Solvency

SRZ uses an internal risk model to determine the economic capital required to support the risks on SRZ’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, SRZ’s solvency remains at a strong level of 218%. Despite a challenging year with large losses SRZ was able to generate a positive underwriting contribution. This is also reflected in a relative increase in insurance risk and a higher market value margin. The dividend payment to the Group, the redemption of a subordinated instrument and depressed financial markets resulting in significantly lower contribution from investments ultimately lead to a decrease in the overall SST ratio.

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 2

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 the dividend paid in 2018, negative foreign exchange movements and current year taxes, partly offset by positive underwriting and investment contributions.

Drivers for the underwriting contribution are the following:

• The Property & Casualty Reinsurance contribution to the SST NAV is mainly driven by a net favourable development in expected claims payout patterns and ultimate claims estimates. The positive impacts are partly offset by adverse large-loss experience from natural-catastrophe and man-made losses, including typhoons Jebi and Trami in Japan, hurricanes Florence and Michael and the California wildfires in the US.
• The Life & Health Reinsurance underwriting contribution is driven by transactional business in New Zealand and Japan and improved core business profitability in the US, partly offset by adverse experience, valuation and assumption updates mainly in the US and EMEA.

The investment contribution reflects positive risk-free investment return, partly offset by the impact of spread widening as well as losses from equities.

Unfavourable foreign exchange movements are mainly due to the weakening of the other major currencies against the US dollar.

Deductions mainly reflect projected dividends to the Group (to be paid in 2019) as well as deferred taxes on real estate. These items decrease by USD 259 million compared to SST 2018.

Supplementary capital is recognised as risk-bearing under SST. The decrease in SST supplementary capital of USD 591 million reflects the redemption of a subordinated instrument; this is partly offset by a new internal loan from the Group 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 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 is USD 1.2 billion higher at USD 15.8 billion, due to an increase in total risk (see Risk profile for details) and higher other impacts.

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.

The increase in MVM is mainly driven by actual and projected growth in Asian critical illness business and model improvements. These effects are partly offset by a depreciation of major currencies against the US dollar and slightly higher interest rates.