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5 Risk Management Policies and Procedures

The Group’s core business is life insurance and pensions. A life insurance and pensions contract re­presents a long-term promise to the policyholder. To fulfil its future payment obligations to the policyholders, the insurance entities of the Group must be financially sound over an extended period of time. The ability to remain financially sound and strong depends on a number of risk factors. The Group’s risk map can be broadly divided into financial, insurance, strategic and operational risks. All of these risk categories may affect the financial stability of the Group.

Risks must be identified, assessed, managed and monitored locally and aggregated at Group level. During the year, regular reports covering interest rate risk, equity and real estate price risk, currency risk, credit risk, liquidity risk and insurance risk are prepared by the local insurance units and consolidated at Swiss Life Ltd and at Group level. Strategic and operational risks are assessed and reported on an annual basis.

The risk appetite is defined and set by the Board of Directors using limit frameworks based on solvency ratios and economic capitalisation. Furthermore, it is allocated by the Group Risk Committee of the Corporate Executive Board to the relevant units in the insurance business. This risk budget at unit level is used as a framework for the asset and liability management process, the objective of which is to define a strategic asset allocation. From this strategic asset allocation a scenario-based expected return is calculated, which forms the basis for the Group’s mid-term planning.

Risk management functions are performed at several levels by corresponding bodies within the Swiss Life Group, such as the Investment and Risk Committee at the level of the Board of Directors of the Swiss Life Group and the Group Risk Committee at the level of the Corporate Executive Board of the Swiss Life Group. The risk management functions at the level of the individual operations of the Swiss Life Group are organised accordingly.

Group risk management is responsible for the definition of the Group-wide methodology for the measurement of the risks and produces a consolidated risk report which aggregates the main quantitative elements of the risk management of the Swiss Life Group’s operations. Furthermore, Group risk management also produces consolidated views on the strategic and operational risks of the Swiss Life Group.

Since the Group’s core business is insurance, its risk management is in line with the two main regulatory solvency frameworks in Switzerland (SST) and throughout Europe (Solvency II), as well as economic considerations. In addition to general governance aspects and extensive reporting requirements, this includes an annual Own Risk and Solvency Assessment (ORSA) at Group level covering a comprehensive risk assessment as well as the integration of risk and solvency aspects in the overall management of the Swiss Life Group.

The information below focuses first on the risk budgeting and asset and liability management process and then on the principal risk categories faced by the Swiss Life Group.

5.1 Risk budgeting and limit setting

Based on the risk appetite determined by the Board of Directors and using the same frameworks, the Group Risk Committee of the Corporate Executive Board sets risk budgets for the relevant units in the insurance business under consideration of local regulatory constraints. This process ensures a consistent and efficient use of the risk capacity of Swiss Life.

To control and steer exposure to risks, capital and exposure limits are defined in addition. They include capital limits for market and credit risk and, more specifically, capital limits for interest rate and credit spread risk as well as exposure limits for net equity and foreign currency.

5.2 Asset and liability management (ALM)

The main objective of the ALM process is to ensure that the Swiss Life Group’s insurance operations can meet their commitments to policyholders at all times while also adequately compensating shareholders for making risk capital available. Based on the economic principles of risk management and on the risk appetite definition applied in the risk budgeting process, ALM comprises the following main activity: the determination of the strategic asset allocation and of the risk capital and exposure sublimits.

The ALM process is centrally coordinated and steered at Group level by means of local asset and liability management committees with representatives from local senior management and representatives from the Group. The local units are in charge of implementing the decisions. The process requires the involvement of investment management, finance, actuarial and risk functions.

Consideration of constraints

Aspects other than the economic view, such as regulatory requirements including solvency, statutory minimum distribution ratios (“legal quote”), funding ratios, local accounting rules and International Financial Reporting Standards, liquidity requirements and rating targets, are also to be considered in the ALM process.

Depending on the regulatory framework in which the Swiss Life Group’s insurance operations evolve, the asset portfolios might need to be split to reflect the various categories of insurance products. The asset portfolios of the insurance operations in Switzerland have been separated to distinguish between individual life and group life. As a consequence, such separation is also reflected in the ALM process. Insurance companies are generally obliged to hold tied assets in view of claims arising from insurance contracts. Special rules apply to investments in tied assets. They specify the eligible asset classes as well as requirements to be met in terms of investment organisation and processes.

Strategic asset allocation

Defining the strategic asset allocation is the first major task of the ALM process and aims at achieving an efficient risk capital allocation, i.e. optimising the returns on the asset portfolio for the available risk capital defined within the risk budgeting process, taking into account all known constraints.

The liabilities are largely predefined in terms of amount and timing of the payments and the associated assumptions are regularly reviewed. The corresponding asset portfolios mainly comprise fixed-income instruments. This way, the impact of interest rate fluctuations and the risk capital consumption are strategically optimised under a risk/return point of view, thus ensuring that the policyholders receive the benefits consistent with their products. Policyholders may benefit from the ensuing investment returns in the form of discretionary participation, while shareholders may benefit from an increase in the value of their investment in the Swiss Life Group.

The strategic asset allocation is therefore determined on the basis of the insurance liabilities and the risk capacity of the Swiss Life Group’s insurance operations. The strategic asset allocation is reviewed at least once a year and adjusted if necessary.

Distribution policy

The distribution policy seeks to align the interests of the different groups of stakeholders. Holders of traditional life insurance policies favour a guaranteed minimum interest rate coupled with regular and appropriate discretionary participation, whereas shareholders place greater emphasis on returns commensurate with the level of risk they are exposed to. The focus of the Swiss Life Group lies on the sustainability of the business model and should balance the policyholders’ and shareholders’ expectations.

External constraints must be considered in the definition of the distribution policy. Important elements influencing such policy are minimum guaranteed interest rates and the statutory minimum distribution ratio (“legal quote”), which depend on the regulatory environments of the Swiss Life Group’s insurance operations.

Product design

The targets of risk management are supported by product management principles. Product design defines among other things which guarantees and benefits are built into a specific product to respond to the demand from and expectations of customers. The actuarial bases used for this purpose support each individual product generating a sufficient contribution margin. To ensure that the Group’s principles are observed, guidelines and directives on product management and underwriting are in place. Since the Group’s insurance entities operate in a number of different countries, the local regulatory constraints may have an impact on the business units’ product range. These constraints must always be observed.

5.3 Contracts for the account and risk of the Swiss Life Group’s customers

The assets relating to certain life insurance and investment contracts are managed for the account and risk of the Swiss Life Group’s customers (separate account/unit-linked contracts, private placement life insurance). They are segregated and managed to meet specific investment objectives of the policyholders. The assets back the insurance liabilities and the financial liabilities arising from these contracts. The fair values of the liabilities reflect the fair values of the assets. Certain contracts with unit-linked features contain financial and insurance guarantees. The liabilities relating to these guarantees are included in the financial and the insurance liabilities, respectively.

The assets and liabilities from separate account/unit-linked contracts and private placement life insurance are generally excluded from the Swiss Life Group’s financial risk management consider­ations to the extent that the risks are borne by the customers.

Assets for the account and risk of the Swiss Life Group’s customers

In CHF million
        31.12.2021   31.12.2020
Cash and cash equivalents       839   2 667
Derivatives       0   0
Financial assets at fair value through profit or loss            
Debt securities       7 256   7 683
Equity securities       6 073   5 759
Investment funds       29 977   23 337
Other       18   15
Investment property       394   307
Total assets for the account and risk of the Swiss Life Group's customers       44 556   39 768

Liabilities linked to assets for the account and risk of the Swiss Life Group’s customers

In CHF million
    Notes   31.12.2021   31.12.2020
Unit-linked contracts   19    27 592   25 693
Investment contracts   19    6 213   5 315
Insurance liabilities   22    10 448   8 399
Total liabilities linked to assets for the account and risk of the Swiss Life Group's customers       44 253   39 407

The financial result for the years ended 31 December for the account and risk of the Swiss Life Group and the Swiss Life Group’s customers was as follows.

In CHF million
        Assets and liabilities for the account and risk of the Swiss Life Group   Assets and liabilities for the account and risk of the Swiss Life Group's customers   Total
    Notes   2021   2020   2021   2020   2021   2020
Investment income   8    3 909   4 012   10   9   3 918   4 021
Net gains/losses on financial assets   8    707   –795   7   –1   715   –796
Net gains/losses on financial instruments at fair value through profit or loss   8    –980   191   27   –1   –953   191
Net gains/losses on investment property       1 493   847   13   0   1 505   847
Share of profit or loss of associates       8   9       8   9
Financial result       5 137   4 265   57   8   5 194   4 273
5.4 Financial risk management objectives and policies

The Group is exposed to financial risk through its financial assets, financial liabilities (primarily investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from the financial assets are not sufficient to fund the obligations arising from the insurance and investment contracts, as well as from borrowings and other liabilities. The most important components of the financial risk are interest rate risk, equity and real estate price risk, credit risk, currency risk and liquidity risk.

The risk budgeting and limit setting described above ensures that the corresponding risks remain under control. The market risk capital, interest rate risk capital, credit spread risk capital and credit risk capital limits, as well as exposure limits for currencies and net equity for each large insurance operation, are defined based on the risk appetite per operation.

Interest rate risk relating to financial in­stru­ments and insurance contracts

The Group’s primary interest rate exposure is to contracts with guaranteed benefits and the risk that the interest rates of the financial assets purchased with the consideration received from the policyholders are insufficient to fund the guaranteed benefits and expected discretionary participation payable to them.

Interest-sensitive insurance liabilities

In CHF million
    CHF   EUR   Other   Total
                 
Carrying amounts as at 31 December 2021
Minimum guaranteed interest rate 0 – < 1%   29 865   6 411   12   36 289
Minimum guaranteed interest rate 1 – < 2%   27 418   1 530   30   28 978
Minimum guaranteed interest rate 2 – < 3%   7 913   6 236   2   14 152
Minimum guaranteed interest rate 3 – < 4%   14 480   4 623   14   19 118
Minimum guaranteed interest rate 4 – < 5%   55   4 864   16   4 936
Minimum guaranteed interest rate 5 – < 6%       1   1
Total interest-sensitive insurance liabilities   79 732   23 665   76   103 473
Insurance liabilities with no minimum guaranteed interest rate               16 338
Insurance liabilities linked to assets for the account and risk of the Swiss Life Group's customers               10 448
Total insurance liabilities               130 258
Carrying amount as at 31 December 2020
Minimum guaranteed interest rate 0 – < 1%   27 795   7 233   9   35 037
Minimum guaranteed interest rate 1 – < 2%   27 574   1 494   17   29 085
Minimum guaranteed interest rate 2 – < 3%   8 059   6 355   16   14 430
Minimum guaranteed interest rate 3 – < 4%   15 871   4 960   14   20 845
Minimum guaranteed interest rate 4 – < 5%   56   5 252   17   5 325
Minimum guaranteed interest rate 5 – < 6%       1   1
Total interest-sensitive insurance liabilities   79 354   25 294   75   104 724
Insurance liabilities with no minimum guaranteed interest rate               15 654
Insurance liabilities linked to assets for the account and risk of the Swiss Life Group's customers               8 399
Total insurance liabilities               128 776

Some life insurance products with a savings component and investment contracts are subject to minimum guaranteed interest rates. The guaranteed rate differs according to the type of contract. In Switzerland for instance the minimum guaranteed interest rate for the occupational pensions segment (mandatory BVG savings account) stood at 1.00% in 2021 (2020: 1.00%).

In addition to these fixed and guaranteed payments, which are exposed to interest rate risk, contractual rights exist for certain contracts to receive additional benefits whose amount and /or timing is contractually at the discretion of the issuer.

The Group manages interest rate and interest rate volatility risk by managing the interest rate sensitivity of its investment portfolio against the corresponding sensitivity of liabilities issued. The interest rate and volatility exposure of the liabilities is determined by projecting the expected cash flows from the contracts using best estimates of mortality, longevity, disability, expenses, surrender and exercise of policyholder options in combination with interest rate and volatility scenarios. The ALM process defines the strategic asset allocation optimising the net interest rate sensitivity of the investment and liability portfolios. Where this is not practicable, swap contracts and other instruments are used to hedge interest rate risk. In certain markets payer swaps are used to hedge the risk of fair value changes of interest-sensitive financial assets. A minimum interest rate risk is accepted, since a perfect interest rate hedge can either not be achieved or may not be targeted.

In certain businesses, a large part of the impact of interest rate changes is taken by the policyholders based on the specific profit-sharing systems.

Credit spread risk

Spread risk arises from bond investments when the counterparties are not considered risk free. The market value of these bonds corresponds to the discounting of the agreed payment flows with an interest rate curve composed of the base interest rate curve and a spread curve. The spread curve is defined by the counterparty’s credit quality and the risk aversion of the capital market actors. Spreads increase markedly during capital market crises, leading to a significant decrease in the bond portfolio’s market value. On the other hand, typically historic spread volatility increases during such a crisis, which leads to a higher spread risk capital, even if the pre-crisis spread level has been restored. The credit spread risk can be managed through the holding of credit default swaps or credit default swap indices and options on credit default swap indices. The credit default swap index is a hedge on credit risk of a basket of counterparties. A put option on a credit default swap index provides protection against adverse credit spread movements in the underlying basket of counterparties.

Equity price risk

A decline in the equity market may lead to a reduction of the Swiss Life Group’s realised and unrealised gains /losses, which also negatively affects the Swiss Life Group’s results of operations and financial condition.

Hedges in place with respect to the Swiss Life Group’s equity investments are designed to reduce the exposure to declines in equity values but would not prevent an impairment loss in the event that the impairment criteria were met.

A portion of Swiss Life’s investment portfolio comprises investments in funds which hold securities issued by non-public companies (e. g. private equity and infrastructure funds). These investments may be illi­quid or may only be disposed of over time or at a loss, and they may not produce adequate returns or capital gains.

Real estate price risk

Due to the long-term nature of its liabilities, Swiss Life invests in direct residential, commercial and mixed-use property investments. In addition to direct investments, Swiss Life invests in real estate funds and real estate companies.

In building and maintaining its real estate portfolio, Swiss Life ensures adequate diversification in terms of use, location and geography.

Credit risk

The Group is exposed to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Group is exposed to credit risk are:

  • Counterparty risk with respect to bonds purchased
  • Counterparty risk with respect to loans and mortgages granted
  • Counterparty risk with respect to money market and cash positions
  • Counterparty risk with respect to derivative transactions
  • Reinsurance share of insurance liabilities
  • Amounts due from reinsurers in respect of claims already paid
  • Amounts due from insurance contract holders
  • Amounts due from insurance intermediaries

To reduce the credit exposure relating to derivatives a collateral management process is in place. Clearly defined processes ensure that exposure concentrations and limit utilisations are appropriately monitored and managed. Counterparties for derivative transactions, over-the-counter and exchange-traded, have to be approved by both the Group Chief Risk Officer and the Group Chief Investment Officer. Furthermore, the counterparties must fulfil stringent minimum rating requirements for the Swiss Life Group’s insurance operations. During periods of market turmoil reliance on ratings is of limited value; therefore an additional qualitative and quantitative counter­party monitoring process has been established to allow for immediate proactive measures.

Counterparty risk is primarily managed by counterparty exposure limits and diversification in a broad debtor universe. The default risk can be managed through the holding of credit default swaps. A credit default swap provides insurance to the debt holder against a default of the debt issuer. It is traded over-the-counter and itself underlies the collateral management process described above.

The Group is also exposed to credit risk associated with reinsurance recoverables. As a consequence, the financial strength of reinsurers is monitored. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength and also prior to any contract being signed. The general policy of the Swiss Life Group is to reinsure its insurance risks only with counterparties rated A– or above (Standard & Poor’s or equivalent). In exceptional cases, reinsurers with a lower rating may be considered. Additionally, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities.

No single reinsurer is a material reinsurer to the Group, nor is the Group’s business substantially dependent upon one single reinsurer.

For fixed-income assets the total exposure per counterparty is aggregated and reported to the Group Risk Committee. Ratings and single positions above a certain level with regard to fixed-income assets are reported to management on a regular basis. The exposure to individual counter­parties is also managed by other mechanisms, such as the right to offset where counterparties are both debtors and creditors of the Group. In addition, limits regarding single counterparty exposure are in place which depend on the rating and amount of exposure in relation to total investments. Information reported to management includes assessment of bad debts. Where there exists a certain exposure to individual policyholders due to size of the contract, or homogenous groups of policyholders, a financial analysis equivalent to that conducted for reinsurers is carried out.

The non-rated loans primarily comprise mortgages. For the bulk of the mortgages a risk class system is in place which allows the company to identify, measure, monitor and manage the risks at the level of portfolios, borrowers and loans at all times. The risk class system also enables a risk-adequate pricing of the loans. Implementation, parameterisation and control of the system are set out in an internal directive which has been approved by the Group Chief Investment Officer.

In certain countries, specific additional guidelines and rules have been defined locally to monitor credit risk. Such guidelines cover investments in fixed-income securities which are mostly based on the average rating of the issuers (calculated by weighting default probabilities). Minimum and maximum thresholds apply with regard to permitted investments in non-government bonds. For investments in government bonds with a rating lower than AA– (according to Standard & Poor’s or equivalent), additional exposure limits are in place. For certain businesses, credit risk is monitored and controlled with a risk limit framework whereby maximum limits are reviewed and approved at least annually. The majority of the bond portfolio is invested in government bonds (including supranational and sovereigns) and bonds issued by the financial sector covered by collateral or government guarantees.

Maximum exposure to credit risk

In CHF million
    For the account and risk of the Swiss Life Group   For the account and risk of the Swiss Life Group's customers   Total
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                         
Debt securities
Debt securities at fair value through profit or loss   527   674   7 256   7 683   7 784   8 358
Debt securities available for sale   81 306   89 425       81 306   89 425
Debt securities pledged as collateral   4 140   4 064       4 140   4 064
Debt securities classified as loans   877   873       877   873
Total debt securities   86 851   95 037   7 256   7 683   94 107   102 720
                         
Loans and receivables
Senior secured loans available for sale   4 455   3 908       4 455   3 908
Mortgages   11 977   11 534       11 977   11 534
Note loans   4 465   5 028       4 465   5 028
Corporate and other loans   2 501   1 791       2 501   1 791
Receivables   4 439   4 131       4 439   4 131
Total loans and receivables   27 837   26 391       27 837   26 391
                         
Other assets
Cash and cash equivalents   6 369   5 198   839   2 667   7 208   7 865
Derivatives   2 768   3 008   0   0   2 768   3 008
Reinsurance assets   570   556       570   556
Total other assets   9 707   8 761   839   2 667   10 545   11 428
                         
Unrecognised items
Financial guarantees   19   25       19   25
Loan commitments   515   539       515   539
Total unrecognised items   534   564       534   564
                         
Total exposure to credit risk   124 929   130 753   8 095   10 351   133 024   141 104

The following table shows the extent to which collateral and other credit enhancements mitigate credit risk in respect of the maximum exposure to credit risk.

Credit risk mitigation – collateral held and other credit enhancements as at 31 December 2021

In CHF million
    Debt securities   Loans and receivables   Cash and cash equivalents   Derivatives (assets)   Reinsurance assets   Financial guarantees and loan commitments   Total
                             
Secured by
Cash collateral     2     2 072   177     2 251
Securities collateral     244       279   9   532
Mortgage collateral   8 155   13 568         234   21 956
Other collateral     5 910         59   5 970
Guarantees   750   8   505         1 264
Netting agreements     826     646   1     1 473
Total secured   8 905   20 557   505   2 719   456   302   33 445
                             
Unsecured
Governments and supranationals   52 125   3 019   205         55 349
Corporates   25 776   1 123   5 659   49   114   232   32 952
Other   44   3 139           3 183
Total unsecured   77 946   7 281   5 864   49   114   232   91 485
                             
Total   86 851   27 837   6 369   2 768   570   534   124 929

Credit risk mitigation – collateral held and other credit enhancements as at 31 December 2020

In CHF million
    Debt securities   Loans and receivables   Cash and cash equivalents   Derivatives (assets)   Reinsurance assets   Financial guarantees and loan commitments   Total
                             
Secured by
Cash collateral     2     2 245   171     2 418
Securities collateral     191       273   11   475
Mortgage collateral   8 516   13 303         495   22 314
Other collateral     4 714         48   4 762
Guarantees   760   108   525         1 393
Netting agreements     691     729   1     1 421
Total secured   9 276   19 008   525   2 974   445   554   32 783
                             
Unsecured
Governments and supranationals   57 098   3 367   68         60 533
Corporates   28 574   1 130   4 605   34   111   10   34 463
Other   88   2 886           2 974
Total unsecured   85 760   7 384   4 672   34   111   10   97 970
                             
Total   95 037   26 391   5 198   3 008   556   564   130 753

To mitigate specific credit risk, the Group may purchase credit risk protection in the form of credit default swaps and credit default swap indices. As at 31 December 2021, there were no such derivative contracts on the balance sheet that provided any notional principal protection (2020: nil).

Exposure to credit risk of debt instruments – credit rating by class as at 31 December 2021

In CHF million
    AAA   AA   A   BBB   Below BBB   Individual impairment loss allowance   Total
                             
Debt securities
Supranationals   2 882   336   49   33       3 300
Governments   21 805   22 249   2 659   1 882   230     48 825
Covered/guaranteed   8 080   474   44   298   10     8 905
Corporates   397   1 543   7 706   15 219   911     25 776
Other   6     0   33   5     44
Total debt securities   33 170   24 602   10 459   17 464   1 156     86 851
                             
Mortgages
Commercial       2 647         2 647
Residential       9 326     4   0   9 330
Total mortgages       11 973     4   0   11 977
                             
Other loans and receivables
Governments and supranationals   1 247   1 542   187   42   0     3 019
Corporates   1 160   544   755   1 479   5 050     8 987
Other   0   1   48   3 770   66   –32   3 854
Total other loans and receivables   2 407   2 087   991   5 291   5 116   –32   15 860

Exposure to credit risk of debt instruments– credit rating by class as at 31 December 2020

In CHF million
    AAA   AA   A   BBB   Below BBB   Individual impairment loss allowance   Total
                             
Debt securities
Supranationals   3 222   351   48   24       3 645
Governments   24 313   24 060   2 893   2 138   48     53 453
Covered/guaranteed   8 422   545   95   198   15     9 276
Corporates   436   2 083   9 147   15 822   1 086     28 574
Other   7     32   37   12     88
Total debt securities   36 401   27 040   12 216   18 219   1 161     95 037
                             
Mortgages
Commercial       2 721         2 721
Residential       8 808     6   –1   8 812
Total mortgages       11 529     6   –1   11 534
                             
Other loans and receivables
Governments and supranationals   1 463   1 673   189   42       3 367
Corporates   1 264   589   730   1 404   3 812     7 799
Other   1   15   56   3 590   60   –31   3 692
Total other loans and receivables   2 728   2 278   975   5 035   3 872   –31   14 858

Debt instruments that on a specific date give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding meet the SPPI criterion. The exposure to credit risk of such debt instruments is disclosed in the following table at gross carrying amounts.

Exposure to credit risk of debt instruments that meet the SPPI criterion as at 31 December 2021

in CHF million
    AAA   AA   A   BBB   Below BBB   Total
                         
Debt securities
Supranationals   2 879   334   48   33     3 294
Governments   21 451   22 124   2 652   1 881   229   48 337
Covered/guaranteed   7 961   465   33   289   10   8 759
Corporates   393   1 542   7 546   15 058   908   25 448
Other   5     0       6
Total debt securities   32 691   24 465   10 279   17 261   1 148   85 844
                         
Mortgages
Commercial       2 647       2 647
Residential       9 326     4   9 330
Total mortgages       11 973     4   11 977
                         
Other loans and receivables
Governments and supranationals   1 247   1 500   187   42   0   2 977
Corporates   718   406   755   1 442   4 582   7 904
Other   0   1   48   3 770   66   3 885
Total other loans   1 965   1 907   991   5 255   4 648   14 767

Exposure to credit risk of debt instruments that meet the SPPI criterion as at 31 December 2020

in CHF million
    AAA   AA   A   BBB   Below BBB   Total
                         
Debt securities
Supranationals   3 218   350   47   24     3 639
Governments   23 854   23 887   2 885   2 137   47   52 810
Covered/guaranteed   8 291   541   81   188   15   9 116
Corporates   435   2 082   8 798   15 658   1 054   28 028
Other         1     1
Total debt securities   35 798   26 860   11 812   18 008   1 116   93 593
                         
Mortgages
Commercial       2 721       2 721
Residential       8 808     6   8 813
Total mortgages       11 529     6   11 534
                         
Other loans and receivables
Governments and supranationals   1 463   1 630   189   42   0   3 324
Corporates   802   445   730   1 404   3 812   7 193
Other   1   15   56   3 589   60   3 722
Total other loans   2 267   2 090   975   5 035   3 872   14 239

Financial assets past due (not impaired) – age analysis

In CHF million
    Up to 3 months   3–6 months   6–12 months   More than 1 year   Total
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                                         
Debt securities
Governments and supranationals               9     9  
Total               9     9  
                                         
Mortgages
Residential   1   0   2   0   0   1   11   13   14   15
Total   1   0   2   0   0   1   11   13   14   15
                                         
Other loans and receivables                                        
Governments and supranationals   0   0         0       0   0
Corporates   19   33   0   0           19   34
Other   164   87   11   11   5   13   13   6   193   117
Total   183   120   11   11   5   13   13   6   212   151

Financial assets individually determined as impaired

In CHF million
    Gross carrying amount   Impairment loss allowance   Net carrying amount
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                         
Debt securities                        
Corporates   1     –1     1  
Total   1     –1     1  
                         
Mortgages                        
Residential   1   1   0   –1   1   1
Total   1   1   0   –1   1   1
                         
Other loans and receivables                        
Corporates   24   19   –11   –15   13   4
Other   40   36   –32   –31   8   5
Total   64   55   –43   –45   21   9

Financial assets individually determined as impaired – impairment loss allowance for the year 2021

In CHF million
    Balance as at 1 January   Impairment losses/ reversals   Write-offs and disposals   Foreign currency translation differences   Balance as at end of period
                     
Debt securities
Corporates     0     0   1
Total     0     0   1
                     
Mortgages
Residential   1   0   0     0
Total   1   0   0     0
                     
Other loans and receivables
Corporates   15   11   –15   0   11
Other   31   6   –3   –1   32
Total   45   17   –19   –1   43

Financial assets individually determined as impaired – impairment loss allowance for the year 2020

In CHF million
    Balance as at 1 January   Impairment losses/ reversals   Write-offs and disposals   Foreign currency translation differences   Balance as at end of period
                     
                     
Mortgages
Residential   0   0   0     1
Total   0   0   0     1
                     
Other loans and receivables
Corporates   0   15   0   –1   15
Other   20   19   –8   0   31
Total   20   35   –8   –1   45

The criteria used for the assessment of financial assets for impairment are described in note 2.8.

Exposure to credit risk of other assets

In CHF million
    AAA   AA   A   BBB   Below BBB   Total
                         
Credit rating as at 31 December 2021
Cash and cash equivalents   245   2 771   2 776   577   0   6 369
Derivatives   89   373   2 195   111     2 768
Reinsurance assets     472   64   34     570
Total   334   3 616   5 034   723   0   9 707
Credit rating as at 31 December 2020
Cash and cash equivalents   102   1 818   2 671   607   0   5 198
Derivatives   129   288   2 457   133     3 008
Reinsurance assets     445   76   35     556
Total   232   2 551   5 204   775   0   8 761

At 31 December 2021 and 2020, no reinsurance assets were past due or impaired.

Exposure to credit risk of unrecognised items

In CHF million
    AAA   AA   A   BBB   Below BBB   Total
                         
Credit rating as at 31 December 2021
Financial guarantees       5   14     19
Loan commitments   116   111   233   55     515
Total   116   111   238   69     534
Credit rating as at 31 December 2020
Financial guarantees       10   15     25
Loan commitments       491   48     539
Total       501   63     564

Currency risk

The Swiss Life Group operates internationally and its exposures to currency risk primarily arise with respect to the euro, US dollar, British pound and Canadian dollar. Most of the investments and liabilities are denominated in Swiss francs, euros and US dollars, the values of which are subject to exchange rate fluctuations. The Group operates with various functional currencies (predominantly Swiss francs and euros). Its financial position and earnings could be significantly affected by a weakening of said foreign currencies against the Swiss franc.

The following table shows the Group’s sensitivity of monetary items to foreign currency exchange rate fluctuations in profit or loss before policyholder participation.

1% decrease in foreign currency exchange rate

In CHF million
    Gain (+)/loss (–) 1
    2021   2020
EUR/CHF   –2   4
USD/CHF   –6   –2
GBP/CHF   3   1
CAD/CHF   –1   –1
1 before policyholder and income tax effect

The Swiss Life Group’s European insurance and investment operations (excluding Switzerland) generally invest in assets denominated in the same currency as their insurance and investment contract liabilities, which mitigates the currency risk for these operations. As a result, currency risk arises from recognised assets and liabilities denominated in other currencies and net investments in foreign operations. Although the Swiss Life Group actively engages in currency management to reduce the effect of exchange rate fluctuations on its assets and liabilities, particularly by hedging against the risk of such movements in relation to part of its investments denominated in euros and in US dollars, significant movements in exchange rates could adversely affect the Swiss Life Group’s earnings and financial position, including the value of its investment portfolio. Foreign exchange exposure is hedged in line with the strategic asset allocation. The instruments which the Swiss Life Group uses to hedge exposure may not be perfectly correlated to the related assets, so the Group will still be exposed to losses if the value of the hedge and the value of the underlying asset or liability do not correspond appropriately.

Due to the limitations of the Swiss capital market with regards to liquidity and duration, investments in Switzerland are also made in currencies other than the Swiss franc. However, the balance sheet currency exposure is to a large extent hedged using foreign currency derivatives.

Liquidity risk

Liquidity risk is the risk that not enough cash resources may be available to pay obligations when due (primarily obligations arising from the insurance business and debt) at a reasonable cost. The Swiss Life Group is exposed to liquidity risk which primarily arises on calls on its cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. The Swiss Life Group faces the risk of not being able to refinance its debt obligations due to unexpected long-term market disruptions.

At the operational level, rolling forecasts are in place to address situational liquidity risk, which ­primarily arises on unexpected calls on cash resources from claims, amounts payable at maturity and surrenders arising from insurance and investment contracts. To overcome unexpected liquidity shortfalls, when asset disposals are not desired, repurchase agreements and mitigating measures on the liability side are used to ensure short-term refinancing at minimal cost.

At the strategic level, the Swiss Life Group holds substantial liquidity and uses active debt maturity planning to ensure financial flexibility and efficient liquidity management.

The liquidity analysis of financial liabilities and commitments is based on undiscounted cash flows by remaining contractual maturities, whereas insurance and policyholder parti­cipation liabilities are analysed by estimated timing of net cash outflows. Cash outflows of derivative liabilities designated as cash flow hedging instruments are analysed on the basis of expected settle­ment dates for forward starting swaps, and on the basis of contractual maturity for forward starting bonds. The analysis is made for amounts for the account and risk of the Swiss Life Group.

Exposure to liquidity risk as at 31 December 2021

In CHF million
    Cash flows   Carrying amount
    Up to 1 month   1–3 months   3–12 months   1–5 years   5–10 years   More than 10 years   Total    
                                 
Financial liabilities
Derivatives designated as cash flow hedges       324   1 228     10   1 562   111
Investment contracts with discretionary participation   22   39   229   2 878   1 723   5 959   10 850   10 850
Investment contracts without discretionary participation   0   0   0   1   2   179   182   182
Borrowings     1   576   2 134   1 900     4 611   4 099
Lease liabilities   3   6   27   117   20   98   272   224
Other financial liabilities   10 025   2 332   4 766   2 477   716   536   20 852   20 514
Total   10 050   2 378   5 922   8 834   4 361   6 782   38 328   35 980
                                 
Insurance and policyholder participation liabilities
Insurance liabilities   297   319   3 425   9 072   16 039   90 659   119 810   119 810
Policyholder participation liabilities   138   223   5 858   8 109   143   2 930   17 401   17 401
Total   436   542   9 283   17 180   16 182   93 589   137 211   137 211
                                 
Guarantees and commitments
Financial guarantees   14     5         19  
Loan commitments   274   72   149   18   1     515  
Capital commitments   772     390   942       2 105  
Total   1 060   72   545   960   1     2 639  

Exposure to liquidity risk as at 31 December 2020

In CHF million
  Cash flows   Carrying amount
    Up to 1 month   1–3 months   3–12 months   1–5 years   5–10 years   More than 10 years   Total    
                                 
Financial liabilities
Derivatives designated as cash flow hedges       140   1 156       1 296   10
Investment contracts with discretionary participation   22   40   226   2 877   1 734   5 910   10 809   10 809
Investment contracts without discretionary participation   0   0   0   0   0   207   207   207
Borrowings       767   2 531   1 205     4 503   3 949
Lease liabilities   3   6   28   107   23   105   272   220
Other financial liabilities   10 423   1 578   5 219   1 184   1 064   497   19 964   19 662
Total   10 448   1 623   6 379   7 855   4 026   6 718   37 051   34 856
                                 
Insurance and policyholder participation liabilities
Insurance liabilities   376   360   3 561   9 319   16 477   90 283   120 378   120 377
Policyholder participation liabilities   163   279   4 700   10 115   132   3 434   18 824   18 824
Total   540   639   8 262   19 435   16 609   93 717   139 202   139 202
                                 
Guarantees and commitments
Financial guarantees   15     10         25  
Loan commitments   79   141   286   28   3   2   539  
Capital commitments   836     77   1 590       2 504  
Total   930   141   373   1 618   3   2   3 068  

Current and non-current assets and liabilities

The table below shows the expected realisation or settlement of assets and liabilities. Assets are classified as current if they are expected to be realised within twelve months after the balance sheet date. Liabilities are classified as current if they are expected to be settled within twelve months after the balance sheet date. All other assets and liabilities are classified as non-current.

In CHF million
    Current   Non-current   For the account and risk of the Swiss Life Group's customers   Total
    31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020   31.12.2021   31.12.2020
                                 
Assets
Cash and cash equivalents   6 369   5 198       839   2 667   7 208   7 865
Derivatives   2 032   1 350   736   1 657   0   0   2 768   3 008
Assets held for sale   69   1           69   1
Financial assets at fair value through profit or loss   5 083   4 854   4 906   5 688   43 324   36 794   53 313   47 336
Financial assets available for sale   8 220   10 068   93 251   98 373       101 471   108 441
Loans and receivables   6 530   5 425   17 730   17 931       24 260   23 357
Financial assets pledged as collateral   184   20   3 955   4 045       4 140   4 064
Investment property       40 840   37 813   394   307   41 234   38 120
Investments in associates       172   172       172   172
Reinsurance assets   333   309   237   246       570   556
Property and equipment       557   515       557   515
Intangible assets including intangible insurance assets       3 395   3 058       3 395   3 058
Current income tax assets   34   24           34   24
Deferred income tax assets       71   79       71   79
Other assets   461   312   703   630       1 164   942
Total assets   29 315   27 560   166 552   170 209   44 556   39 768   240 424   237 538
                                 
Liabilities
Derivatives   1 103   599   643   788       1 746   1 387
Investment and unit-linked contracts   290   288   10 741   10 727   33 805   31 008   44 837   42 024
Borrowings   470   650   3 629   3 299       4 099   3 949
Other financial liabilities   16 466   15 253   4 272   4 629       20 738   19 882
Insurance liabilities   4 041   4 298   115 769   116 080   10 448   8 399   130 258   128 776
Policyholder participation liabilities   6 219   5 142   11 182   13 682       17 401   18 824
Employee benefit liabilities   218   174   1 363   1 819       1 581   1 993
Current income tax liabilities   341   310           341   310
Deferred income tax liabilities       2 430   2 636       2 430   2 636
Provisions   29   100   19   21       48   121
Other liabilities   379   324   43   47       423   371
Total liabilities   29 558   27 138   150 092   153 729   44 253   39 407   223 902   220 275

Hedging

The Swiss Life Group uses derivatives within the strict limits set by the applicable insurance legislation and by internal guidelines. Derivatives are primarily used to manage the exposure to foreign exchange rates, interest rates, equity securities and counterparties. The main instruments include index futures and option structures in stock markets, bond futures, bond forwards, interest rate swaps and interest rate options in order to manage duration, currency forwards and options in order to manage currency risk and credit default swaps or credit default swap indices and options on credit default swap indices in order to manage credit spread and counterparty risk. Within certain limits, derivatives are used to enhance returns on the existing portfolio. The types of derivatives generally permitted for usage within the Swiss Life Group, as well as the list of allowed over-the-counter trading partners, have been approved by the Group Risk Committee.

Hedging strategies involve hedge accounting in accordance with International Financial Reporting Standards as well as “economic hedging”. “Economic hedges” comprise derivatives in combination with financial assets and financial liabilities which have a common risk factor and give rise to opposite changes in fair value that tend to offset each other.

5.5 Insurance risk management objectives and policies

Insurance contracts are contracts under which one party (the insurer) agrees to compensate the other party (the policyholder) if a specified uncertain future event affects the policyholder. The Group’s insurance entities neither generally accept nor generally deny insurance coverage to applicants, but ensure that all the insurance risks are identified and thoroughly assessed, and that the insurance premiums accurately reflect the risk taken. The amount and type of risk taken must be in line with the Group’s risk policy and strategy, and must also meet the profitability targets.

Nature of insurance risk

When designing a new product or reviewing an existing one, care has to be taken that the product neither includes systemic risk nor provides incentives for adverse selection. The Swiss Life Group favours transparent and simple product designs with a reliable pricing basis with sufficient statistical data available. Insurance risk arises when biometric parameters deviate adversely from expectations. The uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts is due to the unpredictability of long-term changes in overall levels of mortality and disability, for instance. Furthermore, deviations from the expected outcome of a portfolio can also arise because of random fluctuations. The impact of random fluctuations depends on the extent of diversification within a portfolio of contracts.

The quantification of life insurance risk is based on a sensitivity analysis. Insurance risk is thus measured as the deviation of (the realisations of) the insurance risk factors from the corres­ponding best estimate values. Life insurance risk factors include mortality rates, disability/recovery rates and longevity.

The nature of insurance risk can be summarised as follows.

Mortality and longevity

Mortality and longevity risks reflect the financial consequences of insured people dying sooner or living longer than expected, respectively. For example, a life insurer with an annuity portfolio making payments to the policyholders until their death is financially exposed to those individuals who live longer than expected. Conversely, an insurer writing life insurance business that pays out amounts contingent on death of the policyholders is exposed to increases in mortality levels.

The Swiss occupational pensions (BVG) business of the group life insurance business in Switzerland is a significant part of the Group’s overall life insurance business. The BVG business provides an example of a minimum return guarantee. The guarantee takes the form of the right to convert an assured sum into a life annuity at a guaranteed conversion rate: the prevalent annuity conversion rate for the mandatory part of the BVG business is set at 6.8% for men (retirement age 65) and 6.8% for women (retirement age 64).

With regard to mortality, morbidity and longevity risk, the most important annuities payable (annuities in payment phase) or insured (annuities in deferral phase) as well as sums insured are expected to be as follows.

Annuities payable per annum by type of annuity – individual life

In CHF million
    31.12.2021   31.12.2020
Life annuities – in payment   613   559
Life annuities – deferred   361   392
Annuities certain – in payment   5   4
Annuities certain – deferred   31   32
Disability income and other annuities – in payment   246   251
Disability income and other annuities – deferred   7 319   7 488
Total individual life   8 574   8 726

Annuities payable per annum by type of annuity – group life

In CHF million
    31.12.2021   31.12.2020
Retirement annuities – in payment   1 119   1 083
Retirement annuities – deferred   443   446
Survivors' annuities – in payment   151   149
Survivors' annuities – deferred   3 083   3 016
Disability income and other annuities – in payment   283   383
Disability income and other annuities – deferred   19 153   18 751
Total group life   24 231   23 829

Life benefits insured by type of insurance – individual life

In CHF million
    31.12.2021   31.12.2020
Whole life and term life   43 255   36 101
Disability lump-sum payment   17   12
Other   271   373
Total individual life   43 543   36 486

Life benefits insured by type of insurance – group life

In CHF million
    31.12.2021   31.12.2020
Term life   67 221   62 843
Disability lump-sum payment   4 477   4 227
Other   1 201   1 320
Total group life   72 899   68 390

Disability and morbidity

Disability risk reflects the financial consequences of groups of individuals getting disabled more often and/or recovering less quickly than expected. With regard to morbidity, the most significant risk factors are spreading diseases, mental stress, widespread changes in lifestyle, such as eating, smoking and exercise habits, and economic effects.

Embedded options

The ability of a policyholder to pay reduced or no future premiums under a contract, to terminate the contract completely or to exercise a guaranteed annuity option means that the insurer’s liability is also subject to policyholder behaviour to a certain extent. On the assumption that a certain group of policyholders will make decisions rationally, overall insurance risk can be aggravated by such behaviour. For example, it is conceivable that policyholders whose health has deteriorated significantly will be less inclined to terminate contracts insuring disability or death benefits than those policyholders remaining in good health, thus contributing to an increasing trend in the expected mortality of policyholders, as the portfolio of insurance contracts is reduced due to surrender.

Underwriting strategy

Underwriting is the process of selecting and classifying insurable risks. The underwriting strategy attempts to ensure that the risks underwritten are profitable and well diversified in terms of type of risk and level of insured benefits. Life insurance underwriting is performed to ensure that the premiums and the general conditions of the insurance policies are adequate for the risks to be insured. The first step in the underwriting process is to determine which individual risks can be accepted. The second step is to place the accepted risks into groups of similar levels of risk. Both processes must be conducted objectively and consistently. The Group sets limits for the acceptance of insurance coverage arising from new and renewal business. Medical selection is part of the Group’s underwriting procedures, whereby premiums are charged to reflect the health condition and family medical history of the applicants. The limits relate to sums at risk, maximum insured losses or present value of premiums at the contract or insured person level. Depending on the type of business and the limit exceeded, the new or renewed contract must be approved by the corresponding risk committee or senior management. Contracts exceeding the set limits are tested individually for profitability according to predefined procedures and compliance assessments are performed before approval. Certain contracts which include specific risks relating to derivatives or insurance risk factors for which no reliable data is available must be submitted for approval irrespective of the amount of coverage offered. Insurance coverage exceeding set limits is subject to regular internal reporting requirements. Additionally, the underwriting practices must be in line with local laws.

For certain group life business, local law is relevant with regard to medical examinations required before any business is written. For certain individual life business, agreements exist with regard to medical examinations of applicants before business is written. If the risk is assessed as high, exclusion of specific risks, premium adjustments and reinsurance are considered or the application may be rejected.

In the accident and health business, as well as the credit life business in France, the underwriting strategy comprises biometric and financial data of the persons to be insured, type of contract and experience.

Non-life

The Swiss Life Group has non-life operations, mainly in France, covering risks associated with accident and health (disability), property and casualty as well as credit life business.

Claims arising from the accident and health business primarily cover refunds for medical treatment, daily allowances in the case of sick leave, annuities and long-term medical care. The factors that could increase the overall liabilities in health insurance are the increase in the claim frequency due to an increase in the average age of the insured persons and negative economic and social factors. The insurance liabilities arising from accident and health insurance contracts must consider outstanding claims and claims incurred but not reported (IBNR). A large part of the insurance liabilities arising from these contracts relates to IBNR, and experience shows that health insurance contracts are sensitive to late reporting of claims in both number of claims and amounts.

The Group manages the risks arising from these contracts by means of its underwriting strategy and reinsurance arrangements.

Development of claims under non-life insurance contracts

In CHF million
    Estimate of ultimate claim costs by year of loss occurrence
    2012   2013   2014   2015   2016   2017   2018   2019   2020   2021   Total
At end of year of loss occurrence   303   335   342   296   267   297   331   304   295   321   n/a
1 year later   330   361   346   322   331   317   352   369   298     n/a
2 years later   331   296   309   322   276   282   325   306       n/a
3 years later   285   281   324   291   259   269   279         n/a
4 years later   276   299   296   273   255   241           n/a
5 years later   297   280   279   266   228             n/a
6 years later   278   264   271   227               n/a
7 years later   260   258   238                 n/a
8 years later   255   231                   n/a
9 years later   231                     n/a
Current estimate of cumulative claims   231   231   238   227   228   241   279   306   298   321   2 600
Cumulative payments to date   –212   –214   –212   –201   –183   –189   –203   –209   –171   –134   –1 927
Liabilities before discounting   19   17   26   26   45   52   76   97   127   187   672
Liabilities for the current and 9 previous years   19   17   26   26   45   52   76   97   127   187   672
Liabilities for prior years                                           199
Total gross claims under non-life insurance contracts                                           871

The development of claims under non-life insurance contracts comprises the non-life business in France. A minor part of the non-life business is very short-tailed. The claims incurred for this minor part are almost completely settled within one year. The amount of unpaid claims as at the balance sheet date is therefore not material and does not underlie any significant variation in its temporal development. The claims data regarding this type of business are not included in the figures above.

Acceptance rules for risks are consistent with both the Code des Assurances and the French regulations. Underwriting guidelines and tariffs are reviewed on an annual basis.

Monitoring of the risks taken is done on a monthly basis with regard to related premiums and claims. An automated claims supervision system is used for the adjustment of tariffs for risks with loss ratios above a certain level.

Reinsurance

Reinsurance is used to limit the Group’s exposure to insurance risk. This does not, however, discharge the Group’s liability as a primary insurer, and, if a reinsurer fails to pay a claim, the Group remains liable for the payments to the policyholder. A loss allowance would be recognised for any estimated unrecoverable reinsurance.

In addition, the Group holds substantial collateral under related reinsurance agreements in the form of deposited funds and securities. Amounts recoverable from reinsurers are estimated in a manner consistent with the assumptions used for the underlying policy benefits and are presented in the balance sheet as a component of the reinsurance assets.

Management reviews reinsurance programmes covering treaty, type, risks covered and retention on a regular basis. A process, competencies and limits are set up for the approval of reinsurance programmes and their modification. To ensure that the Group’s principles are observed, guidelines on reinsurance are in place.

In accordance with its retention policy for mortality and disability benefits, the Group limits its exposure to CHF 5 million per life. Retention limits can be lower for other products (e.g. critical illness or long-term care) or for exposure in international markets. In addition, catastrophe reinsurance is in place to protect against accumulation of losses from a single event or a series of connected events.

The reinsurance team at Group level is responsible for implementing the retention policy by way of intra-group reinsurance. Intra-group reinsurance is transacted at arm’s length.

As far as property and casualty insurance is concerned, the reinsurance arrangements mostly include non-proportional coverage on any single risk and/or event, and are adapted to the specific exposure. This includes excess of loss, stop-loss and catastrophe coverage, as well as facultative reinsurance for protection against specific risks.

Approximately 1.2% in terms of earned insurance premiums was ceded as at 31 December 2021 (2020: 1.1%).

5.6 Strategic risk management

Swiss Life uses a structured process to ensure that strategic risks are dealt with adequately in what continues to be a very challenging economic environment. In its strategic risk management process, Swiss Life incorporates all the information on risks and corresponding return characteristics in its strategic decisions. An understanding of the interplay of individual risks is essential in order to take into account the factors influencing risks during strategy development and address them accordingly.

5.7 Operational risk management and internal control system

Operational risk management at Swiss Life includes the methods and processes used for the ­identification, assessment, monitoring and steering of operational risks. Operational risk management defines operational risk as the adverse impacts from shortcomings or failures stemming from internal processes, people, systems or external events. Reliability of information and ensuring confidentiality, availability and integrity of data are integral parts of operational risk management. Swiss Life’s internal control system consists of the entirety of procedures, methods and measures prescribed by the Board of Directors and the Corporate Executive Board to ensure the orderly conduct of business. The focus is on the reliability of financial reporting, the effectiveness of business processes and compliance with laws and regulations issued to protect the Swiss Life Group’s assets.

5.8 Risk concentrations

Asset allocation shows a concentration of bonds. The remaining investments are mainly distri­buted among property, equities and mortgages.

In addition to asset allocation, the main exposures are at counterparty level.

5.9 Applied instruments for risk minimisation

Reinsurance

The Group assumes and/or cedes reinsurance risks during the normal course of business. For reasons of diversification, some risks are ceded and others are assumed.

Risk transfer primarily takes the form of reinsurance. Alternative forms of risk transfer (such as securitisation) require the formal approval of the Group Risk Committee. No significant alternative form of risk transfer is used by the Group at present.

Derivative financial market instruments

Derivatives held for risk management purposes primarily comprise derivatives sharing a risk with other financial instruments and lead to opposite changes in fair value, which normally cancel each other out (economic hedges), although the cancellation effect is not always simultaneous.

The Group defines risk categories for risk management in connection with derivatives trans­actions and monitors those risk positions. Price risks for derivatives and their underlying instruments are managed according to the risk limits defined by management for the purchase or sale of instruments or closing of positions. The risks arise through open positions in interest rates, credit, currencies and equity instruments dependent on general and specific market movements.

5.10 Sensitivity analysis

The sensitivity analysis is based on how IFRS profit or loss and other comprehensive income would have been affected if changes in the relevant risk variables that were reasonably possible at the end of the reporting period had occurred.

The sensitivity analysis with regard to market risk is as follows.

At 31 December 2021, if interest rates had been 50 basis points higher, profit or loss would have been CHF 36 million lower (2020: CHF 26 million lower) and other comprehensive income would have been CHF 1472 million lower (2020: CHF 1651 million lower). If interest rates had been 50 basis points lower, profit or loss would have been CHF 40 million higher (2020: CHF 13 million higher) and other comprehensive income would have been CHF 1686 million higher (2020: CHF 1965 million higher). These impacts are net after policyholder participation and tax. The sensitivity includes financial assets as well as insurance liabilities. “Investment funds – debt” and investment funds with substantial investment in debt instruments are included in the analysis. This sensitivity measures the impact of a parallel shift of the bond interest rates at the closing date.

At 31 December 2021, if equity prices had been higher by 10%, profit or loss would have been CHF 217 million lower (2020: CHF 155 million lower) and other comprehensive income would have been CHF 759 million higher (2020: CHF 694 million higher). If equity prices had been lower by 10%, profit or loss would have been CHF 27 million higher (2020: CHF 11 million higher) and other comprehensive income would have been CHF 720 million lower (2020: CHF 653 million lower). These impacts are gross before policyholder participation and tax. This sensitivity measures the impact of an increase/decrease in the market value of equities (incl. hedge funds and private equity) at the closing date. Investment funds with substantial investment in equities are included in the analysis, as are hedging effects.

The sensitivity analysis with regard to insurance risk is as follows.

At 31 December 2021, if mortality rates for life assurance had been higher by 5%, profit or loss would have been CHF 1 million lower (2020: CHF 1 million lower). This sensitivity measures the impact of an increase in the mortality rates in life assurance, e.g. endowments and term life insurance products where the net amount at risk is positive. If mortality rates for the annuity business had been lower by 5%, profit or loss would have been CHF 5 million lower (2020: CHF 4 million lower). This sensitivity concerns annuities in payment and future annuities. Whether policies are affected already during the savings accumulation period might depend on technical implementation issues, e.g. whether the accumulation and annuity phases are driven by the same mortality table. These impacts are net after policyholder participation and tax.

At 31 December 2021, if morbidity rates had been higher by 5%, profit or loss would have been CHF 30 million lower (2020: CHF 29 million lower). If morbidity rates had been lower by 5%, profit or loss would have been CHF 30 million higher (2020: CHF 29 million higher). These impacts are net after policyholder participation and tax.