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 (see Swiss Re’s risk landscape, 2018 Financial Report, page 88).

Property and casualty insurance risk is mainly driven by underlying risks inherent in the business Swiss Re underwrites, in particular costing and reserving and non-life claims inflation, as well as Atlantic hurricane risk. The main drivers of life and health insurance risk are lethal pandemic, mortality trend, lapse and critical illness risk.

The Group’s financial risk derives from financial market risk as well as from credit risk. Key drivers of financial market risk are credit spread and equity risk. Credit risk is mainly driven by default risk of capital market products and credit and surety business.

Total risk

Total risk is based on 99% tail value at risk (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 2019, total risk remains broadly stable, as higher underwriting and credit risks are more than offset by a decrease in financial market risk. The weakening of major currencies against the US dollar also lowers this effect.

• The increase in property and casualty risk is driven by growth in property business, which increases both natural-catastrophe and terrorism exposure. Costing and reserving risk decreases, reflecting claims payment and reserve releases related to the 2017 natural catastrophes, partly offset by reserve increases for the 2018 large losses.
• Overall life and health risk increases due to business growth in Asian markets increasing critical illness and lethal pandemic exposure. Mortality trend risk also increases, reflecting an update on external retrocession cash flow. The increase is further driven by the introduction of an improved health model, which assumes higher dependencies between different health products and mortality trend risk.
• Financial market risk decreases mainly driven by significantly lower credit spread risk and to a lesser extent by lower equity risk. The decrease in credit spread and equity risk is driven by adverse market developments during 2018. The increased minority investment of MS&AD into ReAssure leads to a further reduction, in particular for credit spread risk.
• Credit risk increases slightly since SST 2018 driven by business growth in credit and surety business.

Operational risk

Swiss Re 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 Swiss Re 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

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 2019, the largest natural-catastrophe exposure for the Swiss Re Group derives from the Atlantic hurricane scenario with a USD 5.9 billion loss. Lethal pandemic and credit default losses are estimated to be at USD 2.8 billion and USD 2.3 billion, respectively.

Among financial market sensitivities shown below, the Group is most sensitive to a 50-basis-point (bps) decrease in interest rates, leading to an estimated decrease in the SST ratio of 12 percentage points (pp).

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 in the form of insurance-linked securities. 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.