Market risk
The market risk stems from fluctuations on the financial markets which impact the value of capital investments and liabilities. Risk types significant for Swiss Life include primarily:

• risk of changes in interest rates
• volatile stock markets and
• fluctuating rates of exchange against the Swiss franc.

Swiss Life invests in equity markets without actively engaging in stock-picking. The Group’s equity exposure after hedging (net equity exposure) came to 7.5% as at 31 December 2007.

Credit risk
Credit risk arises in connection with investments and, to a lesser degree, in reinsurance business. Swiss Life strives to achieve an adequate return for the risks entered into and to prevent loss of income, for instance failure by borrowers to pay interest on bonds, loans or mortgages. It does so by setting Group-wide guidelines on the creditworthiness of borrowers and by requiring guarantees.

Bonds make up over half of Swiss Life’s investments. Of these, almost 60% are bonds with
an AAA rating.

Underwriting risk
Underwriting risks comprise biometric risks (mortality, longevity and disability) on the one hand and the unpredictability of customer behaviour (surrenders and capital options) on the other.

The underwriting parameters such as mortality, disability and cancellation rates are determined on the basis of in-house historical data and partly on external statistics. These parameters in turn form the basis for the setting of premium rates and the evaluation of insurance portfolios.

Operational risk
Operational risk is understood to be the risk of losses resulting from inadequate or failed internal processes, people and systems, or from external events. With operational risk management (ORM) in the form of an internal control system (ICS), Swiss Life aims to identify, evaluate, manage and reduce these risks.

The identified risks are monitored and steered on the basis of the value chain and the defined risk tolerance with the aim of ensuring that operations run smoothly.