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Zurich Insurance Company Group

Annual Report 2020

Contents

Risk review

Contents

Risk review (continued)

Basis of presentation

The risk review is an integral part of the consolidated financial statements.

Risk and capital are managed at the Zurich Insurance Group, segment, region and business unit level according to the Zurich Insurance Group risk and capital management framework. The principles of the Zurich Insurance Group enterprise risk management described in the risk management and capital management sections are equally applicable to Zurich Insurance Company Ltd (ZIC) and its consolidated subsidiaries (collectively the ZIC Group).

The Zurich Insurance Group Ltd Board of Directors, Chief Executive Officer, and Chief Risk Officer equally serve as Board of Directors, Chief Executive Officer, and Chief Risk Officer for Zurich Insurance Company Ltd.

The figures presented are prepared on a ZIC Group basis.

Risk management

Objectives of risk management

Taking and managing risk is an integral part of the insurance business. Zurich Insurance Group takes and manages risks in an informed and disciplined manner and within a pre-determined risk appetite and tolerance.

The major risk management objectives at Zurich Insurance Group are to:

––Support achievement of the Zurich Insurance Group strategy and protect capital, liquidity, earnings and reputation by monitoring that risks are taken within Zurich Insurance Group’s risk tolerance

––Enhance value creation by embedding disciplined risk-taking in the company culture and contributing to an optimal risk-return profile where risk-reward trade-offs are transparent, understood, and risks are appropriately rewarded

––Efficiently and effectively diversify risk and avoid or mitigate unrewarded risks

––Encourage openness and transparency to enable effective risk management

––Support decision-making processes by providing consistent, reliable and timely risk information

––Protect Zurich Insurance Group’s reputation and brand by promoting a sound culture of risk awareness, and disciplined and informed risk-taking

Risk management framework

The risk management framework is based on a governance process that sets forth clear responsibilities for taking, managing, monitoring and reporting risks.

The Zurich Risk Policy (ZRP) is Zurich Insurance Group’s main risk governance document. It sets standards for effective risk management throughout Zurich Insurance Group. The policy describes Zurich Insurance Group’s risk management framework, provides a standardized set of risk types and defines Zurich Insurance Group’s appetite for risks at Zurich Insurance Group level. Risk-specific policy manuals provide guidelines and procedures to implement the principles in the ZRP. Ongoing assessments verify that requirements are met.

Zurich Insurance Group regularly reports on its risk profile at local and Zurich Insurance Group levels. Zurich Insurance Group has procedures to refer risk topics to senior management and the Board of Directors in a timely manner. To foster transparency about risk, the Board receives quarterly risk reports and risk updates. In 2020, additional dynamic reporting of COVID-19 risk scenarios took place.

Zurich Insurance Group identifies, assesses, manages, monitors and reports risks that have an impact on the achievement of its strategic objectives by applying its proprietary Total Risk Profiling™ methodology. The methodology allows Zurich Insurance Group to assess risks in terms of severity and probability and supports the definition and implementation of mitigating actions. At Zurich Insurance Group level, this is an annual process, followed by regular reviews and updates by management.

Risk review (continued)

Zurich Insurance Group’s risk appetite and tolerance reflects Zurich Insurance Group’s willingness and capacity to take risks in pursuit of value creation and sets boundaries within which the businesses act. Zurich Insurance Group protects its capital, liquidity, earnings and reputation by monitoring that risks are taken within agreed risk appetite levels and tolerance limits. Zurich Insurance Group regularly assesses and, to the extent possible, quantifies material risks to which it is exposed.

Starting as of 2020, Zurich Insurance Group’s solvency position will be disclosed on the basis of the Swiss Solvency Test (SST) ratio to be more aligned with reporting by Zurich Insurance Group’s Swiss and European peers. The Zurich Insurance Group’s SST internal model has been fully approved by the Swiss Financial Supervisory Authority (FINMA). Zurich Insurance Group’s goal is to maintain capital consistent with a ‘AA’ financial strength rating for the Zurich Insurance Group, which translates into an SST ratio target of 160 percent or above.

Zurich Insurance Group continues to apply the Zurich Economic Capital Model (Z-ECM) as an internal metric. Z-ECM provides a key input into Zurich Insurance Group’s planning process as an assessment of Zurich Insurance Group’s economic risk profile.

Risk-based remuneration

Based on Zurich Insurance Group’s remuneration rules, the Board of Directors designs and structures remuneration arrangements that support the achievement of strategic and financial objectives and do not encourage inappropriate risk-taking. Group Risk Management’s role in respect to remuneration and its interaction with Board committees is described in the remuneration report.

Risk review (continued)

Capital management

Objectives of capital management

Zurich Insurance Group manages capital to maximize long-term value while maintaining financial strength within its ‘AA’ target range, and meeting regulatory, solvency and rating agency requirements.

As of December 31, 2020, the International Financial Reporting Standards (IFRS) for Zurich Insurance Company Group (ZIC Group) shareholders’ equity amounted to USD 37.5 billion and subordinated debt of USD 8.3 billion.

ZIC Group strives to simplify its legal entity structure to reduce complexity and increase fungibility of capital.

Capital management framework

Zurich Insurance Group’s capital management framework forms the basis for actively managing capital within Zurich Insurance Group. Zurich Insurance Group uses a number of different capital models, taking into account economic, regulatory, and rating agency constraints. Zurich Insurance Group’s capital and solvency position is monitored and regularly reported to the Executive Committee (ExCo) and Board of Directors.

Zurich Insurance Group’s policy is to allocate capital to businesses earning the highest risk-adjusted returns, and to pool risks and capital as much as possible to operationalize its risk diversification.

Zurich Insurance Group’s executive management determines the capital management strategy and sets the principles, standards and policies to execute the strategy. Group Treasury and Capital Management executes the strategy.

Capital management program

Zurich Insurance Group’s capital management program comprises various actions to optimize shareholders’ total return and to meet capital needs, while enabling Zurich Insurance Group to take advantage of growth opportunities. Such actions include paying and receiving dividends, capital repayments, share buy-backs, issuance of shares, issuance of senior and hybrid debt, securitization and purchase of reinsurance.

Zurich Insurance Group seeks to maintain a balance between higher returns for shareholders on equity held and the security that a sound capital position provides, also for our customers. Dividends, share buy-backs, and issuances and redemption of debt have a significant influence on capital levels. In 2020, Zurich Insurance Group paid a dividend out of retained earnings, issued shares out of contingent capital to fund vesting of shares in 2020, bought own shares to reduce future dilution from share-based employee plans and issued senior and hybrid debt to finance redemptions and investments in Zurich Insurance Group’s development.

The Swiss Code of Obligations stipulates that dividends may only be paid out of freely distributable reserves or retained earnings. Apart from what is specified by the Swiss Code of Obligations, Zurich Insurance Company Ltd (ZIC) faces no legal restrictions on dividends it may pay to its shareholders. As of December 31, 2020, the amount of the statutory general legal reserve was more than 40 times the paid-in share capital. The ability of Zurich Insurance Group’s subsidiaries to pay dividends may be restricted or indirectly influenced by minimum capital and solvency requirements imposed by insurance and other regulators in the countries in which the subsidiaries operate. Other limitations or considerations include foreign exchange control restrictions in some countries, and rating agencies’ methodologies.

For details on issuances and redemptions of debt, see note 18 of the ZIC Group consolidated financial statements.

Risk review (continued)

Analysis by risk type

Insurance risk

Insurance risk is the inherent uncertainty regarding the occurrence, amount or timing of insurance cash flows. The profitability of insurance business is also susceptible to business risk in the form of unexpected changes in expenses, policyholders’ behavior, and fluctuations in new business volumes. Zurich Insurance Group manages insurance risk through:

––Specific underwriting and claims standards and controls

––Robust reserving processes

––External reinsurance

Property and casualty insurance risk

Property and casualty insurance risk arises from coverage provided for motor, property, liability, special lines and worker injury. It comprises premium and reserve risk, catastrophe risk, and business risk. Premium and reserve risk covers uncertainties in the frequency of the occurrence of the insured events as well as in the severity of the resulting claims. Catastrophe risk predominantly relates to uncertainty around natural catastrophes. Business risk for property and casualty predominantly relates to unexpected increases in the expenses relating to claims handling, underwriting, and administration.

Management of Property & Casualty business insurance risk

Zurich Insurance Group’s underwriting strategy takes advantage of the diversification of Property & Casualty (P&C) risks across lines of business, customers and geographic regions. Zurich Insurance Group defines Group-wide governance for insurance risk including for new products. Underwriting discipline is a fundamental part of managing insurance risk. Zurich Insurance Group sets limits on underwriting capacity and delegates authority to individuals based on their specific expertise and sets appropriate underwriting and pricing guidelines. Technical reviews assure that underwriters perform within authorities and adhere to underwriting policies.

Property & Casualty insurance reserves are regularly estimated, reviewed and monitored by qualified and experienced actuaries at local, regional and Zurich Insurance Group levels. To arrive at their reserve estimates, the actuaries take into consideration, among other things, the latest available facts, trends and patterns of loss payments. Inflation is monitored with insights feeding into actuarial reserving models and Zurich Insurance Group’s underwriting processes and pricing.

To ensure a common understanding of business insights and new trends for reserve analysis, financial plans, underwriting and pricing decisions, Zurich Insurance Group has established a culture of continuous cross-functional collaboration. For this, underwriting, actuarial (pricing and reserving), claims, finance, sales and distribution, risk engineering and risk management contribute to quarterly meetings at local and Zurich Insurance Group level.

Zurich Insurance Group’s Emerging Risk Committee, with cross-functional expertise from core insurance functions such as underwriting, claims and risk management, identifies, assesses and recommends actions for emerging risks.

Governance is in place to ensure appropriate focus on top-line targets and profitability. Reinsurance is deployed to help manage insurance risk. Group Risk Management also provides independent assurance through risk reviews.

Zurich Insurance Group is exposed to losses that could arise from natural and man-made catastrophes. The main concentrations of risks arising from such potential catastrophes are regularly reported to executive management. The most important peril regions for natural catastrophes continue to be U.S. and Caribbean hurricane, California earthquake and Europe wind.