Solvency

SRCS uses an internal risk model to determine the economic capital required to support the risks on SRCS’s books as well as to allocate risk-taking capacity to the different lines of business. The model also provides the basis for capital cost allocation in Swiss Re’s EVM framework, which is used for pricing, profitability evaluation and compensation decisions. In addition to these internal purposes, the model is used to determine regulatory capital requirements under economic solvency frameworks such as the SST and Solvency II.

In 2017, FINMA approved Swiss Re’s internal model and its components for use of SST reporting purposes under their revised model review process. In 2018, FINMA conducted a material review of Swiss Re’s credit risk model, which was approved for use of SST 2019, though it will require minor adjustments for later reporting periods.

Since SST 2018, two major model changes have been implemented and were approved by FINMA in October 2018:

• Financial market risks – The change in calibration approach had no impact on required capital when it was introduced. The prospective impact is contingent on financial markets developments.
• Critical illness, income protection and hospital cash risk – The introduction of the new health model resulted in an increase in required capital. This model change is irrelevant for Swiss Re Corporate Solutions Ltd given SRCS’s negligible exposure to L&H risk.

Solvency

SRCS profitability in 2018 was impacted by underwriting performance, driven by an increase in severity and frequency of large man-made losses as well as unfavourable prior-year developments. In line with developments during 2018, the SST ratio of SRCS decreases by 23 points to 137%.

Based on current SST rules introduced in 2017, the ratio is calculated as SST risk-bearing capital (SST RBC) minus the market value margin (MVM), divided by SST target capital (TC) minus the MVM.

Solvency overview

Figure 3

SST risk-bearing capital

The SST RBC is derived from the SST net asset value (NAV), which represents the difference between the market-consistent value of assets and liabilities, according to the valuation methodology prescribed under SST. For this purpose, the SST NAV is adjusted for the items shown in the table below.

The decrease in SST NAV reflects both negative underwriting contribution and negative investment contribution as well as a dividend paid in 2018.

Drivers for the change are the following:

• The underwriting contribution reflects the impact from natural-catastrophe events and the high severity and frequency of large man-made losses as well as reserve strengthening on the North America Excess and Surplus casualty book.
• The investment contribution reflects spread widening on USD credit investments as well as reduced performance from equity investments.

Deductions mainly reflect projected dividends to the Group (to be paid in 2019) as well as deferred taxes on real estate. These items are lower compared to SST 2018 as no dividend is planned for 2019. As a result, the SST RBC increases by USD 51 million.

Supplementary capital is recognised as risk-bearing under SST. The increase in SST supplementary capital of USD 292 million reflects a new internal loan classified as supplementary capital.

A description of the change in MVM, which represents the capital costs for the run-off period, is provided together with the SST target capital (TC) comments below.

SST target capital

In order to derive SST TC, total risk is adjusted for the line item "Other impacts" as shown in the table below.

The SST TC of SRCS decreases slightly by USD 35 million, driven primarily by a decrease in total risk (see Risk profile for details).

Other impacts mainly reflect run-off capital costs (MVM), 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.

MVM increases slightly driven by inflation and generic liability, and offset partially by the weakening of major currencies against the US dollar.