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Swiss Re improves solvency test ratio by 71 points

14th April 2023 - Author: Matt Sheehan

Global reinsurer Swiss Re has reported that its Group Swiss Solvency Test (SST) ratio for 2023 stands at 294%, which is well above its 200-250% target range, and represents an increase of 71 percentage points over its 2022 figure.

Swiss Re outlined its capital position in detail in its Financial Condition report for 2022, where it credited the SST improvement to higher interest rates, as well as lower risk due to additional investment hedges and lower asset valuations.

These effects were partially offset by a negative investment contribution, model updates and paid dividends.

In SST 2023, the largest natural catastrophe exposure for the Swiss Re Group derives from the Atlantic hurricane scenario with a US $6.1 billion loss. Lethal pandemic and credit default losses are estimated to be at $3.5 billion and $2.3 billion, respectively.

Swiss Re also notes that its SST ratio is sensitive to interest rate declines, with a 50-basis-point decrease projected to result in an estimated decrease in the SST ratio of 13 percentage points.

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Running through its financial condition, the reinsurer explains that it is exposed to insurance and financial risks that are calculated in its internal risk model, as well as other risks that are not explicitly part of the economic capital requirement but are actively monitored and controlled due to their significance for the company. These include operational, liquidity, model, valuation, regulatory, political, strategic and sustainability risks.

Property and casualty risk is mainly driven by underlying risks inherent in the business Swiss Re underwrites, in particular non-life claims inflation, natural catastrophe risk, man-made risk and costing and reserving risk, while the main drivers of life and health insurance risk are lethal pandemic risk and mortality trend risk.

The Group’s financial risk, meanwhile, derives from financial market risk as well as from credit risk, with key drivers for the former being credit spread and equity risk, and credit and surety business and default risk on capital market products for the latter.

Swiss Re reports that its total risk decreased to $19.0 billion over 2022, mainly driven by lower financial market risk.

This included an increase in P&C risk due to an inflation parameter update, partially offset by higher interest rates and the depreciation of major currencies against the US dollar, but life and health risk decreased due to the impact of higher interest rates and the depreciation of major currencies against the US dollar.

Financial market risk also decreased mainly due to the increase in investment hedges, the negative performance of credit and equity markets, the introduction of the new financial market risk model and the depreciation of currencies. ̤

And likewise, credit risk decreased driven by the increase in interest rates, credit spread widening and the depreciation of currencies, partially offset by the introduction of the new financial market risk model.

Swiss Re notes that its total risk metric is based on 99% tail value-at-risk and represents the average unexpected loss that occurs with a frequency of less than once in 100 years over a one-year time horizon.

The reinsurer reported net income of $472 million for the full year 2022 compared with $1.4 billion a year earlier, as the impact of economic inflation on expected claims impacted its P&C businesses, and large natural catastrophe losses exceeded expectations at $2.7 billion.

But in its 2022 Annual Report, Swiss Re cited a “very strong” capital position and maintained that its businesses remain “well-positioned for the future.”

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