"We are able to fly with a well-calibrated compass"

At the end of last year, the Swiss regulator FINMA gave approval for our Internal Capital Adequacy Model under their revised model approval process. The model, which is developed and maintained in-house, is used to calculate risk figures under the Swiss Solvency Test. Renate Leukert, Head of Risk Modelling, and Lutz Wilhelmy, Risk & Regulatory Advisor, explain what the approval means for Swiss Re, what the next steps are and why Swiss Re has just won the InsuranceERM Award 2017 as "Risk modelling team of the year".

Swiss Re started to develop an internal risk and capital model in the 1990s and now got the approval to continue to use it under the revised process and regulation. What was the biggest challenge you had to face during the process with the Swiss regulator?
Renate Leukert: The process was surprisingly smooth. At the same time we also invested a lot of time, effort and exceptional teamwork over the past years to develop and document our internal model. It was very time consuming and intense to put together the required documentation and answer all of FINMA's questions. We now have FINMA approval for the entire risk model without the temporal expiry imposed by the old process – for the Group as well as for key legal entities that are domiciled in Switzerland, including Swiss Reinsurance Company Ltd (SRZ), Swiss Re Corporate Solutions Ltd and Swiss Re Life Capital Reinsurance Ltd.
Lutz Wilhelmy: Since the global financial crisis, we have built up a trustful relationship with regulators in different countries – including the Swiss regulator, FINMA. We also have to pay a compliment to the Swiss regulator: Their new model approval process has been very structured and they were highly focused in their interactions with us.   

Can you shed a bit more light on the advantages that an internal model has for Swiss Re compared to the standard model?
Sure, the internal model brings huge advantages for our risk and capital management. The model approval increases the certainty we have in planning for regulatory capital. In our experience, a standard model is not sophisticated enough to reflect Swiss Re's complex and highly diversified risk profile. And let's not forget that our internal model is deeply embedded in the business: It aligns the internal and the regulatory perspective, and thus provides the same steering impulses for both. Having separate models with different steering impulses would be like a cockpit in which different instruments point in conflicting directions. As you can imagine, that would make it quite hard to fly – or steer a business. Using our aligned internal model we are able to fly with a single, well-calibrated compass.  
Lutz: A further benefit of internal models is that they can be applied across the whole business cycle – from setting the risk appetite, to business steering, underwriting and costing, and finally for performance measurement. Our internal model reflects the risk profile of Swiss Re much more accurately than a standard "one-size fits all" approach that translates into rather punitive effects on capital costs for well-diversified insurance and reinsurance companies.   

The quality of our internal model is also recognised in the broader insurance world. Renate, your team just won an award…
Yes, Swiss Re received the InsuranceERM Award 2017 as "Risk modelling team of the year". The award clearly goes beyond the Risk Modelling team and is above all a shared success it includes other teams in Group Risks & Analytics, Actuarial Control, Risk IT, Cat Perils, Business Steering and many more. This is wonderful and would not have been possible without the great teamwork, which expresses how deeply integrated our model is in Swiss Re's company steering and risk culture. InsuranceERM acknowledged that our internal model follows a very clear structure and implementation architecture by separating risk factors from exposure – thus allowing us to better capture dependencies between risk factors. They also acknowledged our sophisticated balance sheet approach that reflects all legal entity balance sheets as well as intra-group transactions and relationships. Both features are a clear differentiator from our peers. The magazine also mentions the successful re-platforming of the model and transition to IRAMP, a major project over the last few years.

Let's come back to the regulatory environment. FINMA's approval is only relevant for Switzerland –what are the next steps?  
Lutz: That is true. We still have many entities outside Switzerland that are regulated under standard approaches. The approval by the Swiss regulator will definitely help us in other regions, for example Asia. We are sharing our experience and expertise with all our colleagues around the world with two key objectives in mind:  Swiss Re wants to enable and improve the steering of different businesses on a regional level – for this we need to refine our internal model in a collaborative effort. Secondly, we hope that over time Asian and other regulators will allow using our internal model also for their local regulatory purposes. We already use it locally in our ORSA (Own risk and solvency assessment). Unfortunately, internal models have lately come under scrutiny by some regulators, mainly on the banking side. However, given the advantages mentioned earlier we continue to advocate for the use of internal models in insurance.
Renate: Even though the approval does not expire, FINMA can always come back and ask for more details or look at certain parts of the model in more depth. The internal model is not static; we will develop it further as our business grows and changes. We are continuously asking ourselves "are there new risks that we can now quantify?" There will also be new risks that we insure and thus need to model.
Lutz: Let me put it this way: Basically, we are constantly improving something that is already very good in order to expand our access to risk pools and steer our business to increased profitability.

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