Solvency

SRLC Re uses an internal risk model to determine the economic capital required to support the risks on SRLC Re’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.

Solvency

In SST 2019, the SST ratio of SRLC Re decreases to 182%, 20 points lower than in SST 2018. The main driver for the lower ratio is a deduction for the projected dividend to be paid in 2019 to the Group.

SRLC Re provides Life Capital open-book businesses with capital support for their new business; a planned expansion of this role in 2019 will be reflected in the SST 2020 calculation.

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 4

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 increase in SST NAV is mostly explained by:

• Positive capital movements reflect capital contributions to SRLC Re mainly to fund the growth in the open-book businesses and the recapture of retrocessions previously in place with SRZ, partly offset by foreign exchange losses due to the weakening of the euro and the Canadian dollar against the US dollar.
• The underwriting contribution to the SST NAV is negative, mainly driven by the inclusion of expenses in new subsidiaries, partly offset by favourable assumption updates on the closed-book business.
• The investment contribution to the SST NAV is negative, mainly driven by spread widening on US dollar credit investments.

Deductions reflect projected internal dividends to be paid in 2019. No dividend projection was included in SST 2018.

SRLC Re has no 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.

SST TC increases by USD 23 million to USD 672 million over 2018, reflecting an increase 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 by USD 19 million compared to 2018. The increase is primarily driven by implementation of a new health model as well as growth in the open-book business.