Risk profile

SRCS is exposed to insurance and financial risks that are calculated in Swiss Re’s 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 the entity. These include operational, liquidity, model, valuation, regulatory, political, strategic and sustainability risks (see Swiss Re’s risk landscape, 2018 Financial Report, page 88).

The table below shows the risk categories calculated in Swiss Re’s internal risk model. On the insurance risk, SRCS is exposed to property and casualty risk, which is mainly driven by costing and reserving, generic liability, non-life claims inflation, D&O & auditors’ PI and Atlantic hurricane risk.

The financial risk of SRCS derives from financial market and credit risk. Financial market risk is mainly related to credit spread, commodity and equity risk. Credit risk is driven by credit and surety underwriting business and credit risk on capital market products.

Total risk

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

In SST 2019, total risk decreases by USD 31 million to USD 2.2 billion, due to lower financial market risk partially offset by higher credit risk:

• Property and casualty risk remains stable. Costing and reserving risk decreases mainly due to lower reserve volatility experience, offset by the growth in risks related to natural-catastrophe and man-made threat scenarios.
• The decrease in financial market risk results mainly from de-risking on equity and lower exposures to commodity underwriting risk.
• Credit risk increases mainly driven by growth in credit and surety underwriting exposures.

Operational risk

SRCS uses a Group-wide risk matrix methodology and Swiss Re’s Global Risk Register to capture operational risks. The matrix in particular focuses on risks exceeding risk tolerance as they require management actions. Adherence to risk tolerance is monitored and reported at least on a quarterly basis. The overall control environment within SRCS remains adequate.

While Swiss Re’s security programme is considered adequate for addressing current cyber threats, new detective and responsive security controls are required in order to strengthen preparedness for potential future threats. Several initiatives are underway to strengthen cyber security controls and return the risk below tolerance.

Other significant risks

For details on other significant risks, including liquidity, model, valuation, regulatory, political, strategic and sustainability risks, see the Group’s 2018 Financial Report sections on Liquidity management on page 80, Swiss Re’s risk landscape on pages 88 and 89, and Management of other significant risks on pages 94–97.

Risk concentration

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

SRCS assesses potential annualised losses from insurance peak scenarios (Atlantic hurricane, Californian earthquake, European windstorm, Japanese earthquake) with a return period of 200 years as well as the annualised potential loss from a credit default event. The impacts of financial risk sensitivities (interest rates +/– 50 bps, credit spreads +/– 50 bps, equity values +/– 25%, real estate values +/– 25%) are assessed in terms of impact on the SST ratio.

In SST 2019, the largest potential annualised loss from an insurance peak scenario or a credit default event stems from the credit default scenario.

Among financial market sensitivities, SRCS’s SST ratio is most sensitive to a 50-bps increase in credit spreads.

Risk mitigation

SRCS manages and controls its risks through an extended limit framework. Insurance risks are also mitigated through retrocession, insurance risk swaps or transferring risk to capital markets. SRCS uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risk arising from investments and insurance liabilities.