Risk and capital management
Swiss Re maintained its very strong capital position in 2020 despite the impact of COVID-19, while successfully deploying capital to attractive risk pools.
50 Swiss Re | Financial Report 2020 Contents
Overview 52 Financial strength and capital management 54 Liquidity management 60 Risk management 61 Risk assessment 67
Swiss Re | Financial Report 2020 51 Risk and capital management
Our resilient balance sheet protects our franchise and makes us a reliable partner for our clients.
The Group’s capital position remains very strong with a Group SST ratio of 215% as of 1 January 2021, compared with a target range of 200–250%. This is supported by our diversified business model and disciplined risk-taking.
Swiss Re’s overarching target is to maintain a very strong capital position that operates efficiently within constraints imposed by regulators and requirements from rating agencies, while giving the company maximum financial flexibility. Swiss Re’s capital allocation decisions are steered to make capital and liquidity fungible to the Group wherever possible, while complying with local regulations and client needs. Cash dividends paid by our Business Units to the Group’s parent holding company, Swiss Re Ltd, have amounted to USD 28.1 billion since 2013.
Based on the Group’s capital strength, the Board of Directors proposes a 2020 regular dividend of CHF 5.90 per share. In accordance with the Group’s capital management priorities, the Board of John R. Dacey Directors has not proposed a public share Group Chief Financial Officer buyback programme for 2021.
Liquidity Financial strength Our core insurance and reinsurance Despite significant loss events during 2020, operations generate liquidity primarily The strength of the Group’s capital position remains very through premium income. Our exposure to strong with a Group Swiss Solvency Test liquidity risk stems mainly from two sources: our business model (SST) ratio of 215% as of 1 January 2021, the need to cover potential extreme loss allows us to continue which is within Swiss Re’s 200–250% events and regulatory constraints that limit target Group capitalisation range. Rating the flow of funds within the Group. to offer an attractive agencies A.M. Best, Moody’s and dividend even in Standard & Poor’s (S&P) rated Swiss Re’s The amount of liquidity held is largely financial strength “superior”, “excellent” determined by internal liquidity stress tests, these unprecedented and “very strong”, respectively. This capital which estimate the potential funding times. strength enables Swiss Re to support its requirements stemming from extreme clients while continuing to return capital loss events. Based on these internal to shareholders. liquidity stress tests, we estimate that Swiss Reinsurance Company Ltd, the most important legal entity of the Group from a liquidity perspective, currently holds significant surplus liquidity.
52 Swiss Re | Financial Report 2020 Swiss Re also provides FINMA, its principal regulator, with a yearly report on its liquidity position, in accordance with FINMA Circular 13/5, “Liquidity — Insurers”.
Risk Management Group Risk Management is key to Patrick Raaflaub the controlled risk-taking that underpins Group Chief Risk Officer Swiss Re’s financial strength. Risk Management is mandated to ensure that the Group and its legal entities have the basis for regulatory reporting under the necessary expertise, frameworks and the SST and under Solvency II for our legal infrastructure to support good risk-taking. entities in the European Economic Area (EEA) Swiss Re’s resilience In addition, it monitors and ensures and the United Kingdom. adherence to applicable frameworks to the impact of and also performs reserving and Swiss Re continuously reviews and updates COVID-19 reflects our reporting activities. its internal model and parameters to reflect the Group’s experiences and changes in the financial strength and Risk Management is embedded throughout risk environment and current best practice. disciplined approach Swiss Re’s business. The Group has dedicated Chief Risk Officers and risk Swiss Re’s risk profile to risk-taking. teams for all major legal entities and In SST 2021, Swiss Re’s overall risk regions. These are closely aligned to increases to USD 22.4 billion (compared to Swiss Re’s business structure, in order to USD 21.3 billion in SST 2020), driven by ensure effective risk oversight, but remain higher insurance risk, offset partly by lower part of the Risk Management function financial market and credit risk. The higher under the Group CRO, thus ensuring their weight of insurance risk leads to increased independence as well as a consistent diversification at risk category level. Group-wide approach to overseeing and controlling risks. They are supported in The increase in property and casualty risk is this by central risk teams that provide mainly driven by a rise in non-life claims specialised risk expertise and oversight. inflation risk reflecting the heightened probability of extreme inflation outcomes, The Group’s risk-taking is steered by as well as an increase in costing and Swiss Re’s Risk Appetite Framework, which reserving risk mainly due to COVID-19- consists of two interlinked components: related reserves. risk appetite and risk tolerance. The risk appetite statement facilitates discussions Higher life and health risk mainly reflects about where and how Swiss Re should the business growth in Asia and the US, deploy its capital, liquidity and other resulting in higher exposure to mortality resources under a risk/return view. The trend, lethal pandemic and critical risk tolerance sets clear boundaries illness risk. to risk-taking. The decrease in financial market risk and Swiss Re’s proprietary integrated risk model credit risk is driven mainly by the sale provides a meaningful assessment of the of ReAssure Group Plc and an increase risks to which the Group is exposed and in credit hedges. represents an important tool for managing our business. It determines the capital requirements for internal purposes and forms
Swiss Re | Financial Report 2020 53 Risk and capital management
Financial strength and capital management
Swiss Re’s capital position remains very strong, demonstrating resilience to large losses and market volatility.
Solid capitalisation enabling of Directors has also defined an SST market opportunities capitalisation target range of 200–250% Swiss Re’s policy of ensuring superior for the Swiss Re Group. capitalisation at all times has meant that even after four consecutive years The below subsections describe Swiss Re’s with large insurance losses, our very strong capitalisation according to the SST and capital position and high financial the financial strength ratings. flexibility enabled us to respond to market opportunities and therefore create Swiss Solvency Test (SST) sustainable long-term shareholder value Swiss Re is supervised by FINMA at the by maintaining the regular dividend. Group level as well as for its regulated legal entities domiciled in Switzerland. Swiss Re’s capital management priorities FINMA supervision comprises minimum aim to ensure the ability to continue solvency requirements, along with a operations following an extremely adverse wide range of qualitative assessments year of losses from insurance and/or and governance standards. financial market events. Swiss Re’s Board
1 Ensure superior Grow the regular 2 capitalisation at all times dividend with long-term and maximise earnings, and at a financial flexibility minimum maintain it Capital management priorities 4 Deploy capital for 3 Repatriate further business growth where excess capital it meets our strategy to shareholders and profitability targets
54 Swiss Re | Financial Report 2020 SST 2021 The SST ratio is calculated as SST risk- compared to SST 2020 is mainly driven SST RBC – MVM 41 504 bearing capital (SST RBC) minus market by COVID-19-related claims and reserves, value margin (MVM), divided by SST target the significant decline in interest rates SST TC – MVM 19 308 capital (SST TC) minus MVM. and higher financial market volatilities. 215% These effects are partly offset by the sale The Group SST 2021 report will be filed of ReAssure Group Plc, a positive SST 2020 with FINMA in April 2021. Accordingly, investment and underwriting performance SST RBC – MVM 41 873 the information presented below is based (excluding COVID-19) and higher SST TC – MVM 18 021 on currently available information and supplementary capital. may differ from the final Group SST 2021 232% figures. The Group SST 2021 ratio lies within the new target range of 200–250%, which Despite a challenging year, Swiss Re Group replaces the fixed Group SST target to SST 2021 maintains a very strong solvency level of better align with market practice. SST RTK – MVM 41 504 215% in SST 2021. The decrease of 17pp SST ZK – MVM 19 308
% 215% Swiss Re Group SST Ratio
SST215 2020 USD millions SST 2020 SST 2021 Change SST ratio SST risk-bearing capital – market value margin 41 873 41 5 0 4 –370 (2021)SST RTK – MVM 41 873 SST target capital – market value margin 18 0 21 19 3 0 8 1 287 SST ZK – MVM 18 021 SST ratio 232% 215% –17pp 232%
SST risk-bearing capital (SST RBC) activities, foreign exchange movements, The SST RBC is derived from the SST net and capital management actions (such asset value (SST NAV), which represents as dividend payments and share buyback the difference between the market programmes). consistent value of assets and best estimate of liabilities, according to the valuation The decrease in SST NAV to USD 48.8 billion methodology prescribed under SST. For is mainly driven by underwriting contribution, this purpose, the SST NAV is adjusted for dividends paid and share buyback the items in the table below. programmes, partly offset by positive investment contribution and foreign Changes to the SST NAV mainly include exchange movements. economic capital generation or depletion due to underwriting and investment
SST risk-bearing capital USD millions SST 2020 SST 2021 Change SST net asset value 4 9 231 48 804 –427 Deductions –3 174 –2 433 741 SST core capital 46 057 46 370 314 Supplementary capital 5 239 6 914 1 675 SST risk-bearing capital 51 29 5 53 284 1 989 Market value margin 9 422 11 780 2 359 SST risk-bearing capital – market value margin 41 873 41 504 –370
Swiss Re | Financial Report 2020 55 Risk and capital management Financial strength and capital management
The overall contribution from underwriting Dividend payments and the completion of Since SST 2020, two major model changes activities is negative, mainly reflecting the last tranche of the 2019 share buyback have been implemented; both changes underwriting contributions from Property & programme resulted in a decline in the were approved by FINMA in October 2020: Casualty Reinsurance, Corporate Solutions SST NAV of USD 2.0 billion. No share • Market value margin – To improve market and Life Capital, partly offset by positive buyback programmes have been launched consistency and more adequately reflect underwriting contribution from Life & Health after Q1 2020 following the BoD decision differences between interest rates of Reinsurance: of the post-AGM 2020 meeting. different currencies, two changes have • The Property & Casualty Reinsurance been made: discounting in original negative contribution is mainly driven Deductions mainly reflect projected currencies and using forward rates to by losses related to COVID-19, adverse dividends (to be paid in 2021 and subject discount to future years. These changes experience and assumption updates to AGM 2021 approval and subsequent reduce the MVM and increases the mainly in US liability business as well as BoD approval) as well as deferred taxes on Group’s SST ratio. by large natural catastrophe losses mainly real estate. No share buyback programmes in Australia and several man-made loss are included. • Lapse risk – The model has been further updates. This is partially compensated strengthened by including additional by natural catastrophe reserve releases Supplementary capital is recognised as dependencies and correlations, as well for typhoons Jebi and Hagibis, risk bearing under SST. The change in SST as anti-selective lapses for lapse trend. Hurricane Dorian and strong renewals supplementary capital of USD 1.7 billion These changes result in minor increases from property natural catastrophe mainly reflects the issuance of two new of lapse and mortality trend shortfall and and specialty. subordinated debt instruments. have no material impact on the Group’s total risk or market value margin. • The Life & Health Reinsurance positive A description of the change in market contribution reflects profitable value margin, which represents the capital The risk exposure basis for SST is a projection transactional business growth across all costs for the run-off period, is provided for the period from 1 January 2021 to regions, in particular in EMEA, mainly together with the SST target capital 31 December 2021 and is based due to large longevity transactions, as comments below. on the economic balance sheet as of well as life transactions in the Americas. 31 December 2020 and adjustments This is partly offset by losses related to SST target capital (SST TC) to reflect 1 January 2021 business shifts. COVID-19 mainly driven by higher Swiss Re uses an internal risk model to incurred and expected mortality claims determine the economic capital required to To derive SST TC, total risk is adjusted for the in the US and the UK as well as higher support the risks on the Group’s book, as line item Other impacts as shown below. disability claims mainly in Australia. well as to allocate risk-taking capacity to the different lines of business. The model also SST TC increases to USD 31.1 billion due to • The Corporate Solutions negative provides the basis for capital cost allocation an increase in the market value margin contribution mainly reflects losses related in Swiss Re’s EVM framework, which is (reflected under Other impacts) and higher to COVID-19. This is partly offset by used for pricing, profitability evaluation and total risk driven by increased insurance management actions taken to improve compensation decisions. In addition to risk (see Risk assessment p. 67 for details). profitability and by low large man-made these internal purposes, the model is used loss activity. to determine regulatory capital requirements Other impacts mainly reflect run-off capital under economic solvency frameworks costs (MVM) – which are deducted again • The Life Capital underwriting contribution such as SST and Solvency II. from target capital to calculate the ratio – to SST NAV is negative, driven by the as well as the impact from business loss on the sale of ReAssure Group Plc In 2017, FINMA approved Swiss Re’s development over the forecasting period to Phoenix Group Holdings Plc, expenses internal model and its components for SST and requirements from FINMA that are for open books, underperformance reporting purposes under their revised not included in total risk as they are not in elipsLife as well as unfavourable model review process. consistent with Swiss Re’s own risk view. persistency in the closed book US business. The increase in MVM is mainly driven by the impact of lower interest rates. The contribution from investment activities is positive, mainly driven by favourable interest rate impact on the net duration SST Target Capital position and strong real estate performance. USD millions SST 2020 SST 2021 Change Total risk 21 3 32 22 353 1 021 Positive foreign exchange movements are Other impacts 6 110 8 735 2 625 driven by the appreciation of major SST target capital 27 4 4 3 31 088 3 645 currencies against the US dollar. Market value margin 9 422 11 780 2 359 SST target capital – market value margin 18 0 21 19 308 1 287
56 Swiss Re | Financial Report 2020 External dividends to shareholders Business Unit structure and 21.7 Based on the Group’s very strong capital capital allocation Distribution to position and positive market outlook, Our peer-leading capital repatriation is shareholders the Board of Directors proposes a regular supported by strong dividend payments since 2013, dividend of CHF 5.90 per share for from our Business Units. The cash dividends in USD billions the 2020 financial year, maintaining the paid to Swiss Re Ltd since 2013 totalled dividend per share paid for the 2019 USD 28.1 billion, while the total amount financial year. of capital returned to shareholders in the same period is USD 21.7 billion.
The Group also reinvested in the business by redeploying capital into the Business Units. The majority of this capital was allocated to grow profitable business.
CapitalCapital returned toto shareholders shareholders since since 2013 2013
CashCapital dividends created bypaid each from business each business unit unit to SRL (USD(USD$bn) billions)
14.4 14.4 Reinsurance Reinsurance P&C P&C $USD bn bn USD$ bn bn 4.4 4.4 Reinsurance Reinsurance L&H L&H 28.128.1 21.721.7 1.8 1.8 Corporate Corporate Solutions Solutions totaltotal capital cash dividendscreated for distribution toto shareholdersshareholders22 5.7 5.7 Life CapitalLife Capital Swisspaid toRe Swiss Ltd1 Re Ltd1
1 Principal Investments has paid to the Group dividends of USD 1.7 billion between January 2013 and December 2020. 2 Reflects total external dividend and public share buyback programmes between January 2013 and December 2020.
Swiss Re | Financial Report 2020 57 Risk and capital management Financial strength and capital management
Rating agencies On 6 May 2020, Moody’s affirmed Rating agencies assign credit ratings to Swiss Re’s insurance financial strength the obligations of Swiss Re and its rated rating and outlook as “Aa3” stable. subsidiaries. The agencies evaluate Swiss Re The rating reflects Swiss Re’s excellent based on a set of criteria that include market position, extensive diversification an assessment of our capital adequacy, by line of business and geography, very governance and risk management. Each strong capital adequacy and good rating agency uses a different methodology reserve adequacy. for this assessment. On 17 July 2020, A.M. Best confirmed A.M. Best, Moody’s and S&P rate the Group Swiss Re financial strength Swiss Re’s financial strength based upon Rating of A+ (Superior) with stable outlook. interactive relationships. The insurance The rating reflects A.M. Best’s assessment financial strength ratings are shown of Swiss Re’s balance sheet strength as in the table below. “strongest”, strong operating performance, very favourable business profile and very On 25 November 2020, S&P affirmed the strong enterprise risk management. AA– financial strength of Swiss Re and its core subsidiaries. The outlook on the rating is “negative”. The rating reflects Swiss Re’s very strong capital adequacy, its excellent franchise and diversified product suite across non-life and life reinsurance.
Swiss Re’s financial strength ratings
As of 31 December 2020 Financial strength rating Outlook Last update Standard & Poor’s AA– Negative 25 November 2020 Moody’s Aa3 Stable 6 May 2020 A.M. Best A+ Stable 17 July 2020
58 Swiss Re | Financial Report 2020 Funding activities Finance (UK) Plc was substituted as the During 2020, Swiss Re took advantage of issuer of the EUR 750 million senior attractive market conditions to execute the notes due 2023 in place of Swiss Re following planned funding activities: Finance (Jersey) Ltd following a noteholder consent process. The notes • In May 2020, Swiss Re Finance (UK) Plc are guaranteed by Swiss Re Ltd. issued EUR 800 million of subordinated fixed rate reset step-up callable notes • In September 2020, Swiss Reinsurance with a coupon of 2.714%. The notes, Company Ltd exercised its option to early which are guaranteed on a subordinated redeem its CHF 175 million subordinated basis by Swiss Re Ltd, have a first call contingent write-off notes. date in June 2032 and a scheduled maturity in June 2052. • In December 2020, in connection with the announced reorganisation of • In June 2020, Swiss Re Finance (UK) Plc the legal entity structure of the Group, issued SGD 350 million of subordinated Swiss Reinsurance Company Ltd was fixed rate reset callable notes with a substituted as the issuer of the coupon of 3.125%. The notes, which are USD 500 million subordinated fixed guaranteed on a subordinated basis rate resettable callable loan notes with by Swiss Re Ltd, have a first call date a scheduled maturity in 2024 in place in July 2025 and a scheduled maturity of Swiss Re Corporate Solutions Ltd in July 2035. following a noteholder consent process.
In addition, Swiss Re also undertook As of 31 December 2020, the Group’s total the following activities in connection with leverage ratio was 24%. management of its funding platform: The USD 2.7 billion undrawn, off-balance • In April 2020, in connection with the sheet pre-fundedsubordinated debt pending sale (and deconsolidation) of the facilities, add further strength to the Group’s ReAssure Group Plc to Phoenix Group financial flexibility. Holdings Plc in July 2020, Swiss Re
Financial flexibility strengthened through reduced leverage USD billions USD bn Additional 37.7 USD 2.7bn 36.6 36.0 36.1 pre-funded 33.7 subordinated debt available on 28% demand. 26% 24% 24% 24%
6.7 6.6 5.0 5.2 4.4 4.6 4.1 4.1 4.0 4.1 3.5 3.1 3.2 1.9 1.0
2016 2017 2018 2019 2020 CoreLOC 1capital 4 Senior Seniordebt debt Total3 subordinatedTotal hybrid incl. incl. contingent contingent capital capital22 CoreLOC capital1 3 Total leverage ratio5 Total leverage ratio4
1 Utilised unsecured LOC and related instruments. 2 Funded subordinated debt and contingent capital instruments, excluding non-recourse positions. 3 Core capital of Swiss Re Group is defined as economic net worth (ENW). 4 Total on-balance sheet senior and subordinated debt and contingent capital, including utilised LOCs, divided by total capitalisation.
in Milliarden USD 37,7 36,6 36,0 36,1 33,7
28% 26% 24% 24% 24%
Swiss Re | Financial Report 2020 59
6,7 6,6 5,0 5,2 4,4 4,6 4,1 4,1 4,0 4,1 3,5 3,1 3,2 1,9 1,0
2016 2017 2018 2019 2020 Core capital4 Senior debt3 Total hybrid incl. contingent capital2 LOC1 Total leverage ratio5 Risk and capital management
Liquidity management
The active management of liquidity risks ensures the Group’s ability to satisfy its financial obligations.
As a re/insurance group, Swiss Re’s Liquidity risk management The primary liquidity stress test is based core business generates liquidity Swiss Re’s core liquidity policy is to retain on a one-year time horizon and a loss event primarily through premium income. access to sufficient liquidity in the form corresponding to 99% tail value at risk The Group’s exposure to liquidity risk of unencumbered liquid assets, cash and (see page 67). stems mainly from two sources: the pre-funded facilities, to meet potential need to cover potential extreme loss funding requirements arising from a range Swiss Re’s liquidity stress tests are reviewed events and regulatory constraints of possible stress events. To allow for regularly and their main assumptions that limit the flow of funds within regulatory restrictions on intra-Group are approved by the Group Executive the organisation. funding, liquidity is managed from a legal Committee. Swiss Re provides FINMA with entity perspective. The amount of liquidity a yearly report on its liquidity position, A range of liquidity policies and held is determined by internal liquidity in accordance with FINMA circular 13/5, measures are in place to manage these stress tests, which estimate the potential “Liquidity — Insurers.” risks, in particular to ensure that funding requirements stemming from • sufficient liquidity is held to meet funding extreme loss events. Liquidity position of requirements under current conditions Swiss Reinsurance Company Ltd (SRZ) as well as adverse circumstances; The funding requirements under From a liquidity perspective, SRZ is the • funding is charged and credited at an stress include: most important legal entity of the Group. appropriate market rate through • Cash and collateral outflows, as well The estimated total liquidity sources in SRZ Swiss Re’s internal transfer pricing; as potential capital and funding support available within one year, after haircuts and • diversified sources are used to meet the required by subsidiaries as a result net of short-term loans from Swiss Re Ltd Group’s residual funding needs; and of loss events and securities lending, amounted to • long-term liquidity needs are taken • Repayment or loss of all maturing USD 26.7 billion as of 31 December 2020, into account in the Group’s planning unsecured debt and credit facilities compared with USD 21.7 billion as of process and in the management of • Additional collateral requirements 31 December 2019. Based on the internal financial market risk. associated with a potential ratings liquidity stress tests described above, downgrade we estimate that SRZ holds surplus • Further contingent funding requirements liquidity after dividends to Swiss Re Ltd. related to asset downgrades • Other large committed payments, such In 2020, the amount of surplus liquidity as expenses, commissions and tax increased. This increase was largely due to changes to intra-Group retrocession The stress tests also assume that funding agreements, the decrease in interest rates, from assets is subject to conservative and changes in foreign exchange rates, haircuts, intra-Group funding is not available which more than offset the negative impact if subject to regulatory approval, no new associated with COVID-19 losses. unsecured funding is available and funding from new re/insurance business is reduced.
60 Swiss Re | Financial Report 2020 Risk management
Risk Management provides independent oversight and applies an integrated approach to managing current and emerging risks.
Embedded throughout the business, Taking and managing risk is central to Swiss Re applies a differentiated the Group Risk Management function Swiss Re’s business. All risk-related governance approach at the legal entity ensures an integrated approach to activities, regardless of the legal entity in level, depending on the materiality of managing current and emerging threats. which they are undertaken, are subject to individual entities. Major legal entities Risk Management plays a key role the Group’s risk management framework. within the Group that are designated as in business strategy and planning Consequently, the framework is applied so-called “Level I entities”, are subject to discussions, where Swiss Re’s at Group level and cascaded to all legal enhanced governance, which includes the risk appetite framework facilitates entity levels. following requirements: risk/return discussions and sets • Develop and maintain corporate and risk boundaries to Group-wide risk-taking. The risk management framework sets governance documentation that governs out how Swiss Re organises and applies the responsibilities of the legal entity its risk management practices to ensure Board, committees and management that all activities are conducted in line • Establish an Audit Committee as well with the principles and limits mandated as a Finance and Risk Committee to by the Group Risk Policy. support the legal entity Board in performing its oversight responsibility The framework comprises the following for risk and capital steering major elements: • Designate a Chief Risk Officer and • Risk governance documentation, Chief Financial Officer including Group Risk Policy • Key risk management principles • Fundamental roles for delegated risk-taking • Risk culture and behaviour • Organisation of risk management, including responsibilities at Board and executive level • Risk control framework • Risk appetite framework, including limits
Swiss Re | Financial Report 2020 61 Risk and capital management Risk management
Risk governance documentation Key risk management principles Fundamental roles for delegated Swiss Re’s risk management framework is Swiss Re’s risk management is based on risk-taking set out in risk governance documentation at four fundamental principles. These apply In order to ensure clear control, Group and legal entity level. Risk governance consistently across all risk categories at accountability and independent monitoring is the subset of corporate governance that Group and legal entity level: for all risks, Swiss Re’s risk governance describes the risk management framework • Controlled risk-taking – Financial distinguishes between three fundamental and documents risk management practices. strength and sustainable value creation roles in the risk-taking process: Group-level risk documents form the basis are central to Swiss Re’s value • Risk owner – establishes a strategy, for all risk governance across Swiss Re. proposition. The Group thus operates delegates execution and control, and Additional risk governance for legal entities within a clearly defined risk policy and retains ultimate responsibility for the is prepared as an addendum to the Group risk control framework. outcomes. or parent entity document. • Clear accountability – Swiss Re’s • Risk taker – executes an objective operations are based on the principle of within the authority delegated by the risk Group risk governance documents are delegated and clearly defined authority. owner; risk takers are required to provide organised hierarchically across five Individuals are accountable for the the respective risk controller with all levels, which are mirrored by equivalent risks they take on, and their incentives information required to monitor and documents at legal entity (LE) level: are aligned with Swiss Re’s overall control their risks. • The Bylaws define Swiss Re’s governance business objectives. • Risk controller – is tasked by the risk owner framework and include the responsibilities • Independent risk controlling – Dedicated with independent oversight of risk-taking of the Board of Directors and the Group units within Risk Management control all activities to mitigate potential conflicts of Executive Committee and their members, risk-taking activities. These are supported interest between the risk owner and risk including the responsibilities related to by Compliance and Group Internal Audit taker; risk controllers are responsible for risk management. functions. escalating relevant concerns. • The Group Risk Policy is defined by the • Transparency – Risk transparency, Group Board and articulates Swiss Re’s knowledge-sharing and responsiveness Risk-taking activities are typically subject to risk appetite framework (risk appetite and to change are integral to the risk three lines of control. The first line comprises tolerance) as well as fundamental risk control process. The central goal of risk the day-to-day risk control activities and capital structure principles. transparency is to create a culture of performed by risk takers in the business as • The Group Risk Management Standards mutual trust, and reduce the likelihood well as in Group functions, including outline how the Group organises and of surprises in the source and potential identification of risks and design of effective applies its risk management practices. magnitude of losses. controls. Independent oversight performed • Risk category standards describe how by functions such as Risk Management risk practices are implemented for a and Compliance represents the second line specific category. of control. The third line consists of • The lowest level comprises risk independent audits of processes and management methodology and process procedures carried out by Group Internal documentation. Audit or by external auditors. This approach is designed to achieve a strong, coherent and Group-wide risk culture built on the principles of ownership and accountability.
Risk Governance documentation hierarchy
Level 0 ‒ Risk management tasks of Boards and Executive Management SRL LE Bylaws bylaws
Group Level 1 ‒ Risk Appetite Framework incl. risk and capital principles LE risk appetite Risk Policy
Group Risk Level 2 ‒ Risk-taking oversight throughout the Group Management Standards LE risk management standards Level 3 ‒ Risk-taking oversight for specific risk categories Group risk category standards
Level 4 ‒ Method and process documentation Documentation on specific topics LE specific topics
62 Swiss Re | Financial Report 2020 Risk culture Key risk takers across Swiss Re are a Swiss Re fosters and maintains a strong particular focus in promoting good risk- risk culture to promote risk awareness and control-related behaviours. The and discipline across all its activities. This relevant positions are identified in a regular risk culture stands for the risk- and control- process, and those who hold them are related values, knowledge and behaviour subject to additional behavioural objectives shared by all employees. Its principal and assessments. components are summarised in a framework that builds on the Group’s Code of Conduct Risk culture is directly linked to Swiss Re’s as well as on key risk management performance management, which is based principles in the Group Risk Policy. not only on business results but also on behaviours. Swiss Re’s compensation The risk culture framework serves to framework aims to foster compliance and influence appropriate risk-taking behaviour support sensible risk-taking. Swiss Re also in four key aspects, which are assessed has a range of incentive programmes that annually for all employees in the performance reflect the long-term nature of its business and compensation process: by rewarding sustained performance rather • Leadership in providing clear vision than short-term results. This helps to align and direction shareholder and employee interests. • Consideration of risk-relevant information in decision-making Swiss Re’s compensation principles • Risk governance and accountability and framework are captured within the of risk takers as well as transparent flow Swiss Re Group Compensation Policy. of risk information The Group’s Finance and Risk Committee • Embedding of risk management skills conducts a regular risk assessment for and competencies all changes to this policy.
Swiss Re’s risk culture provides the foundation for the efficient and effective application of its Group-wide risk management framework. Group Risk Management reinforces the risk culture by ensuring risk transparency and fostering open discussion and challenge in the Group’s risk-taking and risk management processes.
Swiss Re | Financial Report 2020 63 Risk and capital management Risk management
Key Risk Management bodies and responsibilities
Board of Directors of Swiss Re Ltd • Responsible for the Group’s governance principles and policies • Acts through the Finance and Risk Committee, Investment Committee and Audit Committee
Group Executive Committee Group CRO Central Risk Management units Group Internal Audit • Develops and implements • Principal independent • Oversight of financial market, • Independent risk risk management framework risk controller credit and liquidity risk controller • Sets and monitors risk limits • Heads the Risk • Shared risk expertise: risk • Assesses adequacy • Some responsibilities Management function modelling and governance, as and effectiveness delegated to Group CRO • Member of Group well as political, sustainability of internal control and major legal entities Executive Committee and emerging risks systems • Reports to Board as • Strategic control services: well as to Group CEO operational and regulatory risk management
Legal entity management Legal entity CROs Compliance • Manages underwriting • Responsible for risk oversight and establishing risk governance • Compliance with decisions and operational in their respective legal entities applicable laws, risks in its area • Supported by functional, regional and subsidiary CROs as well Code of Conduct as dedicated risk teams • Manages compliance risks
Organisation of risk management The Group Executive Committee is risk management framework. The Risk The Board of Directors of Swiss Re Ltd responsible for developing and implementing Management function comprises (the Group Board) is ultimately responsible Swiss Re’s Group-wide risk management dedicated risk teams for legal entities and for Swiss Re’s overall risk governance framework. It also sets and monitors major regions, as well as central teams that provide principles and policies. It defines basic risk risk limits, oversees the Economic Value specialised risk expertise and oversight. management principles and the risk Management framework, determines appetite framework, including the Group’s product policy and underwriting standards, While the Risk Management organisation risk appetite and risk tolerance; in addition, and manages regulatory interactions is closely aligned to Swiss Re’s business it approves the Group’s risk strategy. The and legal obligations. The Group Executive structure, in order to ensure effective risk Group Board mainly performs risk oversight Committee has delegated various oversight, all embedded teams and CROs and governance through three committees: risk management responsibilities to the remain part of the Group Risk Management • Finance and Risk Committee − defines Group Chief Risk Officer (Group CRO) function under the Group CRO, thus the Group Risk Policy, reviews risk as well as to certain legal entity CROs. ensuring their independence as well as capacity limits, monitors adherence a consistent Group-wide approach to to risk tolerance, and reviews top The Group CRO is appointed as the principal overseeing and controlling risks. risk issues and exposures. independent risk controller of Swiss Re. • Investment Committee − reviews the He is a member of the Group Executive Legal entity risk teams are led by financial risk analysis methodology and Committee and reports directly to the dedicated CROs who report directly or valuation related to each asset class, and Group CEO as well as to the Board’s indirectly to their top-level entity CRO, ensures that the relevant management Finance and Risk Committee. The Group with a secondary reporting line to their processes and controlling mechanisms CRO also advises the Group Executive respective legal entity CEO. These legal are in place. Committee, the Chairman or the respective entity CROs are responsible for risk • Audit Committee − oversees internal Group Board Committees, in particular the oversight in their respective entities, as controls and compliance procedures. Finance and Risk Committee, on significant well as for establishing the proper risk matters arising in his area of responsibility. governance to ensure efficient risk identification, assessment and control. The Group CRO leads the independent They are supported by functional, regional Risk Management function, which is and subsidiary CROs who are responsible responsible for risk oversight and control for overseeing risk management issues across Swiss Re. It thus forms an integral that arise at regional or subsidiary level. part of Swiss Re’s business model and
64 Swiss Re | Financial Report 2020 The central risk teams oversee Group Risk control framework Swiss Re has implemented a principle- liquidity and capital adequacy and maintain Swiss Re operates within a clearly based integrated internal control system the Group frameworks for controlling defined risk control framework. This is to mitigate identified operational risks these risks throughout Swiss Re. They also set out in the Group Risk Management including financial reporting and support CROs at Group and legal entity Standards and comprises a body of compliance risks, as well as risks that could level in discharging their oversight standards that establish an internal control impair the effectiveness and efficiency of responsibilities. They do so by providing system for taking and managing risk. operations. This control system represents a services, such as: These standards set responsibilities for risk subset of Swiss Re’s risk control framework • Financial risk management takers and risk controllers. The risk control and is based on international standards • Specialised risk category expertise framework defines key tasks, which are established by COSO (the Committee of and accumulation control the core components of Swiss Re’s risk Sponsoring Organisations of the Treadway • Risk modelling and analytics management cycle: Commission). It is applied on multiple • Regulatory relations management • Risk tolerance and appetite assessment organisational levels, including Group, • Maintaining the central risk of plan – ensures that the risk functions, regions and legal entities. governance framework implications of plans are understood, and determines whether business Risk transfer Risk Management is also in charge of and investment plans adhere to the risk To efficiently manage capital across actuarial reserving and monitoring of reserve appetite framework (risk appetite the Group and ensure that risk-taking in holdings for Corporate Solutions business and tolerance). individual legal entities is well diversified, while for Reinsurance business the setting • Risk identification – ensures that all the Group employs internal retrocession of the reserves is performed by valuation risks to which Swiss Re is exposed are and funding agreements. These serve actuaries within the P&C and L&H Business transparent in order to make them to improve the fungibility of capital and Management units. controllable and manageable. consequently Group-wide diversification. • Risk measurement – enables Swiss Re In addition, the Group aims to maximise Risk management activities are to understand the magnitude of its risks the amount of funds available centrally by complemented by Swiss Re’s Group and to set quantitative controls that limit optimising the excess capital held within Internal Audit and Compliance units: its risk-taking. its subsidiaries and branches. • Group Internal Audit performs • Risk limit framework – allows Swiss Re independent, objective assessments to control its risk-taking decisions and Swiss Re also manages and mitigates of the adequacy and effectiveness of total risk accumulations, including the insurance risk through external retrocession, internal control systems. It evaluates the passive risk we are exposed to through insurance risk swaps or by transferring risk execution of processes within Swiss Re, our operations. to capital markets through insurance-linked including those within Risk Management. • Risk reporting – creates internal risk securities, industry loss warranties or other • The Compliance function oversees transparency and enables Swiss Re to derivatives. This provides protection against Swiss Re’s compliance with applicable meet external disclosure requirements. extreme catastrophic events, further laws, regulations, rules and the Code of diversifies risk, stabilises economic results Conduct. It also assists the Group Board, In addition, Risk Management performs and releases underwriting capacity. Group Executive Committee and other the following risk control activities: management bodies in identifying, • Model and tool assurance – ensures In addition, Swiss Re uses financial market mitigating and managing compliance risks. that models or tools used for costing, derivative instruments as well as financial valuation and risk capital determination market securities to hedge financial market are based on sound scientific concepts, and credit risks arising from investments have been implemented and calibrated and insurance liabilities. Interest rate correctly, and produce accurate results. risk from insurance liabilities is managed • Valuation assurance – assesses the through investments in fixed-income quality of valuations for financial instruments whose pricing is sensitive instrument prices and reserves. to changes in government yields, such • Insurance risk reviews – assess the as government bonds. quality of decision-making in the taking of insurance risks by performing independent evaluations of underwriting, costing, pricing and claims handling.
Swiss Re | Financial Report 2020 65 Risk and capital management Risk management
To meet the first objective, the Risk Policy Risk Appetite Framework defines respectability limits to ensure that the Group has enough resources to meet The risk appetite framework establishes the overall approach through which capital requirements at Group level as well Swiss Re practices controlled risk-taking throughout the Group. The framework as respectability and liquidity requirements is set out in the Group Risk Policy and consists of two interlinked components: for all legal entities. These limits ensure that risk appetite and risk tolerance. Swiss Re has adequate capital and liquidity above minimum requirements to be considered a respectable counterparty by Risk appetite Risk tolerance external stakeholders. To meet the second objective, Swiss Re's risk tolerance criteria Group Risk Risk appetite Risk tolerance includes resilience limits for SRZ to ensure Policy statement objectives and limits that the main operating entity is able to withstand capital and liquidity stresses. To meet the third objective, the Group has Target liability portfolio established a Group-wide risk matrix Group and strategic asset Risk capacity limits methodology in which key operational risks strategic plan allocation are assessed against an acceptable level of expected losses. Any operational risk Control risk exposures exposure that exceeds the Group’s Optimise risk/return portfolio Annual planning operational risk tolerance limit is subject to Business plans Operational limits process a mitigation plan that is monitored by the Group's Finance and Risk Committee.
The risk tolerance respectability criteria for the Swiss Re Group are set out in the Group Risk Policy. The Group and SRZ Risk Appetite Framework The Group Board further details Swiss Re’s Boards are responsible for approving the In the context of business strategy and risk appetite through its approval or review risk tolerance criteria, as well as for planning, the risk appetite statement of the following key steering frameworks as monitoring and reviewing risk tolerance. facilitates discussions about where and part of the Group’s planning process: target Breaches or anticipated breaches of limits how Swiss Re should deploy its capital, liability portfolio, strategic asset allocation established to control the risk tolerance liquidity and other resources under a and the Group’s target capital structure. criteria must be communicated to the risk/return view, while the risk tolerance Finance and Risk Committee. sets clear boundaries to risk-taking. Swiss Re’s risk tolerance describes the extent to which the Group and SRZ Boards Swiss Re’s risk-taking is governed by a During strategic planning and target- have authorised executive management to limit framework in order to ensure that setting, Risk Management provides an assume risk. It represents the amount of accumulation risk and large losses remain opinion on the proposed strategy and risk that Swiss Re is willing to accept within at an acceptable level, as well as to steer targets to the Group Executive Committee the constraints imposed by its capital and the allocation of available risk capacity. and ultimately the Group Board. The opinion liquidity resources, its strategy, and the The limit framework is rooted in the risk focuses on the risk impact of the proposed regulatory and rating agency environment appetite and risk tolerance objectives set in strategy and the risks related to its within which it operates. the Group Risk Policy and helps to translate implementation. The strategic plan, risk these objectives into concrete, measurable appetite and capital allocation ambition Swiss Re’s risk tolerance is based on criteria. In addition, lower level limits are are expressed in a target portfolio for the following objectives: implemented to allocate scarce capacity. the Group’s assets and liabilities, which • To maintain Group capital at a level that The limit framework also allows for risk should ultimately deliver the Group’s safeguards respectability with clients monitoring and thus supports risk controlling targeted performance. and regulators. during the execution of the plan. • To ensure the resilience of SRZ as the Swiss Re’s risk appetite outlines the main operating entity from a capital and Group’s principles on acceptable risks and liquidity perspective. provides key directions for risk-taking • To avoid material operational risks that and risk controlling as part of implementing could subject the Group to large Swiss Re’s strategy: achieving targeted operational losses with corresponding performance, providing liquidity and consequences from an economic, financial flexibility, managing capital reputational or regulatory perspective. adequacy, and protecting and growing franchise value.
66 Swiss Re | Financial Report 2020 Risk assessment
In SST 2021, total risk increases to USD 22.4 billion driven by higher insurance risk, offset partly by lower financial market and credit risk.
Swiss Re’s internal model provides a Swiss Re is exposed to insurance and The Group’s financial risk derives from meaningful assessment of the risks financial risks that are calculated in its financial market risk as well as from credit to which the company is exposed and internal risk model, as well as other risks risk. Key drivers of financial market risk is an important tool for managing that are not explicitly part of the economic are credit spread and equity risk. Credit risk the business. It is used to measure capital requirement but are actively is mainly driven by the credit and surety the Group’s risk position and related monitored and controlled due to their business and default risk of capital capital requirements as well as for significance for Swiss Re. These include market products. defining the risk tolerance, risk limits operational, liquidity, model, valuation, and liquidity stress tests. regulatory, political, strategic and Total risk is based on 99% tail value-at-risk sustainability risks (see Swiss Re’s risk (tail VaR) and represents the average landscape, p. 68). unexpected loss that occurs with a frequency of less than once in 100 years Property and casualty insurance risk is over a one-year time horizon. mainly driven by underlying risks inherent in the business Swiss Re underwrites, in Total risk increases to USD 22.4 billion particular natural catastrophe risk, non-life driven by higher insurance risk, offset partly claims inflation, costing and reserving and by lower financial market and credit risk. man-made risk. The main drivers of life and The higher weight of insurance risk leads health insurance risk are mortality trend to increased diversification at risk and lethal pandemic risk. category level.
Group capital requirement based on one-year 99% tail VaR
USD millions SST 2020 SST 2021 Change cross reference information Property and casualty 11 708 12 895 1 187 see page 70 Life and health 9 857 11 852 1 996 see page 71 Financial market 11 218 10 594 –624 see page 72 Credit1 3 496 3 186 –310 see page 73 Diversification –14 945 –16 174 –1 228 Total risk 21 332 22 353 1 021
1 Credit comprises credit default and credit migration risk from both asset management and underwriting. Credit spread risk falls under financial market risk.
Swiss Re’s internal risk model takes account of the accumulation and diversification between individual risks. The effect of diversification at the category level is demonstrated in the table above, which represents the difference between the Group 99% tail VaR and the sum of standalone tail VaR amounts in the individual risk categories. The extent of diversification is largely determined by the selected level of aggregation – the higher the aggregation level, the lower the diversification effect.
Alternative Risk Measurements for Swiss Re Group
USD billions SST 2020 SST 2021 Change in % 99% VaR1 16.1 17.2 7 99.5% VaR1 19.0 20.1 6
1 For the alternative risk measurements, the same risk exposure and data basis is applied as for the SST calculation.
Alternative risk measurements — 99% and 99.5% VaR — increase to USD 17.2 billion and USD 20.1 billion, respectively.
Swiss Re | Financial Report 2020 67 Risk and capital management Risk assessment
Swiss Re’s risk landscape
The risk categories shown in the table below are discussed on the following pages. Across these categories we identify and evaluate emerging threats and opportunities through a systematic framework that includes the assessment of potential surprise factors that could affect known loss potentials. Liquidity risk management is discussed on page 60.
Core risks in Swiss Re’s internal model
Insurance risk Financial risk
Property & Casualty L i f e & H e a l t h Financial market Credit • Natural catastrophe • Lethal pandemic • Credit spread • Default risk • Man-made • Mortality trend • Equity • Migration risk • Costing and reser ving • Longevity • Foreign exchange • Claims inflation • Critical illness • FM inflation • Income protection • Interest rate • Lapse • Real estate
Other significant risks
Operational Liquidity Model Valuation
Regulatory Political Strategic Sustainability
Emerging risks
Swiss Re is exposed to a broad • Financial market risk represents the The risk landscape also includes other landscape of risks. These include potential impact on assets or liabilities risks that are not explicitly part of the risks that are actively taken as part that may arise from movements in Group’s economic capital requirement of insurance or asset management financial market prices or rates, such as but are actively monitored and controlled operations, and are calculated in equity prices, interest rates, credit due to their significance for Swiss Re: the internal risk model as part of spreads, hedge fund prices, real estate • Liquidity risk represents the possibility the Group’s economic capital prices, commodity prices or foreign that Swiss Re will not be able to meet requirement as well as to allocate exchange rates. Financial market risk expected and unexpected cash flow risk-taking capacity: originates from two main sources: and collateral needs without affecting investment activities and the sensitivity either daily operations or Swiss Re’s • Property and casualty insurance risk of the economic value of liabilities to financial condition. arises from coverage provided for financial market fluctuations. • Operational risk represents the potential property, liability, motor, and accident • Credit risk reflects the potential economic, reputational or compliance risks, as well as for specialty risks such financial loss that may arise due to impact of inadequate or failed internal as engineering, agriculture, aviation diminished creditworthiness or default processes, people and systems or from and marine. It includes underlying of counterparties of Swiss Re or of third external events, including legal risk risks inherent in the business Swiss Re parties; credit risk arises from investment and the risk of a material misstatement underwrites, such as inflation or and treasury activities, structured in financial reporting. Swiss Re has uncertainty in pricing and reserving. transactions and retrocession, as well implemented a capital model for • Life and health insurance risk arises from as from liabilities underwritten by credit operational risk, which is used for coverage provided for mortality (death), and surety insurance units. Solvency II purposes. longevity (annuity) and morbidity (illness • Strategic risk represents the possibility and disability). In addition to potential that poor strategic decision-making, shock events (such as a severe execution or response to industry pandemic), it includes underlying risks changes or competitor actions could inherent in life and health contracts that harm Swiss Re’s competitive position arise when mortality, morbidity, or lapse and thus its franchise value. experience deviates from expectations.
68 Swiss Re | Financial Report 2020 • Regulatory risk arises from changes to • Sustainability risk comprises the insurance regulations and supervisory environmental, social and ethical risks regimes as well as from interactions with that may arise from individual business regulatory authorities and supervisory transactions or the way Swiss Re regimes of the jurisdictions in which conducts its operations. Swiss Re operates. • Across all risk categories, Swiss Re • Political risk comprises the consequences actively identifies emerging risks and of political events or actions that could threats as part of its risk identification have an adverse impact on Swiss Re’s process; this includes new risks as well business or operations. as changes to previously known risks • Model risk reflects the potential impact that could create new risk exposures, of model errors or the inappropriate or increase the potential exposure or use of model outputs. It may arise from interdependency between existing risks. data errors or limitations, operational or simulation errors, or limitations in Some of these risks are reflected indirectly model specification, calibration or in the risk model, as their realisations implementation; model risk may also be may be contained in the historical data and caused by insufficient knowledge of the scenarios used to calibrate some of the model and its limitations, in particular by risk factors. In addition, output from the management and other decision-makers. model is used in measuring liquidity risk • Valuation risk represents uncertainty under stressed conditions. As separate around the appropriate value of assets risk categories, these risks are an integral or liabilities. It may arise from product part of Swiss Re’s risk landscape. They are complexity, parameter uncertainty, monitored and managed within the Risk quality and consistency of data, valuation Management organisation, and included in methodology, or changes in market risk reports to executive management and conditions and liquidity. Swiss Re is the Board at Group and legal entity level. exposed to financial valuation risk from investment assets it holds as well as Reputational risk is not considered a reserve valuation risk from insurance separate risk category but rather represents liabilities that result from the coverage a possible consequence of any risk type it underwrites. in addition to the potential financial and compliance impact.
Swiss Re | Financial Report 2020 69 Risk and capital management Risk assessment
Insurance risk
Insurance risk management involves Swiss Re’s Group limit framework includes insurance risk landscape and related identifying, assessing and controlling risk limits for major insurance exposures governance processes are regularly risks that Swiss Re takes through that guard against risk accumulations and discussed and reviewed by the Senior Risk its underwriting activities, including ensure that risk-taking remains within Council and other insurance risk oversight related risks such as inflation or Swiss Re’s risk tolerance. At the entity level, bodies in order to assist and advise the uncertainty in pricing and reserving. underwriting and capacity limits are Group CRO in the risk oversight. assigned that are used to steer the business, Risk Management also provides and ensure adherence to the Group’s risk Swiss Re also manages and mitigates independent assurance throughout the limits and SST capitalisation targets. insurance risk through external retrocession, business cycle, starting with the annual insurance risk swaps or by transferring risk business planning process. It reviews Regular internal reports ensure to capital markets. This provides protection underwriting standards, costing models transparency across the Group, providing against extreme catastrophic events, further and large transactions, and monitors management with quantitative and diversifies risk, stabilises economic results exposures, reserves and limits. qualitative risk assessments. Swiss Re’s and releases underwriting capacity.
Property and Risk developments otherwise complex or unusual triggers an escalation casualty risk The increase in property and casualty risk is mainly process that extends up to the Group Executive driven by a rise in non-life claims inflation risk Committee. Certain single risks and specified % reflecting the heightened probability of extreme renewable treaty classes with non-material changes +10 inflation outcomes, as well as an increase in costing can be authorised by only one individual underwriter Change since and reserving risk mainly due to COVID-19-related with the necessary authority − but these risks SST 2020 reserves. and treaties are subject to checks after acceptance.
Management All transactions that could materially impact the Legal entity CROs are responsible for overseeing risk at Group level or for key legal entities require all property and casualty exposures written in their independent review and sign-off by Risk Management areas. In addition, Group Risk Management monitors before they are authorised. This is part of a three- and controls accumulated exposures across Swiss Re signature principle, under which key transactions to ensure that they remain within the defined risk must be approved by Client Markets, Underwriting tolerance level. and Risk Management. For transactions of defined types and within defined limits, this may be applied The first line of control for property and casualty risks through the approval of underwriting or pricing lies within Swiss Re’s underwriting units. In general, guidelines. For other transactions, the signatures all transactions must be reviewed by at least two must be secured through an individual review. authorised individuals, and are subject to authority limits. Each underwriter is assigned an individual Swiss Re’s limit framework for property and casualty authority based on technical skills and experience. In exposures includes risk limits for major natural addition, capacity limits are allocated to local teams; catastrophe scenarios and other key risks, such as any business that exceeds this authority or is terrorism, claims inflation, reserving and liability.
70 Swiss Re | Financial Report 2020 Insurance risk stress tests with a 200-year return period
Annualised unexpected loss, 99.5% VaR in USD millions1 SST 2021 Atlantic hurricane 5 826 Californian earthquake 4 739 European windstorm 2 345 Japanese earthquake 4 101 Lethal pandemic 3 616
1 Excluding the impact of earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.
In SST 2021, the largest natural catastrophe exposure for Swiss Re Group derives from the Atlantic hurricane scenario with a USD 5.8 billion loss. The lethal pandemic loss is estimated to be at USD 3.6 billion.
Life and health Risk developments entities require independent review and sign-off by risk Higher life and health risk mainly reflects the Risk Management before they can be authorised. business growth in Asia and the US, resulting in This is part of a three-signature principle, under which % higher exposure to mortality trend, lethal pandemic key transactions must be approved by Client Markets, +20 and critical illness risk. The increase is further driven Products and Risk Management. For transactions of Change since by the impact of lower interest rates and the defined types and within defined limits, this may SST 2020 appreciation of the Canadian dollar and the British be applied through the approval of underwriting or pound against the US dollar. pricing guidelines. For other transactions, the signatures must be secured through a review of the Management individual transaction. Legal entity CROs are responsible for overseeing all life and health exposures written in their respective Swiss Re’s limit framework for life and health areas. Accumulated exposures across Swiss Re are exposures includes risk limits for key risks, such as monitored and controlled by Group Risk Management mortality, longevity, lethal pandemic, critical illness to ensure that they remain at an acceptable level and income protection. Market exposure limits for the Group. are in place for catastrophe and stop loss business. Swiss Re pays particular attention to densely Costing actuaries represent the first line of control populated areas and applies limits for individual for life and health risks. All transactions that could buildings to guard against risk exposure accumulations. materially change risk at Group level or for key legal
Swiss Re | Financial Report 2020 71 Risk and capital management Risk assessment
Financial risk
Financial risk management involves Financial Risk Management controls financial market and credit risk at Group identifying, assessing and controlling exposure accumulation for financial market level. Where required, additional risk limits risks inherent in the financial markets and credit risks. In addition, the team is are established by Risk Management for as well as counterparty credit risks, responsible for assurance activities related legal entities, key business lines, individual while monitoring compliance with to asset valuation and financial risk models, counterparties and countries. Furthermore, Swiss Re’s risk appetite and risk as well as for reporting Swiss Re’s financial as part of the planning process, the management standards. risks. These responsibilities are exercised risk-taking functions employ capacity limits through defined governance processes, to control the amount of risk mandated Swiss Re’s central Financial Risk including regular reviews by Swiss Re’s from the risk owner to the risk takers. Limits Management team oversees all activities Senior Risk Council and other financial risk may be expressed in terms of notional that generate financial market or credit oversight bodies. value of policies, losses in a stress scenario, risk. Its mandate covers internally and value at risk based on historic market externally managed assets, strategic All activities with financial market and moves, linear sensitivities to a particular participations, treasury activities, and credit risk are subject to limits at various risk factor or different methodologies credit and market risks that derive from levels of the organisation (eg Group, legal of exposure aggregation. Swiss Re’s underwriting and retrocession entities and lines of business). At the activities, including structured transactions, highest level, the Group Board of Directors credit insurance and surety business. sets a financial risk concentration limit The Head of Financial Risk Management which defines how much of the Group’s risk reports to the Group Chief Risk Officer, exposure can derive from financial risk. The with a secondary reporting line to the Group Executive Committee establishes Group Chief Investment Officer. the principal risk limits for aggregate
Financial Risk developments and externally managed investment mandates. These market risk The decrease in financial market risk is driven mainly reports track exposures, document limit usage and by the sale of ReAssure Group Plc and an increase provide information on key risks that could affect the % in credit hedges, which reduced credit spread risk. portfolio. The reports are presented and discussed –6 This is partly offset by higher financial market with those responsible for the relevant business line Change since volatilities resulting from the COVID-19-related at the Financial Market Risk Council. SST 2020 market turbulence, as well as by the appreciation of major currencies against the US dollar. The reporting process is complemented by regular risk discussions between Financial Risk Management, Management Asset Management and the Group’s external Financial market risk is monitored and controlled by investment managers, as well as by regular interactions dedicated experts within the Group’s Financial Risk with other key units that take financial market risk, Management team. Financial Risk Management such as Principal Investments and Acquisitions, regularly reports on key financial market risks and risk Treasury, and the respective business teams that aggregations, as well as on specific limits for internally write transactions.
72 Swiss Re | Financial Report 2020 Financial Market SST ratio sensitivities
Impact on SST ratio SST 2021 Interest rates +50bps 12pp Interest rates –50bps –14pp Spreads +50bps –5pp Spreads –50bps 5pp Equity values +25% 3pp Equity values –25% –4pp Real estate values +25% 6pp Real estate values –25% –7pp
Among financial market sensitivities, the Group is most sensitive to a 50-basis point decrease in interest rates, leading to an estimated decrease in the SST ratio of 14 percentage points.
Credit risk stress test with a 200-year return period
Annualised unexpected loss, 99.5% VaR in USD millions SST 2021 Credit default1 2 228
1 Excluding the impact of earned premiums for the business written and reinstatement premiums that could be triggered as a result of the event.
Credit risk Risk developments The reporting process is supported by a Group-wide Credit risk decreases mainly due to the sale of credit exposure information system that contains all % ReAssure Group Plc and the increase in credit relevant data, including counterparty details, ratings, –9 hedges. credit risk exposures, credit limits and watch lists. Change since Key credit practitioners across Swiss Re have access SST 2020 Management to this system, thus providing the necessary Credit risk is monitored and controlled by experts transparency to implement specific exposure within the Financial Risk Management team. Financial management strategies for individual counterparties, Risk Management regularly monitors and reports industry sectors and geographic regions. on counterparty credit quality, credit exposures and limits. In addition, it is responsible for regularly Credit risks are aggregated by country in order to monitoring corporate counterparty credit quality and monitor and control risk accumulation to specific exposures, and for compiling watch lists of cases that risk drivers, such as economic, sovereign, and merit close attention. These reports are presented political risks. and discussed with those responsible for the relevant business line at the Credit Council.
Swiss Re | Financial Report 2020 73 Risk and capital management Risk assessment
Management of other significant risks
Operational risk Operational events and issues are recorded Regulatory risk The Group has implemented an internal and managed in a central Operational Regulatory developments and related risks control system to mitigate operational Risk Management system in order to that may affect Swiss Re and its subsidiaries risks through three lines of control. This address the identified problems and avoid or branches are identified, assessed and system assigns primary responsibility for the recurrence of similar events. The monitored as part of regular oversight identifying and managing operational risks results are reviewed by the relevant CRO activities. Swiss Re is actively engaged in a to individual risk takers (first line of control), and reported to the company’s dialogue with relevant regulators to improve with independent oversight and control management team and Board of Directors. mutual understanding of the implications by the Risk Management and Compliance arising from new regulatory proposals. functions (second line of control) as well COVID-19 has impacted many aspects of Periodic reports and recommendations on as Group Internal Audit (third line of control). our risk and control landscape, in particular regulatory issues are provided to executive Members of the Group Executive Committee around outsourcing, financial reporting and management and the Board of Directors are required to certify the effectiveness of data security. The Group did not experience at Group and legal entity level. the internal control system for their area of any major operational or compliance responsibility on a quarterly basis. failings thanks to early lessons from our The regulatory environment of the insurance Asia operations, and the resilience and industry continues to evolve on the national, Operational risk is inherent within Swiss Re’s pragmatism of our employees in adapting regional and international level. While some business processes. As the company to a new work environment. In addition, regulatory changes create new business does not receive an explicit financial return effective communications and collaboration opportunities, others come with significant for such risks, the approach to managing across teams, and between business and costs and business restrictions. Growing operational risk differs from the approach risk functions, enabled us to maintain all regulatory complexity, increased national applied to other risk categories. The purpose our critical processes throughout the crisis. protectionism and a fragile global economy of Operational Risk Management is not are persistent themes affecting regulation to eliminate risks but rather to identify Strategic risk and the way Swiss Re operates worldwide. and cost-effectively mitigate operational Overall responsibility for managing risks that approach or exceed strategic risk lies with the Group Board, Regulatory efforts are becoming increasingly Swiss Re’s tolerance. which establishes Swiss Re’s overall forward-looking, aimed at a broad range strategy. The Boards of legal entities are of emerging risks, both actual and perceived. Risk Management is responsible for responsible for the strategic risk inherent in If new regulation is not based on clearly monitoring and controlling operational their specific strategy development and understood risks, the resulting requirements risks based on a centrally coordinated execution. Strategic risks are addressed by may create an excessive burden for both methodology. This includes a pre-defined examining multi-year scenarios, considering insurers and policyholders. It remains taxonomy that is used for identifying, the related risks, as well as monitoring the a key priority for Swiss Re to highlight the classifying and reporting operational risks, implementation of the chosen strategy year negative impacts of market access as well as a matrix in which risks are by year in terms of the annual business plan. restrictions or impediments to global assessed according to their estimated diversification towards regulators. At the probability and impact. Risks are assessed As part of their independent oversight same time, such risks are mitigated by for their residual economic, financial role, Risk Management, Compliance and seeking solutions that reduce the negative reporting, reputational and compliance Group Internal Audit are responsible for impact on Swiss Re and its clients. impact, taking into account existing controlling the risk-taking arising from the mitigation and controls. implementation of the strategy. Several regulators, particularly in Europe and Asia, have developed specific The matrix is also used to assess residual expectations of how climate risks should exposures against Swiss Re’s tolerance be managed and are translating these limits for operational risk. This limit expectations into concrete regulations. represents the level of operational risk that New climate-related regulations are the Board of Directors and executive expected, even in jurisdictions which have management teams are willing to accept. thus far been hesitant to act. Swiss Re Material risks that exceed or are approaching supports such measures and will continue risk tolerance are reported to executive to advocate for a harmonised and gradual management and Boards of Directors at implementation of these requirements Group and legal entity level. In addition, in line with international standards, such mitigation strategies are required for all risks as those recommended by the Financial that are outside of operational risk limits Stability Board Task Force for Climate- in order to bring them within tolerance. related Financial Disclosure (TCFD), in order to avoid regulatory fragmentation and improve comparability.
74 Swiss Re | Financial Report 2020 Swiss Re consistently advocates the removal In addition to identifying and assessing model parameters (and the data on which or reduction of market access barriers, so the impact of political risk on its business, calibration relies) must be trustworthy, that policyholders, governments and the Group seeks to raise awareness of while expert judgments are required to be national economies can fully benefit from political risk issues within the industry and sensible, documented and evidenced. international diversification and reliable, among the broader public, through active sound and affordable risk cover and transfer. dialogue with clients, the media and Analytical or financial models that are other stakeholders. The Group also builds used for costing, valuation and risk capital The ongoing pandemic presents challenges relationships that expand its access calculations are governed by Swiss Re’s not only for the insurance industry, but for to information and intelligence, and Model and Tool Assurance Framework. the entire global economic system. Swiss Re allow Swiss Re to further enhance its Material models used for costing, valuation is a strong proponent of coordinated methodologies and standards. For example, of reserves and assets, as well as Swiss Re’s responses to COVID-19 as it believes that Swiss Re participates in specialist events internal risk model, are validated by only through collaboration among hosted by institutions such as industry dedicated teams within Risk Management. governments, regulators and industry, and risk management associations, and These teams provide independent can societies effectively manage events maintains relationships with political risk assurance that the framework has been of such magnitude. specialists in other industries, think tanks and adhered to, and also conduct independent universities, as well as with governmental validations. Swiss Re’s risk model is also Political risk and non-governmental organisations. subject to regulatory scrutiny. Political developments can threaten Swiss Re’s operating model but also open up Swiss Re continues to operate in the UK Model-related incidents are captured within opportunities for developing the business. mainly through the UK branches of its Swiss Re’s operational risk framework. The Group adopts a holistic view of political Luxembourg entities. From 1 January 2021, In addition, material model developments, risk and analyses developments in individual Swiss Re’s UK branches are operating incidents and risks are reported in regular markets and jurisdictions, as well as under the UK’s Temporary Permissions risk updates to executive management and cross-border issues such as war, terrorism, Regime which, subject to certain the Board of Directors at Group and legal energy-related issues and international conditions, allows third country branches entity level. trade controls. to carry on insurance and reinsurance business in the UK until licences are granted Valuation risk Dedicated political risk analysts identify, by UK regulators. Applications for licenses Financial valuation risk is managed by monitor, and assess political developments for third country branches have been internal and external portfolio managers, across the world. Swiss Re’s political risk submitted and Swiss Re is in regular who ensure that valuations remain in line experts also exercise oversight and control contact with the UK’s Prudential Regulatory with the market. In addition, Swiss Re has functions for named political risks, such as Authority to progress the applications. a function within Financial Risk Management in the political risk insurance business; this that independently assesses valuations and includes monitoring political risk exposures, Model risk valuation techniques; this team performs providing recommendations on particular Swiss Re uses models throughout its independent price verification for financial transaction referrals and risk reporting. business processes and operations, in risk positions to confirm that valuations are In addition, the Political Risk team provides particular to price insurance products, reasonable and ensure there are no material specific country ratings that cover political, value financial assets and liabilities, assess misstatements of fair value in Swiss Re’s economic and security-related country reserves and portfolio cash flows, and financial reports. The results of the risks; these ratings complement sovereign estimate risk and capital requirements. independent price verification process are credit ratings and are used to support risk Model owners have primary responsibility reviewed by the Asset Valuation Committee. control activities and inform underwriting for model-related risks and are required Summary results are regularly reported or other decision-making processes to adhere to a robust tool development to executive management and the Board throughout the Group. process, including testing, peer review, of Directors at Group and legal entity level. documentation and sign-off. A similar In addition, Swiss Re’s external auditor process also applies to model maintenance. conducts quarterly reviews as well as a comprehensive year-end audit of controls, Swiss Re’s model governance is based on methodology and results. Group-wide standards for model assurance. These standards seek to ensure that each model has a clear scope, is based on sound mathematical and scientific concepts, has been implemented correctly and produces appropriate results given the stated purpose. Furthermore, the calibration of
Swiss Re | Financial Report 2020 75 Risk and capital management Risk assessment
Reserve valuation risk is managed by Sustainability risks are monitored and Emerging risk Swiss Re’s Actuarial Control function, managed by dedicated experts in Anticipating possible developments in with dedicated teams for property and Swiss Re’s Group Sustainability Risk team, the risk landscape is a central element of casualty, and for life and health valuations. which is also responsible for maintaining Enterprise Risk Management. Swiss Re These teams ensure that Swiss Re’s the Sustainability Risk Framework. In promotes pre-emptive thinking on risk in all reserve setting process uses an appropriate addition, this unit supports Swiss Re’s areas of the business in order to reduce governance framework, including defined management and business strategy uncertainty and diminish the volatility of accountabilities and decision-making through tailored risk assessments and risk the Group’s results, while also identifying processes for risk takers (as the first line portfolio reviews. It fosters risk awareness new business opportunities and raising of control) as well as for Actuarial Control. through internal training, and facilitates awareness for emerging risks. The framework ensures that there is development of innovative solutions independent assurance on the data, to address sustainability issues. Finally, For this purpose, Swiss Re’s risk assumptions, models and processes used it represents and advocates Swiss Re’s identification processes are supported by for valuation purposes; for all property position on selected sustainability risk a systematic framework that identifies, and casualty business and selected life topics to external stakeholders. assesses and monitors emerging risks and and health portfolios, it also includes opportunities across all areas of Swiss Re’s an independent valuation of coverage Swiss Re is a founding signatory of the risk landscape. This framework combines provided to ensure that reserves are within UN Principles for Sustainable Insurance a bottom-up approach driven by employee an adequate range. Regular deep-dive (UN PSI) and is currently a board member input with regional experts on emerging investigations are performed into of this initiative. The UN PSI seeks to risk. The resulting information is selected portfolios in order to review the promote sustainable insurance, which is complemented with insights from external appropriateness of both the reserves intended, among other goals, to contribute parties such as think tanks, academic and the applied reserving approach. In to environmental, social and economic networks and international organisations, addition, Swiss Re’s external auditor sustainability. Swiss Re has been actively as well as from interaction with clients. conducts quarterly reviews as well as a contributing to the initiative for several years. comprehensive year-end audit of controls, During 2020, Swiss Re and the UN PSI Findings are reported to management and methodology and results. convened four virtual events for insurers to internal stakeholders, including a prioritised continue work on promoting sustainable overview of newly identified emerging risks Sustainability risk insurance. and an estimate of their potential impact Swiss Re’s continued business success on Swiss Re’s business. Swiss Re also depends on the successful management of As a signatory of the Paris Pledge for publishes an annual emerging risk report sustainability risks, thus helping to maintain Action, the Group reinforced its support by (Swiss Re SONAR) to raise awareness the trust of its stakeholders. The Group has committing to reach net-zero emissions for across the industry. a long-standing commitment to sustainable our insurance and investment portfolios by business practices, active corporate 2050 and for our own operations by 2030. To further advance risk awareness across citizenship, as well as good, transparent Swiss Re is developing a methodology the industry and beyond, Swiss Re governance. All employees are required to assess the carbon footprint of our maintains regular exchanges on emerging to commit to and comply with Swiss Re’s underwriting business. This will serve as a risks with its clients and continues to values and sustainability policies. basis for carbon risk steering and will support participate actively in strategic risk initiatives Swiss Re and our clients in their transition. such as the CRO Forum’s Emerging Risk Potential sustainability risks are mitigated In this context, Swiss Re has contributed to Initiative and the International Risk through clear corporate values, active a CRO Forum publication on methodologies Governance Council. dialogue and engagement with affected to measure and eventually disclose the external stakeholders, and robust internal carbon footprint of insurance portfolios. The following significant long-term controls. These include a Group-wide emerging risks are deemed particularly Sustainability Risk Framework to identify Reflecting the Group’s strong overall important for Swiss Re’s business: and address sustainability risks across commitment to sustainability, Swiss Re Swiss Re’s business activities. The framework continued to be included in leading comprises sustainability-related policies sustainability indices and rankings, such − with pre-defined exclusions, underwriting as FTSE4Good, Euronext Vigeo World 120, criteria and quality standards − as well as Ethibel Excellence Global, oekom Prime a central due diligence process for related Investment and the Dow Jones transactional risks. Sustainability Index. For more information on Swiss Re’s sustainability practices, see the Sustainability Report 2020.
76 Swiss Re | Financial Report 2020 Cyber risk – Edge computing Climate change – Moving to a low Prolonged large-scale power blackout An emerging aspect of cyber risk is related carbon future Long-lasting power blackouts can be to data processing at the periphery or edge To meet the objectives of the Paris triggered by natural catastrophes (eg solar of a network which is increasingly relevant agreement, global warming needs to stay storms), and intentional (eg cyber risk) or with the prevalence of the Internet of Things below 2˚C compared to pre-industrial unintentional man-made events. Power (IoT). An important example is autonomous levels. To achieve this, the target is to reduce blackout becomes more likely as energy vehicles where time-lags in signal greenhouse gas emissions to net-zero by grids are increasingly operating at capacity transmission and processing can prove fatal. 2050. A rapid transition to a low carbon limits and are not always well maintained. Edge computing involves minimising latency economy is required. The changes are Adding to the complexity and in data transactions by adding computing needed across all industries and entail an interdependency are alternative energy power close to connected end-devices. entire cluster of new risks which need to be supplies and the digitisation of parts of the It is playing a pivotal role in innovating and understood, assessed and where possible grid interacting with older installed maintaining digital ecosystems across mitigated. Swiss Re, and the insurance infrastructure. All of these can trigger or manufacturing, utilities, robotics and other industry in general, regularly assesses the exacerbate power blackouts. spheres. In addition to such benefits, changing risk landscape and can help there are also inherent risks. accelerate this transition through risk transfer Potential business impact products and as a long-term investor. A prolonged large-scale power blackout Potential business impact can lead to widespread property damage, Edge computing can lead to an increased Potential business impact business interruption, financial market cyber risk for the devices themselves but The insurance sector is exposed to transition impacts and operational disruptions. also to the network they are connected to. risks which may arise as a result of policy, Importantly, it is likely that business impacts Heightened exposure can be a result of poor legal, technology and market changes that will increase non-linearly the longer a power implementation and maintenance of edge are required to facilitate the transition to blackout lasts. This could lead to catastrophic computing devices. Such devices may not a low-carbon economy. For insurers and economic losses. Loss exposure for the be designed and operated following the reinsurers, investment risks arising from this insurance industry could be significant, same security principles as for an e-banking transition are mainly linked to the potential though many of these risks remain uninsured. system or a smartphone. The security focus re-pricing of carbon-intensive financial on Operational Technology is still not the assets, and the speed at which any such Mitigation measures same as on Business IT. This emerging re-pricing might occur. To a lesser extent, Swiss Re actively addresses prolonged cyber risk is relevant to Swiss Re both as insurers and reinsurers may also need to power blackout risk through scenario an operational threat and as a subject adapt to potential impacts on insurance assessment to estimate the potential for insurance and reinsurance solutions resulting from, for example, reductions in business impact. As an example of such for clients. insurance premium volumes from carbon- a scenario assessment, Swiss Re looked intensive sectors or coverage of new at direct and indirect loss potentials from Mitigation measures technologies without established loss a long-duration power blackout in the Swiss Re’s Digital Governance Framework histories, which may increase uncertainties US triggered by a solar storm. Enriched by considers all activities where digital services in lines of business such as property findings from vulnerability assessments are introduced, irrespective of whether and engineering. for the US energy industry, as well as from it is Business IT or Operational Technology. internal exposure data, this also provided Therefore, minimum baseline standards are Mitigation measures insights for underwriting. being ensured for the secure usage of edge Swiss Re is taking proactive measures to computing devices. Swiss Re regularly reduce potential business impacts on our Swiss Re maintains a risk dialogue with monitors and reassesses cyber security investment and insurance portfolios, for governmental bodies, power suppliers robustness against latest standards and example, reducing exposure to assets and other stakeholders to discuss power threats, including the maintenance of an with the potential to be stranded in carbon- blackout risk and potential mitigation inventory of IoT devices. intense energy infrastructure (eg thermal measures. Considerations include coal). More generally, climate change preventive measures, possibilities for requires global risk mitigation actions and public-private partnerships to create Swiss Re is dedicated to supporting insurance pool solutions and other decarbonisation pathways. Swiss Re approaches to improve resilience. underwrites renewable energy risk and is actively adapting existing products, as well as developing new risk transfer solutions. A new focus area for the future will be the risk cluster related to innovations in carbon removal which will be an integral part of reaching net-zero.
For more information about emerging risk, see the Swiss Re SONAR report.
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