mainly driven by significantly lower credit spread risk and to a lesser extent by lower equity risk. The decrease in credit spread and equity risk is driven by adverse market developments during 2018.
Credit risk increases slightly since SST 2018 driven by business growth in credit and surety business.