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Risk Management (Online Only) Risk management Risk management (Online Only) 18 Swiss Re | Financial Report 2020 Risk management Swiss Re | Financial Report 2020 19 Risk management Internal control system and risk model regulatory requirements which Swiss Re is subject to, including compliance, legal and tax risks Internal control system • Effectiveness and efficiency of The internal control system is overseen by operations − addressing basic business the Board of Directors of Swiss Re Ltd and objectives, including performance and the Group Executive Committee. It aims to profitability goals, and the safeguarding provide reasonable oversight and assurance of assets covering significant market, in achieving three objectives: credit, liquidity, insurance, technology • Reliability of reporting − addressing the and other risks preparation of reliable reporting arrangements as well as related data Operationally, the internal control system is covering significant financial, economic, based on Swiss Re’s three lines of control regulatory and other reporting risks and comprises five components: • Compliance with applicable laws and regulations − addressing legal and RISK ASSESSMENT CONTROL INFORMATION & MONITORING ACTIVITIES ACTIVITIES COMMUNICATION ACTIVITIES Processes to identify Risk mitigation activities Capturing and sharing Ongoing evaluation of control and assess risks established in policies and information for risk control effectiveness procedures and management decisions • Performed by risk takers • Performed by risk takers (1st • Performed by all lines of • Risk controlling by Risk (1st line of control) line of control) control Management and • Based on Global Operational • Based on Global Control • All incidents logged in central Compliance (2nd line of Risk Register Catalogue repository control) • Assurance by Internal Audit and Compliance (3rd line of control) CONTROL ENVIRONMENT • Standards, processes and structures that provide the basis for carrying out internal control (eg, operational risk tolerance) • Risk culture, including Swiss Re’s corporate values, governance oversight and roles and responsibilities, as well as performance measures, incentives, and rewards that drive accountability for performance 20 Swiss Re | Financial Report 2020 Risk tolerance and appetite Based on internal and external information, assessment of plan Swiss Re identifies risks such as: Risk oversight of planning aims to ensure • Previously unidentified risks that the Group and major legal entities fully • Known non-material risks that have understand the risk implications of the become material risks business and financial plan, and that the • Known material risks that have changed planning approach is based on sound following a reassessment or increased assumptions. The plan represents the understanding of the nature of the risk implementation of Swiss Re’s strategy • Changes in risk exposure from increased under the baseline scenario. It is used to understanding of interdependencies assess the risk and capital implications of between risks the plan within the expected economic and business environment. Risk takers have primary responsibility for identifying risk, including emerging risks, by Risk Management provides both input into assessing all risk exposures arising from and risk oversight of the business and active positions (ie, assets and financial planning process. It does so by underwriting) and operational processes as reviewing and challenging key assumptions well as the risk factors underlying these supporting the plan as well as by assessing exposures. Risk takers are also charged with potential risks and threats that may arise providing Risk Management with all from its implementation. Risk Management relevant information about their risk factors also provides transparency on detailed risk and exposures. Where a risk is relevant for implications of the plan and works with multiple Swiss Re entities, it is generally Finance to test its adherence to risk appetite assessed in cooperation with Group Risk and risk tolerance, and determine whether it Management. complies with the relevant capital and liquidity limits and targets. Adherence of the Risk measurement plan to risk tolerance is also subject to Risk measurement enables Swiss Re to quarterly review based on updated plan assess the magnitude of its risk exposures information. Execution of the plan is subject and set quantitative controls that limit to the risk control framework. risk-taking. The implications of the business and Swiss Re uses a full internal risk model to financial plan are further assessed against determine the economic capital required to selected sensitivities, as well as by support the risks on the company‘s books, projecting the risk, capital and liquidity as well as to allocate risk-taking capacity to positions under alternative scenarios. The the different lines of business. The model insights gained from scenario analysis also provides the basis for capital cost enable senior management to prepare a allocation in Swiss Re‘s Economic Value response to adverse events as they occur. In Management framework, which is used for some cases, this may lead to preventative pricing, profitability evaluation and actions being carried out in advance, while compensation decisions. In addition to in other cases management may react to these internal purposes, the model is used events as they unfold, taking into to determine regulatory capital consideration the insights gained during the requirements under economic solvency planning process. frameworks such as the Swiss Solvency Test (SST) and Solvency II. Risk identification Risk identification is an ongoing process to The internal model provides a meaningful establish transparency around all potentially assessment of the risks to which the material risks in order to make those risks company is exposed and is an important controllable and manageable. This provides tool for managing the business. Swiss Re‘s a basis for exposure monitoring, risk model has a history of more than 20 years measurement, monitoring of capital of development and continuous requirements and reporting. All quantifiable improvement driven both by the company‘s risks must be reflected in costing, specific risk profile and by changing underwriting, reserving, capital and requirements as a globally operating steering models. reinsurer. Risk management Swiss Re | Financial Report 2020 21 Risk management While economic solvency regimes such as expected value of annual losses likely to SST and Solvency II offer standard models occur with a frequency of less than once in for calculating regulatory requirements, one hundred years, thus capturing the such models are generally geared towards potential for severe, but rare, aggregate regulating the local or regional re/insurance losses. market and thus do not take sufficient account of Swiss Re‘s broad geographic In addition, the model is used to calculate and diversified portfolio structure. Swiss value at risk (VaR) measures including Re‘s model uses the Monte Carlo simulation 99.5% VaR, which is used in other method to estimate a joint multivariate regulatory regimes such as Solvency II. distribution of all relevant risk factors, rather 99.5% VaR represents the loss likely to be than a limited set of deterministic scenarios exceeded in only one year out of two and factors. It therefore provides more hundred and is thus more severe than the detailed results than standard formulas, 99% VaR measure, which estimates the loss which are often based on simplified likely to be exceeded in one year out of one industry-wide common denominators. hundred. For Swiss Re‘s loss distribution, the 99% expected shortfall (tail VaR) Swiss Re‘s internal model is based on two measure is generally larger than the 99.5% important principles. First, it applies an VaR measure. asset-liability management approach, which measures the net impact of risk on Separate risk modules are used to model the economic value of both assets and the individual risk factors of Swiss Re’s core liabilities. Second, it adopts an integrated risks (see Swiss Re’s risk landscape). perspective, recognising that a single risk Depending on the underlying risk and factor can affect different sub-portfolios and available historic experience, Swiss Re that different risk factors can have mutual applies different modelling approaches: dependencies. Swiss Re’s internal model is • Non-life insurance risk – Swiss Re’s fully stochastic and is based on a separation model comprises several components for of risk factors and exposure functions. non-life risks: one main contributor is costing and reserving risk; this is The model generates a probability modelled based on a statistical model distribution for economic profit and loss, approach which derives its assessment of specifying the likelihood that the outcome future uncertainty from the observation of will fall within a given range. past volatility. Another key component of non-life insurance risks are natural In line with the SST, the Group measures its catastrophes: Swiss Re has developed its economic risk capital requirement as the own proprietary natural catastrophe 99% expected shortfall (or tail value at risk) models, which are used for costing as level. This represents an estimate of the well as risk assessment. In addition, Swiss Probability 99.5% VaR 99% VaR Average of 1% 1 in 100 year loss1 in 100 worst losses 1 in 200 year loss 99% Tail VaR Expected result Profit Loss 22 Swiss Re | Financial Report 2020 Re uses a number
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