Swiss Re: Transforming Liquidity Risk Management with Zanders’ Expertise

In the 150 years of its existence, Swiss Re has grown to be one of the world’s largest providers of reinsurance and insurance-based forms of risk transfer. Reinsurers are mostly associated with insurance for extreme loss events, such as natural catastrophes. However, Swiss Re’s services cover the entire insurance spectrum: Swiss Re is the counterparty to risks which primary insurance companies and large corporates decide to mitigate.

Liquidity risk

Usually, liquidity is not the first topic that comes to mind as a key risk for reinsurance companies. “The general view was, and kind of still is, that reinsurance companies do not run a lot of liquidity risk, like a bank,” Martin Ramseyer says. For banks, the main driver of liquidity risk is a sudden customer run on deposits. The risk for reinsurers is rather that claims can reach the order of billions, sometimes to be paid out at short notice relative to the magnitude. If sufficient assets cannot be liquidated at a reasonable price within the required time frame, the company not only puts its reputation at stake but also risks bankruptcy – regardless of its solvency or profitability.

From a capital perspective, expanding services across businesses yields a risk diversification benefit. But that benefit does not extend to liquidity, Ramseyer clarifies: “There are many legal limitations imposed by different jurisdictions that limit our abilities to move assets between subsidiaries within the group.” A joint effort of risk and treasury was initiated several years ago to create a framework to measure and manage funding liquidity risk. Initially, the primary objective was to identify potential liquidity constraints for the major legal entities. Calculations gradually grew more extensive, and the framework evolved into an important scenario analysis mechanism used to support executive management decisions. Its execution had become time-consuming, and the operational risk inherent in manual calculations increasingly relevant. The time was ripe to streamline and automate liquidity risk analysis and the reporting process. Andreas Tonn became the business project manager for the system selection and implementation.

Implementation

The choice was made for a vendor solution. “The core advantage is that they provide a framework, which reduces implementation time and facilitates the translation of needs into requirements,” Tonn says. “But as you will never find the perfect tool, it is important to have a clear focus.” Liquidity risk measurement models for the insurance business in vendor systems are still in evolution phase. Flexibility was therefore a key priority for Swiss Re, as the majority of the logic needed to be implemented from scratch. Swiss Re embarked on an intensive proof-of-concept phase, and asked vendors to provide a working demonstration that addressed all aspects of its liquidity risk framework. They chose Wolters Kluwer’s RiskPro, as it proved both mature and sufficiently flexible at the same time.

A phased implementation approach was chosen to gradually introduce the solution into the reporting cycle. However, after the first release, it became apparent the project team would need additional business support if it was to cover all the aspects thoroughly within the stated time frame. “Our internal resources were too committed to other tasks and could not provide support to the extent an intensive project requires,” Tonn says, “but external resources are actually only beneficial to a project if they bring the right expertise to the table.” There were very positive experiences with Zanders on other treasury projects so a request was made for support.

Jeroen van der Heide from Zanders was asked to join the project team: “His ample experience with functional design of various systems across risk domains convinced us that he would indeed accelerate our project.”

Andreas Tonn, business project manager for the system selection and implementation

Challenges

As with many system implementations, getting the data delivered in a systematic fashion was a challenge: different departments have different priorities and downstream reporting is often not on top of their list. Afterwards, the interpretation for modeling was not always clear either as it was complicated by the global reach of the company in which data ownership spans across time zones. For example, intra-group funding was previously measured using a net aggregate approach. With the implementation of RiskPro, the choice made sense to model each debt contract based on its characteristics as booked in the system. Understanding how to calculate the impact of all implicit options automatically for different scenarios required detailed discussions across teams and continents.

The project team has worked relentlessly during the past year in close cooperation with business and IT colleagues. A total of six minor and major releases were accomplished, during which the necessary data and calculations with respect to investments, collateral, reinsurance portfolios, debt, internal cash flows, and contingent funding requirements were added to the system. The RiskPro results were embedded in existing reporting templates, and the change analysis process between reporting dates was partly automated. They were very satisfied with the Zanders support: “Of great benefit was Jeroen’s talent to quickly gain insight out of a huge amount of information, and present the newly created results in such a way to make them understandable to the business user and fit right into existing business processes. That has been a very valuable business contribution.”

Looking towards the future

With the system up and running, the team is able to provide reporting and analytics for the major legal entities within the group and across business segments and branches, rather than only for those with the largest impact from a risk perspective. “It allows us to understand and represent the liquidity dynamics in a more systematic way across the group,” Ramseyer says. The next step is to increase the quantity and quality of the information flow between local business units and treasury. “It will really enhance the risk awareness of local boards and empower them in their active steering efforts. With their feedback they will help improve the framework in return.”

Developments within Treasury Business Services don’t stop there. The system contains the vast majority of Swiss Re’s economic balance sheet down to the transaction and cash flow level. “The vendor software is designed to be an integrated risk system. With the market data and contract data available in full detail, we have a suitable basis to extend the scope of the solution to other domains,” Tonn says. The plan for the next two years, therefore, is to gradually support other analyses, for example with respect to currency risk, funding cost, liquidity planning, and ALM. The consistency between and efficiency of the analyses will improve, enabling the treasury teams to dedicate more time to proactive analysis and steering. Zanders will continue to support these efforts: “Given his successful contribution to the project and his interest to continue to support Swiss Re, we asked Jeroen to manage next year’s project,” Tonn says, “But first things first: we are very much looking forward to the daily use of the implemented solution.”