Methodology and valuation

Introduction

The SST is the solvency regime applicable to re/insurance groups and entities and groups domiciled in Switzerland. The key principles of the SST are defined in the Insurance Supervision Ordinance (ISO) and in FINMA Circular 2017/3 SST.

The Group and its Swiss-regulated entities submit their SST report to FINMA. The published SST ratio is subject to FINMA’s review and approval. Swiss Re applies an internal model to calculate the SST ratio, which is also subject to FINMA’s approval.

The calculation of the SST ratio includes forward-looking elements. For factors that could affect the SST ratio, see Note on risk factors and Cautionary note on forward-looking statements in the appendix of this Report.

Key principles

The SST is a market-consistent and risk-based approach to determine available and required capital. An entity is solvent under SST if the available capital (the SST risk-bearing capital – RBC) is higher than the required capital (the SST target capital – TC).

The SST ratio determines the solvency position of an entity:

SST risk-bearing capital – market value margin
SST target capital – market value margin

The market value margin (ie the run-off capital costs) is a reserve for capital costs included in the SST TC. FINMA Circular 2017/3 SST requires that the market value margin is subtracted from the SST RBC and the SST TC, aligning the definition of the SST ratio more closely with Solvency II.

SST risk-bearing capital

The SST RBC is the amount of capital that is available to protect the policyholders of an entity in case of a large and unexpected adverse event.

The SST RBC is derived as follows:

  SST net asset value
– Deductions
+ Supplementary capital   
= SST risk-bearing capital

The SST net asset value is the value of an entity’s assets minus the value of its liabilities. Investments are determined using mark-to-market valuations. Re/insurance business assets and liabilities are derived using best estimate cash flow projections and risk-free discounting. Own debt not qualified as SST supplementary capital is valued using risk free discounting, whereas debt qualified as supplementary capital is fair valued. Other assets and liabilities are valued based on market-consistent valuations or using US GAAP valuations where appropriate. Deferred tax assets and liabilities are not valued under SST. The value of a participation is based on its SST net asset value including the market value margin.

The deductions from SST net asset value consist of dividends for the upcoming one-year period and deferred tax on real estate. No deductions are made for own shares and intangible assets, as these items are not valued in Swiss Re’s SST balance sheet. 

The supplementary capital consists of additional risk absorbing capital instruments, such as hybrid debt. The eligibility of debt instruments as supplementary capital is defined in the ISO and subject to FINMA’s approval.

SST target capital

The SST TC represents the capital required to cover the risks assumed by the company. It is based on the company’s total risk. In order to derive SST TC, the total risk is adjusted for other items summarised under other impacts.

  • An entity’s total risk is measured in terms of 99% tail VaR, ie the average unexpected loss at entity level that occurs with a frequency of less than once in 100 years over a one-year time horizon. All losses are a combination of insurance, financial market and credit losses and accumulation as well as diversification between individual risks is taken into account.
  • Other impacts include the minimum cost of holding capital after the one-year SST period until the end of a potential run-off period (market value margin), the impact from business development over the forecasting period, as well as requirements from FINMA that are not included in total risk as they are not consistent with Swiss Re’s own risk view.

SST balance sheet

This report includes a comparison of the SST balance sheet with audited financial statements. The consolidated financial statements of the Group are prepared using US GAAP. The statutory financial statements of Swiss Reinsurance Company Ltd, Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Reinsurance Ltd are based on Swiss law.

Valuation and scope differences with audited financial statements

The main scope and valuation differences are summarised in the following table:

 

SST

US GAAP

Statutory

1

For the purpose of the balance sheet comparison, SST may recognise subordinated debt and convertibles as supplementary capital for solvency assessment upon FINMA approval.

Actuarial assumptions

Best estimate

Non-life business: Liabilities for unpaid claims are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims. The unexpired portion of coverage is recognised as unearned premiums. Premiums are earned over the contract period in proportion to the insurance coverage provided.
Life and health business: For traditional long duration contracts, assumptions are set and locked in when the contract is issued or purchased. Assumptions are based on projected past experience. Liabilities recognised include a provision for adverse deviation (PAD).

Non-life business: Reinsurance contracts are accrued when insured events occur and are based on the estimated ultimate cost of settling the claims; Unearned premium reserves are calculated based on a “pro-rata” share of the estimated premium written, taking into account seasonality of risk when necessary; allowance for equalisation reserves
Life and health business: Best estimate with additional provisions for possible adverse deviations (PAD)

Liability cash-flows

Discounted using risk-free rates; market-consistent valuation of options and guarantees

Non-life business: Cash flows from prospective insurance and reinsurance contracts are usually not discounted.
Life and health business: Cash flows for traditional products are generally discounted at yields of assets backing the liabilities, with yields locked in at inception. Options and guarantees embedded in insurance contracts are only valued on a market-consistent basis when certain criteria are met (eg some features embedded in variable annuity contracts have to be accounted for as derivatives and valued stochastically).

Non-life business: generally no discounting
Life and health business: Generally discounted at historical yields of assets backing liabilities, with a PAD applied; generally no market-consistent valuation of embedded options and guarantees; for some derivative instruments (eg variable annuities) a full stochastic valuation is carried out

Capital generation from new business

Recognised upfront for all business

Generally, recognition of profit is deferred over time, with the approach dependent on contract classification (eg through earned premiums for short duration contracts and the net premiums approach for traditional long duration contracts).

Deferred over time for positive expectation (unearned premium reserve), immediately for negative expectation

Explicit margin for risk

MVM is part of SST TC. Valuation of subsidiaries on the balance sheet include MVM

No

No

Investment assets

Market values

Mostly at fair value, with some exceptions such as investment real estate and loans

Fixed income securities and short-term investment at amortised value, shares in investment funds at cost or lower market value, loans at nominal value

Goodwill and intangibles

Not recognised

Goodwill is recognised upon acquisition of a business and is subject to impairment testing. Intangible assets with a definite useful life are subject to amortization and impairment testing

Normally no goodwill recognition; intangibles and potential goodwill amortised/depreciated on a straight line basis

Senior debt, subordinated debt and convertible instruments

Valuation at fair value excluding own credit risk, except for supplementary capital instruments which are valued at fair value with no adjustment1

Debt is generally measured at amortised cost under the effective interest method; some capital instruments with contingent conversion features into shares of the issuer are classified as equity.

Generally valued at redemption value; all debt positions recognised as liabilities

Deferred taxes

No

Yes

No

Contract boundaries

Contracts incepted until 31 December 2017 as well as business shifts as of 1 January 2018

Contracts incepted until 31 December 2017

Contracts incepted until 31 December 2017

Minority interest

SST recognises minority interests in the proportional consolidation of assets and liabilities

Full consolidation is required if an entity exercises control over another entity. A non-controlling interest is reported as part of equity of the consolidated group and recorded separately from the parent’s interests.

No minority interests on stand-alone financial statement.

Sub-consolidation principles for solo view

Some entities are sub-consolidated for SST reporting

Not applicable

No sub-consolidation applied for statutory reporting

Comparison with audited financial statements

The balance sheet comparison included in this Report is provided on an aggregated basis, which is explained in the following table (empty cells denote items that are not reflected in the respective view):

Account for comparison

SST accounts (as published)

US GAAP accounts (as published)

Statutory accounts (as published)

2

For the comparison with SST, US GAAP loans and mortgages are disclosed separately in this report.

3

Excluding unit-linked life insurance

4

Excluding unit-linked life insurance

5

Before and after retrocession for direct insurance and active reinsurance

6

Policyholder account balances also includes some non-linked, non-participating universal life type contracts

 

 

 

 

Assets

 

 

 

Real estate
  • Real estate
  • Investment real estate

 

Investments in subsidiaries and affiliated companies
  • Investments in subsidiaries and affiliated companies

 
  • Investments in subsidiaries and affiliated companies

Fixed income securities
  • Fixed income securities
  • Available-for-sale, at fair value
  • Trading
  • Fixed income securities

Loans
  • Loans
  • Policy loans, mortgages and other loans2
  • Loans

Mortgages
  • Mortgages
  • Mortgages

Equity securities
  • Equity securities
  • Available-for-sale, at fair value
  • Trading
  • Equity securities

Other investments
  • Shares in investment funds
  • Alternative investments
  • Other investments
  • Short-term investments, at fair value
  • Other invested assets
  • Shares in investment funds
  • Short-term investments
  • Alternative investments

Investments for unit-linked and with-profit business
  • Investments for unit-linked and with-profit business
  • Investments for unit-linked and with-profit business

 

Cash and cash equivalent
  • Cash and cash equivalents
  • Cash and cash equivalents
  • Cash and cash equivalents

Funds held by ceding companies and other receivables from reinsurance
  • Funds held by ceding companies and other receivables from reinsurance
  • Premiums and other receivables
  • Funds held by ceding companies
  • Funds held by ceding companies
  • Premiums and other receivables from reinsurance

Other assets
  • Derivative financial instruments assets
  • Other receivables
  • Other assets
  • Accrued investment income
  • Reinsurance recoverable on unpaid claims and policy benefits
  • Deferred acquisition costs
  • Acquired present value of future profits
  • Goodwill
  • Income taxes recoverable
  • Deferred tax assets
  • Other assets
  • Assets in derivative financial instruments
  • Reinsurance recoverable from unpaid claims
  • Reinsurance recoverable from liabilities life and health
  • Reinsurance recoverable from unearned premiums
  • Reinsurance recoverable from provision for profit commissions
  • Tangible assets
  • Deferred acquisition costs
  • Intangible assets
  • Other receivables
  • Other assets
  • Accrued income

 

 

 

 

Liabilities

 

 

 

Re/insurance liabilities
  • Total best estimate value of insurance liabilities before retrocessions3
  • Total retrocessions4
  • Unpaid claims and claim adjustment expenses
  • Liabilities for life and health policy benefits
  • Unearned premiums
  • Unpaid claims
  • Liabilities for life and health policy benefits
  • Unearned premiums
  • Provisions for profit commissions
  • Equalisation provision

Unit-linked and with profit liabilities
  • Unit-linked life insurance5
  • Policyholder account balances6

 

Debt
  • Debt
  • Short-term debt
  • Long-term debt
  • Debt
  • Subordinated liabilities

Funds held under reinsurance treaties
  • Funds held under reinsurance treaties
  • Funds held under reinsurance treaties
  • Funds held under reinsurance treaties

Other liabilities
  • Non-technical provisions
  • Derivative financial instruments liabilities
  • Reinsurance balances payable
  • Other liabilities
  • Reinsurance balances payable
  • Income taxes payable
  • Deferred and other non-current tax liabilities
  • Accrued expenses and other liabilities
  • Tax provisions
  • Provision for currency fluctuation
  • Other provisions
  • Liabilities from derivative financial instruments
  • Reinsurance balances payable
  • Other liabilities
  • Accrued expenses

Drivers of change in SST net asset value

The change in SST net asset value presented in this Report is attributed to the following drivers:

  • Underwriting contribution: It consists of new business impacts based on best estimate cash flow projections and risk-free discounting, and impacts on in-force business from experience variances, assumption changes and reserve releases.
  • Investment contribution: It is derived from mark-to-market return on investments less the minimum risk benchmark return. The latter is the return on the theoretical investment portfolio that would minimise the financial market risk exposure of the entity.
  • Market value margin of subsidiaries
  • Dividend paid
  • Other contributions such as foreign exchange impacts, cost of debt and current taxes

The underwriting, investment and other contributions include the impact of subsidiaries.