Risk assessment

1. Strategic.

Risk considerations are a key element in the strategic decision-making process. The Group assesses the implications of strategic decisions on risk-based return measures and risk-based capital in order to optimize the risk-return profile and to take advantage of economically profitable growth opportunities as they arise.

In 2010, the Group enhanced its assessment of strategic risks by implementing procedures to aggregate and analyze its exposures by country. This helps the Group evaluate when making strategic decisions whether its aggregated exposures, including insurance and investment exposures, to a country could become overly concentrated.

The Group specifically evaluates the risks of M&A transactions both from a quantitative and a qualitative perspective. The Group conducts risk assessments of M&A transactions to evaluate risks specifically related to the integration of acquired businesses.

1. Insurance.

General

Risks of natural catastrophes

The Group models at the local and Group level in order to assess and aggregate its exposures. The Group centrally oversees its modeling for consistency in approach and to form a global perspective on accumulations. The Group has technical centers embedded within the business which help to improve the overall quality of data. The Group models potential losses from property policies located in the most hazard-prone areas and adjusts for non-property related losses. These assessments principally address climate-induced perils such as windstorms, river floods, tornadoes, and hail, and geo-risk perils such as earthquakes. The Group constantly seeks to improve its modeling, fill in gaps in models with additional assessments and increase the granularity of data collection in order to increase the accuracy and utility of the information.

Risks from man-made catastrophes

The Group reviews and aggregates workers’ injury and property exposures to identify areas of significant concentration. The Group also assesses other lines of business, such as liability and auto, although the potential exposure is not as significant. The resulting data allows underwriters to evaluate how insuring a particular

customer’s risk might affect Zurich’s overall exposure.

In North America, Zurich uses a vendor-provided catastrophe model to evaluate potential exposures in every major U.S. city. The Group undertakes more detailed and frequent analytics for cities in which Zurich has greater exposure. In 2010, Zurich continued to use a multi-disciplinary team to examine the vendor tool and make adjustments based on its own experience, expertise and view of the potential risks.

Life

The Group undertakes more detailed and frequent analytics for cities in which Zurich has greater exposure. In 2010, Zurich continued to use a multi-disciplinary team to examine the vendor tool and make adjustments based on its own experience, expertise and view of the potential risks.

1. Market.

Investment Committees and regularly assesses market risks both at a Group and at a local business level. Risk assessment includes quantification of the contributions to financial market risk from major risk drivers. The economic effect of potential extreme market moves is regularly examined and considered when setting the asset allocation.

Risk assessment reviews include the analysis of the management of interest rate risk for each major maturity bucket and adherence to the aggregated positions with risk limits.

1. Credit.

To assess counterparty credit risk, the Group uses the ratings assigned by external rating agencies, qualified third parties, such as asset managers, and internal rating assessments. When there is a difference among external rating agencies, the Group assesses the reasons for the inconsistencies and applies the lowest of the respective ratings unless other indicators of declining credit quality justify the assignment of lower internal credit ratings.

1. Liquidity.

At the Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input and the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group maintains sufficient cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows including those for maturing debt obligations. In addition, the Group maintains internal liquidity sources that cover the Group’s potential liquidity needs, including under stressed conditions. The Group takes into account the amount, permanence of availability and speed of accessibility of the sources. The Group centrally maintains committed borrowing facilities, as well as access to diverse funding sources to cover contingencies.

1. Operational.

The Group uses a scenario-based approach to assess, quantify and allocate risk-based capital for operational risk for all business units. This approach allows comparison information across the Group. Zurich conducts operational risk assessments through which operational risks are identified for key business areas and are qualitatively assessed. In the assessments, the Group makes use of such sources of information as Total Risk Profiling™, internal control assessments, and audit findings, as well as scenario modeling and loss event data.

Date: 2015-02-16; view: 706