Risk and crisis anticipation:some insights from Swiss ReBeat Habegger, OECD / Federal Chancellery Workshop, 28 May 2015
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The sooner we anticipaterisk, the more effectivewe will be at preventionand preparation.
Beat Habegger | OECD | 28 May 2015
Swiss Re at a glance
These traditional products are complemented by insurance-based corporate financesolutions and supplementary services for comprehensive risk management
The company offers traditional reinsurance products and related services for propertyand casualty, as well as for life and health businesses
Swiss Re is a leading and highly diversified global reinsurer, founded inZurich (Switzerland) in 1863
The “Gherkin”, London
Headquarters, Zurich
Armonk, New York
Swiss Re named as the insurance sector leader in the 2014 Dow Jones SustainabilityIndices
Our financial strength1 is currently rated:Standard & Poor’s: AA- (stable); Moody’s Aa3 (stable); A.M. Best: A+ (stable)
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1 As at 13 February 2015
Key statistics (USD billions) FY 2011 FY 2012 FY2013 FY 2014
Total revenues: 28.0 33.6 36.9 37.3Net income: 2.6 4.2 4.4 3.5Shareholders’ equity: 29.6 34.0 33.0 36.0
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P&C Re50%
L&H Re36%
CorporateSolutions
11%
Admin Re®3%
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Swiss Re is broadly diversified by geography and productline
Swiss Re benefits from geographic and business mix diversification and has the ability toreallocate capital to achieve profitable growth
EMEA AsiaAmericas
39% 36% 25%
12.2 11.3
7.8
Net premiums and fee income earned1 2014 (USD 31.3 bn)by region (in USD bn) … and by business segment
1 Includes fee income from policyholders; does not reflect the exposure to HGMs through Principal Investments (PI)Source: Swiss Re
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Swiss Re GroupOverview
Reinsurance
• To be a focused, lean,global player in largecommercial business
• To be a recognisedforce in the closed lifebook market
• To be the world'sleading reinsurer
• The foundation of ourstrengths
• A key opportunity forgrowth
• Providing cashdividends
Corporate Solutions
Swiss Re Group
Admin Re®
Current position
Strategic goal
Current position
Strategic goal
Current position
Strategic goal
P&C L&H
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Political EnvironmentSocietal Environment
Competitive & Business Environment Technological & Natural Environment
2015 Macro Trends List
Radical medical innovation4
The future of work & talent gaps6
Urbanisation of global population
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Connected & collaborative society3Public sector moving risk to private sector
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Increasing government influence andregulations, “nationalisation"
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Emergence of new economic powers,“shift to the East"
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Geopolitical instability & divergence
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Increasing supply of alternative capitalfor reinsurance solutions20
Insourcing of reinsurance risks byprimary insurers19
Market entrance of non-insurancecompanies in primary market, "Primary Attackers"
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Redistribution of risk along the re/insurancevalue chain18
Massive expansion of cyber risks
E-distribution as the dominantdistribution channel
17 Autonomous vehicles (incl. cars and drones)
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Big data & digital analytics /cognitive computing14
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Climate change12
Internet of things15
Growing middle class inHigh Growth Markets1
Regional champions going global
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Longevity and chronic diseases
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Low-yield environment
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• A company is directly involved in a crisis as an "actor"
– Example: Banks and other financial institutions have been involved in regulatorycontroversies, which have led to heavy fines for violations of law (e.g., violation ofsanction regimes, Libor manipulation, tax evasion)
• A company is affected by a crisis without playing any (significant) role in it,nor having the capacity to prevent the crisis from happening:
– Example: Swiss Re could be affected by a huge earthquake (underwriting loss),equity market crash (investment loss) or a terrorist attack at an office building(operational activity).
The latter is the more prevalent crisis situation a company is facing.
How are companies affected by a crisis?
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Crisis impact assessment and management action
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•Is the crisis relevant in light of our business model,markets, time frame, etc.?
•Could it become relevant if it propagates, widens, etc.?
Relevance of thecrisis
•Can we shape – at least to some extent – the evolutionof the crisis?
•Or are we just external observers?
Ability to shapethe crisis evolution
•Can we mitigate the negative impact on our business?•What are the consequences in terms of financial loss,
operational risks, reputational damage, regulatoryaction, market access, etc.?
Ability to mitigatethe crisis' impact
•What actions can we take?•What consequences do these actions entail?
Managementaction
Beat Habegger | OECD | 28 May 2015
Crisis timeline
• 2013: Ukraine's economicsituation declines
• Nov ember 2013: Euromaidanprotests begin
• February 2014: Protests gathermomentum and peak inviolence, after which PresidentYanukovich flees and pro-Russian militants seizegovernment buildings in Crimea
• 16 March: Crimea referendum
• 17 March: first round of US andEU sanctions
Swiss Re actions• Q3/2013: Ukraine scores a CCC rating on Swiss Re's
Political Risk Rating, while Russia scores a B
• 13 Dec 2013: Asset Mgmt sells Ukraine assets and removesit from permitted HGM country list for debt investments
• January 2014: Group Risk and Capital Committee imposesa freeze on all Ukrainian credit risk-related activity
• February: creation of Ukraine/Russia task force
• March: Safety & security risks for travellers to regions ofUkraine raised to high; no specific actions for Russia
• 7 March: Group EC discusses Ukraine risk assessment
• 11 March: Contagion risks assessment of escalation
• 2 April: Assessment of underwriting exposure in Ukraineand Russia for P&C and L&H businesses
• 16 April: Group Risk and Capital Committee discusses aRussian country risk review and contagion assessment
Case-in-point: Ukraine crisis 2014Crisis timeline and Swiss Re actions
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Beat Habegger | OECD | 28 May 2015
Selected Short term risks
– Increase in insurance andreinsurance claims, eg. due topolitical violence, businessinterruption, expropriations
– Sanctions by the EU, US, andretaliatory acts by Russia
– Companies
– People
– Services provided to companies orpeople
Selected medium to long-term risks:
– Strategic implications on ourbusiness in light of expanded Russianambitions to Belarus, Moldova,Poland, etc.
– War risks (Russia, Ukraine, NATO)
– Negative impact on Russian,European, global growth
– Negative effects on EU energy market
– Russian unwillingness to honoursovereign debt obligations
– …
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Case-in-point: Ukraine crisis 2014Political risk implications
Beat Habegger | OECD | 28 May 2015
Underwriting
InvestmentOperations
Businessenvironment
Is there "crisis management" at Swiss Re?
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• Crisis Management is not a term thatis (regularly) used in Swiss Re. If it isused, it is in connection to
– Safety & Security measures for ourstaff and premises not in focushere
– colloquial use to refer to any kindof negative events….
– a particular insurance product…*
• Key question: what exogenous eventsor developments can significantlyimpact our organization in an adversemanner?
* In Swiss Re, Crisis Management underwriting refers to "Political Violence" insurance policies that follow an existingproperty policy and cover terrorism, sabotage, SRCC, warlike actions and war
Beat Habegger | OECD | 28 May 2015
Underwriting
InvestmentOperations
Businessenvironment
In practical terms: what does this mean from a politicalrisk perspective?
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Political dynamics shapeeconomic growth anddevelopment trajectoriesof all markets
Politically-motivatedviolence and cyber-attacks can pose threatsto a re/insurer's property,personnel, and systems
Political dynamics canaffect the value ofinsurance companiesinvestments
Political dynamics couldaffect insured property,payments, and persons ina variety of sectors
Beat Habegger | OECD | 28 May 2015
Time horizons in a corporate context and examples
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• Example I: regular risk reporting• Example II: marine war ratings• Example III: travel warnings
Short-termearly warning
(approx. 1-3 months)
• Example IV: emerging marketsmonitor
• Example V: Life Guide
Issue monitoring &risk anticipation(approx. 6-18 months)
• Example VI: Executive round-tableson geopolitical risks
• Example VII: Sonar-Emerging Risks
Strategic trends(approx. 3-5 years)
Beat Habegger | OECD | 28 May 2015
Example I: regular risk reporting
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Risk reporting• Issue description• Risk implication• Action plan
Beat Habegger | OECD | 28 May 2015
Example II: marine war ratings
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Beat Habegger | OECD | 28 May 2015
• Safety & Securityissues for our staff andpremises are managedby a special unit inLogistics: the GroupSecurity Office
• It is a good example ofcrisis management inrespect of our ownoperations, but notdirectly linked to our'core business'
Example III: travel warnings
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Beat Habegger | OECD | 28 May 2015
Example IV: emerging markets monitor
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Issue monitoring& risk anticipation(approx. 6-18 months)
Provide an overview ofthe sustainability andpolitical risk performanceof Swiss Re focusemerging markets basedon a scorecard ofproprietary Swiss Redata and country ratings,and complemented byselected external sourcesand expert judgment.
Beat Habegger | OECD | 28 May 2015
• 'Life Guide': used by +7,000primary life insurers
– Ratings to assess risks forexpatriates, travelling to,working or residing abroad
– Indications on risks and risklocations to decide onloadings: occupations,regional issues, targets (e.g.infrastructure, assets)
• Political Country Riskprofiles for local businesshubs: in-depth countrybriefings where extra riskpremiums are applied
Example V: Life Guide
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Issue monitoring& risk anticipation(approx. 6-18 months)
Beat Habegger | OECD | 28 May 2015
Example VI: executive managementround-tables on geopolitical risks
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Strategic trends(approx. 3-5 years)
Beat Habegger | OECD | 28 May 2015
Example VII: Sonar – Emerging Risk Mgmt
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Strategic trends(approx. 3-5 years)
• SONAR is Swiss Re's tool for identifying, assessingand managing emerging risks
• Its purpose is to detect early signals of emergingrisks to avoid surprises and enable mitigation actions
• Emerging Risk Management owns the process and issupported by so-called SONAR officers and experts
S ystematicO bservation ofN otionsA ssociated withR isk
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SONAR 2015: Overview of emerging risk topics
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Beat Habegger | OECD | 28 May 2015
SONAR Example I: Challenges of the Internet of Things
By 2020 there will beapprox. 50bn. of networkeddevices worldwide.
Increased interconnectivityraises questions aboutnetwork and data security.
There is significant losspotential from system failureand malicious attacks.
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SONAR example II: The great monetary experiment
Many structural deficienciesof the global economyremain unaddressed.
Traditional policy measuresare no longer feasible orhave reached their limitsleading to competitivecurrency devaluation.
Unconventional strategies,such as "helicopter money"are entering the policydebate.
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SONAR example III: De-globalisation
Political conflicts worldwideintensified over the lastyears.
Economic distresssimultaneously has led to arise in nationalist partiesand territorial separatismmovements.
The economic environmentmay be negatively affected,leading to lower premiumvolumes and return oninvestment.
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Beat Habegger | OECD | 28 May 2015
• Anticipation of future risks and crises on different time horizons
• Many corporate units are tasked with monitoring developments in theexternal environments and have some role in detecting strategic trends
• There are some specialized units that have a particular focus on strategictrends, anticipation or early warning. Two examples include Political RiskManagement and Emerging Risk Management seven examples!
• Safety & Security issues for our staff and premises are managed by a specialunit in Logistics
• Covering long-term risks and trends is a pre-requisite for reacting toimmediate crisis events: The sooner we anticipate risk, the more effectivewe will be at prevention and preparation.
Conclusions
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Beat Habegger | OECD | 28 May 2015
Thank you!
Dr. Beat HabeggerHead Political Risk+41 43 285 7924 – [email protected]
Beat Habegger | OECD | 28 May 2015
Legal notice
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