Risk profile

SRZ 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 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).

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

The financial risk of SRZ derives from both financial market and 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 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.

Total risk increased by USD 878 million to USD 15.6 billion, driven by both higher insurance risks and higher financial market and credit risk. This is partly offset by a reduction in risk due to the weakening of major currencies against the US dollar.

• The increase in property and casualty risk is driven by the growth in property business, which increases both natural-catastrophe and terrorism exposure. Costing and reserving risk decreases, reflecting claims payment and reserve releases.
• The increase in life and health risk is mainly driven by higher critical illness and mortality trend risks mainly due to business growth and the introduction of the new health model. Mortality trend risk also increases reflecting an update on external retrocession cash flow.
• Financial market risk increases mainly due to higher equity and real estate risk. The higher equity risk is driven by repositioning of equity derivatives along with additional investments more than offsetting market value losses. Real estate risk increases following additional investments.
• Credit risk increases due to higher credit and surety risk reflecting new business as well as renewals of in-force business.

Operational risk

SRZ 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 SRZ 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

SRZ 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.

SRZ assesses potential annualised losses from insurance peak scenarios (Atlantic hurricane, Californian earthquake, European windstorm, Japanese earthquake, lethal pandemic) 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.

SRZ’s largest potential annualised loss from an insurance peak scenario or a credit default event in SST 2019 derives from the Atlantic hurricane scenario.

Among the financial market sensitivities mentioned above, SRZ’s SST ratio is most sensitive to a 50-bps decrease in interest rates.

Risk mitigation

SRZ 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. SRZ uses financial market derivative instruments as well as financial market securities to hedge financial market and credit risk arising from investments and insurance liabilities.