Risk management

A further pillar of Swiss Life’s responsible, sustainable business is its integrated, value-oriented risk management involving both quantitative and qualitative elements. The goal is to protect customers’ funds and ensure the best possible investment of risk capital, while complying with regulatory requirements and taking into account persistently challenging economic conditions.

Risk management is a key component of Swiss Life’s management process. The respective committees of the Corporate Executive Board and the Board of Directors continually monitor and take decisions in the area of risk management; these are then incorporated into the annual planning process. On the one hand, they comprise qualitative assessments from a strategic perspective, taking into consideration operational risks and the internal control system (ICS). On the other hand, quantitative elements for each insurance unit, such as risk budgeting and investment strategy, are included in Asset Liability Management. Based on overall risk capacity and risk appetite and taking account of regulatory provisions, limits are set in the individual units for the financial risks incurred, according to which the investment targets are set. The qualitative risk management elements mentioned above are presented and discussed below. Detailed information on the risk budgeting process and asset and liability management is provided in Note 5 (Risk Management Policies and Procedures) of the Consolidated Financial Statements.

Swiss Life uses analytical methods to ensure that strategic risks are dealt with adequately in what continues to be a very challenging economic environment. In its strategic risk management process, Swiss Life incorporates all the information on risks and the risk/return characteristics in its strategic decisions. An understanding of the interplay of individual risks is essential in order to take due account of the factors influencing risks during strategy development so that these factors can be steered appropriately.

Operational risk management (ORM) at Swiss Life includes the methods and processes used for the identification, assessment and steering or avoidance of operational risks. ORM defines operational risk as the danger that losses may result from shortcomings or failures in internal processes, people or systems, or from external events. Swiss Life’s internal control system consists of the entirety of procedures, methods and measures prescribed by the Board of Directors and the Corporate Executive Board to ensure the orderly conduct of business. The focus is on the reliability of financial reporting, the effectiveness of business processes and compliance with laws and regulations issued to protect the company’s assets.

Swiss Solvency Test

The Swiss Solvency Test (SST) sets out the capital requirements valid for insurance companies and groups in Switzerland. It was enacted in 2006 with the revised Insurance Supervision Law and corresponding Insurance Supervision Ordinance and constituted a reporting requirement during a five-year transition period before it ultimately became binding on 1 January 2011. The SST is a principles-based framework where the main objective is the alignment of the required capital with the underlying risks. The SST capital requirements are based on the understanding that insurers will meet their obligations towards policyholders even under difficult conditions. Swiss Life uses an internal model to calculate the available and required capital for the SST. Based on this internal model, which has been partially or conditionally approved by FINMA, Swiss Life meets the capital requirements.

Economic capital

The value of a life insurance company for its shareholders comprises the economic net worth and the present value of future profits. The optimal amount of economic capital an insurance company needs to hold in order to maximise the company value is based on a risk/return trade-off. For risk and capital management decisions, Swiss Life uses an integrated approach. The economic risk capital is determined bottom-up for each large business unit and takes into account market risks, credit risks and insurance risks. These risks are calculated on the basis of loss distributions using a specified risk measure. The overall capital requirements are obtained by taking into consideration respective diversification effects.

Continuous monitoring of solvency under the SST is conducted on a monthly basis; calibration is effected based on the full SST calculations as at the beginning of each calendar year and as at mid-year.

Economic and statutory capital requirements and the profit target are the main elements determining the risk budgets. Based on the overall risk budget set by the Investment and Risk Committee of the Board of Directors, the Group Risk Committee of the Corporate Executive Board defines the risk limits for the business areas. Adherence to these limits is also checked on a monthly basis.

Standard & Poor’s rating capital

In the Standard & Poor’s risk-based model, the total adjusted capital (TAC) is the measure used for available capital. TAC is set against the capital required given the company’s target rating category (target capital). The calculation of target capital takes into account, in particular, insurance risks, asset value volatility and credit risks. Swiss Life has established a target capital level in line with its rating ambition. Within the capital analysis, in addition to assessing capital adequacy, Standard & Poor’s assesses the quality of capital with respect to its structure (including the share of equity and hybrid capital). Capital adequacy is monitored on an ongoing basis according to the Standard & Poor’s model.

Following the rating upgrade to “A–” in May of 2012 and the raising of the outlook from “stable” to “positive” in May 2014, Standard & Poor’s once again recognised Swiss Life’s operational progress and increased its rating to “A with stable outlook” in May 2015.