Risk profile

Swiss Re is exposed to insurance and financial risks that are calculated in its internal risk model, as well as other risks that are not explicitly part of the economic capital requirement but are actively monitored and controlled due to their significance for Swiss Re. These include operational, liquidity, model, valuation, regulatory, political, strategic and sustainability risks.

Property and casualty insurance risk is mainly driven by natural catastrophe risks, such as Atlantic hurricanes, as well as underlying risks inherent in the business Swiss Re underwrites, in particular costing and reserving as well as non-life claims inflation risks. The main components of life and health insurance risks are lethal pandemic, mortality trend, lapse and critical illness risks. The Group’s financial risk derives from financial market risks such as credit spread and equity risk, as well as from credit risk.

Total risk

Total risk is based on 99% tail VaR and represents the average unexpected loss that occurs with an estimated frequency of less than once in 100 years over a one-year time horizon.

In SST 2018, total risk increases by USD 220 million to USD 19.9 billion, primarily driven by higher underwriting risks. This increase is partly offset by lower financial market and credit risk:

• The increase in property and casualty risk is to a large extent due to the strengthening of major currencies against the US dollar and higher property reserves following the natural catastrophe events in the second half of 2017. These effects are partly offset by a decrease in natural catastrophe exposures, particularly in the first half of 2017, as a result of active cycle management.
• Overall life and health risk increases driven mainly by the strengthening of major currencies against the US dollar as well as lower Canadian dollar, US dollar and British pound interest rates for longer maturities. In addition, higher lethal pandemic and critical illness exposures contribute to the increase.
• Financial market risk decreases mainly driven by credit spread risk. Credit spread risk decreases significantly over the period reflecting mainly the minority investment of MS&AD in ReAssure and, to a lesser extent, a simplified aggregation methodology for bond portfolios and lower risk factor volatilities. The decrease is partly offset by the strengthening of the British pound and additional government bond and credit investments.
• Credit risk decreases, mainly due to lower exposure as a result of the minority investment of MS&AD in ReAssure as well as the implementation of counterparty default hedges.

Operational risk

Swiss Re uses the Group-wide risk matrix methodology and Swiss Re’s Global Risk Register to capture operational risks which exceed or approach the entity´s risk tolerance limit. Adherence to risk tolerance is monitored and reported at least on a quarterly basis.

The Group has appropriate processes and procedures in place in order to identify and implement mitigation strategies, closely monitor their developments and, if required, act timely upon changes to these risks.

Other significant risks

For details on other significant risks, including liquidity, model, valuation, regulatory, political, strategic and sustainability risks, see the Group’s 2017 Financial Report sections on Liquidity management on pages 73 and 74, Swiss Re’s risk landscape on pages 82 and 83, and Management of other significant risks on pages 88–91.

Risk concentration

Swiss Re uses 99% tail VaR to measure its risk concentrations. Additionally, risk concentrations are also measured via value at risk calculations for major natural catastrophe scenarios with a 200-year return period and stress calculations for credit default, as well as sensitivities to key financial market parameters.

The tables below provide details on potential annualised losses from insurance peak scenarios with a return period of 200 years as well as the annualised potential loss from a credit default event. The impacts of the most severe financial risk sensitivities are shown in terms of impact on the SST ratio.

In SST 2018, the largest natural catastrophe exposure for the Group derives from the Atlantic hurricane scenario with a USD 4.5 billion loss. Lethal pandemic and credit default losses are estimated to be at USD 2.8 billion and USD 2.2 billion, respectively.

Among the financial market sensitivities shown below, the Group is most sensitive to a 50-basis point decrease in interest rates, leading to an estimated decrease in the SST ratio of 10 percentage points.

Risk mitigation

Swiss Re manages and controls its risks through an extended limit framework. The Group employs internal retrocession and funding agreements to efficiently manage capital across Swiss Re and ensure that risk-taking in individual legal entities is well diversified. Insurance risks are also mitigated through external retrocession, insurance risk swaps or transferring risk to capital markets. For financial risks, Swiss Re uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risk arising from investments and insurance liabilities.