Methodology and valuation
Introduction
The SST is the solvency regime applicable to re/insurance entities and groups domiciled in Switzerland. The key principles of the SST are defined in the Insurance Supervision Ordinance (ISO) and in the FINMA circular 2017/03 on SST.
Swiss Re 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.
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) is higher than the required capital (the SST target capital).
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 target capital. FINMA circular 2017/03 on SST requires that the market value margin is subtracted from the SST risk-bearing capital and the SST target capital, aligning the definition of the SST ratio more closely with Solvency II.
SST risk-bearing capital
The SST risk-bearing capital 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 risk-bearing capital 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. All traded assets and liabilities are marked to market, based on quoted prices in active markets or observable inputs. Non-traded assets and liabilities are valued on a market-consistent basis. Insurance liabilities are valued on a market-consistent basis by replicating future best-estimate expected cash flows with liquid financial market instruments. As the majority of the insurance liabilities do not contain embedded financial market risks other than interest-rate risk, the market-consistent value of liabilities is determined by discounting estimated future cash flows using prevailing risk-free interest rates. If insurance liabilities include embedded options or guarantees (eg variable annuities or interest sensitive life business), they are valued on a market-consistent basis using stochastic models and other appropriate valuation techniques. 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 are valued based on market-consistent valuations or using US GAAP valuations where appropriate. Other liabilities mainly consists of securities sold under agreement to repurchase, securities sold short, payables for securities in transit and other creditors. Since other liabilities are not in the focus of re/insurance activities, as a simplification their valuation is aligned with US GAAP. Hence, securities sold short are valued based on market-consistent valuations, other creditors are valued based on the nominal, and lastly securities sold under agreement to repurchase and payables for securities in transit are valued based on amortised cost. 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 target capital 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 target capital, the total risk is adjusted for various items summarised under other impacts.
- An entity’s total risk is measured in terms of 99% shortfall, 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) as requested by the Swiss Solvency Test, 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.
Market value margin
The SST target capital includes the minimum cost of holding capital after the one-year SST period until the end of a potential run-off period. Known as the MVM at the end of the risk assessment period, this represents the amount required to compensate a third party for the capital costs associated with running-off the insurance and reinsurance portfolio following a shortfall event. For a solo legal entity, only business assumed on the own book (including intra-group transactions) is considered; however, the consolidated view of Swiss Re Group also takes into account the business assumed through all its subsidiaries.
The MVM is calculated using the 99% shortfall on projected insurance and reinsurance exposure from the end of the solvency assessment period onwards, discounted back to the beginning of the period with US dollar rates, as most of the long-tail business is written in that currency. The sum of the calculated present values is then multiplied by the 6% capital cost rate specified by FINMA.
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 in accordance with US GAAP. The statutory financial statements of Swiss Reinsurance Company Ltd, Swiss Re Corporate Solutions Ltd, Swiss Re Life Capital Reinsurance Ltd and Swiss Re International SE, Luxembourg, Zurich branch are based on Swiss law.
Valuation and scope differences with audited financial statements
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SST |
US GAAP |
Statutory |
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Actuarial assumptions |
Best estimate |
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 |
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 |
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Liability cash-flows |
Discounted using risk-free rates; market-consistent valuation of options and guarantees |
Non-life business: generally no discounting |
Non-life business: generally no discounting |
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Capital generation from new business |
Recognised upfront for all business |
Deferred over time (unearned premium reserve) |
Deferred over time for positive expectation (unearned premium reserve), immediately for negative expectation |
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Explicit margin for risk |
MVM is part of SST target capital. Valuation of subsidiaries on the balance sheet include MVM |
No |
No |
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Investment assets |
Market values |
Mostly market values, with some exceptions such as real estate and real estate for own use which are held at depreciated cost |
Fixed-income securities and short-term investment at amortised value, shares in investment funds at cost or lower market value, loans at nominal value |
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Goodwill and intangibles |
Not recognised |
Recognised, goodwill subject to impairment test, intangibles subject to amortisation |
Normally no goodwill recognition; intangibles and potential goodwill amortised/depreciated on a straight line basis |
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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 |
Generally valued at amortised cost; for convertible instruments classification depends on the instrument’s characteristics. It is either classified as debt at amortised cost or as equity |
Generally valued at redemption value; all debt positions recognised as liabilities |
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Deferred taxes |
No |
Yes |
No |
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Contract boundaries |
Contracts incepted until 31 December 2018 as well as business shifts as of 1 January 2019 |
Contracts incepted until 31 December 2018 |
Contracts incepted until 31 December 2018 |
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Minority interest |
SST recognises minority interests in the proportional consolidation of assets and liabilities |
Minority interest are recognised as part of the statement of shareholders’ equity |
No minority interests on standalone financial statement |
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Sub-consolidation principles for solo view |
Some entities are sub-consolidated for SST reporting |
Not applicable |
No sub-consolidation applied for statutory reporting |
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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):
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Account for comparison |
SST accounts (as published) |
US GAAP accounts (as published) |
Statutory accounts (as published) |
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Assets: |
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Real estate |
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Investments in subsidiaries and affiliated companies |
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Fixed-income securities |
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Loans |
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Mortgages |
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Equity securities |
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Other investments |
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Investments for unit-linked and with-profit business |
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Cash and cash equivalents |
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Funds held by ceding companies and other receivables from reinsurance |
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Other assets |
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Liabilities: |
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Reinsurance liabilities |
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Unit-linked and with profit liabilities |
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Debt |
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Funds held under reinsurance treaties |
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Other liabilities |
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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: 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: 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.
- Other contributions: consists particularly of other assets and liabilities and current taxes.
- Capital movements: consists of dividends paid and capital repatriation.
- Other, such as impact of foreign exchange movements.
The drivers of change in SST net asset value are prepared on a best-effort basis to support the analysis of the SST net asset value. The calculation of the SST net asset value is based on the EVM balance sheet and not the drivers identified above.