4th Workshop on Strategic Crisis Management, Panel 1 - Risk and crisis anticipation

Risk and crisis anticipation:some insights from Swiss ReBeat Habegger, OECD / Federal Chancellery Workshop, 28 May 2015

Beat Habegger | OECD | 28 May 2015 2

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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Beat Habegger | OECD | 28 May 2015 5

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


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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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


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


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


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)


Example I: regular risk reporting

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Risk reporting• Issue description• Risk implication• Action plan


Example II: marine war ratings

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• 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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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.


• '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)


Example VI: executive managementround-tables on geopolitical risks

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Example VII: Sonar – Emerging Risk Mgmt

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• 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


SONAR 2015: Overview of emerging risk topics

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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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• 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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Thank you!

Dr. Beat HabeggerHead Political Risk+41 43 285 7924 – [email protected]


Legal notice

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©2015 Swiss Re. All rights reserved. You are not permitted to create any modificationsor derivative works of this presentation or to use it for commercial or other public purposeswithout the prior written permission of Swiss Re.

The information and opinions contained in the presentation are provided as at the date ofthe presentation and are subject to change without notice. Although the information usedwas taken from reliable sources, Swiss Re does not accept any responsibility for the accuracyor comprehensiveness of the details given. All liability for the accuracy and completenessthereof or for any damage or loss resulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstances shall Swiss Re or its Groupcompanies be liable for any financial or consequential loss relating to this presentation.

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4th Workshop on Strategic Crisis Management, Panel 1 - Risk and crisis anticipation