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Risk Management Risk management is one of a life insurer’s core tasks. In this respect, Swiss Life pursues an integrated approach. For many years now, the company has been using an internal risk model that essentially corresponds to the new risk-based solvency regulations in Switzerland.
Swiss Life pursues an integrated approach in the area of risk management. The economic perspective serves as a basis for all processes. Other relevant aspects also come into play when making decisions on risk. These are primarily statutory considerations such as solvency, annual financial statements and investment regulations. Furthermore, the possible implications for the Group consolidated results in accordance with the International Financial Reporting Standards (IFRS) and considerations about the possible effects on the capital requirements of rating agencies also form part of the risk analysis.
Process The financial risk specialists at head office and in the local units jointly develop the principles and measuring methods for risk management, which are subsequently approved by the Board of Directors. The various risk categories are measured and monitored as part of the risk policy. The Investment and Risk Committee of the Board of Directors determines Swiss Life’s risk tolerance based on the preset risk capacity parameters, and this forms the basis for deriving the individual limits for the various risk categories at each Group company. It is the responsibility of the relevant teams in the individual companies to ensure that these limits are complied with at all times. Every month, a central system tracks the limits currently being used; this system is also available to the individual companies.
The Investment and Risk Committee of the Board of Directors receives quarterly reports on the risk situation of the Group companies and the Group as a whole. The Committee appraises the situation, defines suitable measures and informs the Board of Directors.
In addition to involvement with the Group-wide risk management process, the relevant local units are responsible for ensuring compliance with the regulatory and legal requirements specific to each country, and support local management in all matters relating to risk management.
Market risks It is imperative that a life insurance company monitors and controls market risks. Swiss Life is obliged to offer insurance contracts with a guaranteed rate of interest to its policyholders. Besides the guarantees, often customers with long-term ties expect to benefit from a positive trend on the financial markets in the form of bonuses. In the individual countries, life insurers are required by law to allocate to policyholders a minimum share of the profit in the form of bonuses. In order to generate the guaranteed interest and the anticipated or legally prescribed bonuses, suitable financial instruments are used on the investment side. These are usually bonds or investments which – like properties – generate regular income and preserve value.
As of 31 December 2006, the Swiss Life Group held assets under management of CHF 205.5 billion. The insurance portfolio came to CHF 147.5 billion, the lion’s share of which (60%) was invested in bonds. The net equity exposure – adjusted for positions held on the client’s account and allowing for hedging instruments – amounted to 6.7% on the key date. As Swiss Life announced in December 2006, the Group’s equity exposure may exceed the previous target range (0% to 7%) in the future.
The market risk corresponds to fluctuations on the financial markets which impact on the value of capital investments and liabilities. As part of the market risk, the interest rate risk arises from fluctuations in interest rates which simultaneously affect both capital investments and liabilities.
Such interest-rate risks are reduced by purchasing corresponding interest instruments, in particular bonds, as the maturity structures of investments and liabilities are harmonised. To diversify the investment portfolio and benefit from the higher longer-term earnings expectations, Swiss Life also opts for other types of investment, such as equities, alternative investments or foreign currency investments. The equity risk replicates fluctuations in global equity markets. The individual business units control this risk by setting investment limits. The currency risk concerns fluctuations in foreign currencies vis-à-vis the Swiss franc and is restricted by exchange rate hedging transactions.
In addition to being monitored and controlled in the individual business units, market risks are also consolidated and centrally managed at Group level.
Credit risk Describes the risk that a counterparty will fail to honour its obligations towards Swiss Life. Such risks are especially common in the reinsurance and investment areas, for instance outstanding interest payments in the case of bonds, loans or mortgages. Stringent guidelines on minimum borrower ratings and guarantees in the event of default are in place throughout the Group to prevent such instances. The guidelines also specify individual limits for each borrower depending on the borrower’s rating.
The individual business units constantly monitor the creditworthiness of their borrowers. To avoid concentrations of risk across the Group as a whole, the central risk management team collates the credit positions at Group level and reduces them, as required, in the individual units. In the case of credit business with financial institutions, Swiss Life regularly appraises the outstanding positions and requests additional payments if an agreed limit has been exceeded.
Swiss Life primarily invests in government bonds with excellent ratings (AAA). The remaining credit positions are greatly limited to ensure that the company is exposed to a marginal credit risk only.
Underwriting risks These include mortality, disability and cancellations. Swiss Life conducts an annual review of the mortality tables and analyses the mortalities. To manage disability risk and stabilise risk performance, Swiss Life draws up evaluations on specific disability cases in addition to the portfolio analyses. This information is incorporated in the setting of premium rates. The data is also used to form suitable reserves so that Swiss Life can meet its future obligations in the insurance business at any time. Sensitivity analyses quantify the actuarial risk by examining fluctuations in the value of liabilities as a result of variations in risk factors such as mortality, disability and costs. Swiss Life analyses the cancellation rate annually by making comparisons between assumed and actual customer behaviour.
Operational risks Operational risks include process risks, risks relating to moral hazard, technology risks and business risks; they result from changes in the economic, fiscal or legal environment. In order to pre-empt such risks, a review based on uniform criteria is carried out periodically throughout the Group. The consolidated report highlights any potential need for action at an early stage.
Risk-based solvency check The revised Swiss Insurance Supervisory Law (VAG) came into effect on 1 January 2006. With the introduction of the Swiss Solvency Test (SST), Swiss insurers are subject to new regulatory requirements. Large insurers were required to implement the SST as early as 2006. Smaller companies have until 2008 to determine their solvency in accordance with the new risk-based principles. In the Swiss Solvency Test, Swiss Life records the details of the parent company, i.e. the Swiss business as well as activities in the German, French and Dutch subsidiaries.
The risk categories that Swiss Life has been using for several years to steer economic risk are congruent with the corresponding categories of the Swiss Solvency Test. The new Supervisory Act also stipulates that operational risks be included; these have yet to be incorporated in the Swiss Life model.
The European Solvency II project also has the aim of checking solvency based on risk monitoring. Swiss Life is involved in shaping the Solvency II guidelines together with the Swiss Insurance Association (SIA) and the European Insurance and Reinsurance Federation (CEA). Harmonising the Solvency II principles with those of the Swiss Solvency Test is extremely important for the internationally active Swiss Life Group.
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