Credit risks are associated with a loss or potential loss from counterparties failing to fulfill their financial obligations. Zurich's exposure to credit risks maybe derived from the following main categories of assets:
• Cash and cash equivalents
• Debt securities
• Reinsurance assets
• Mortgage loans and mortgage loans given as collateral
• Other loans
Zurich strives to manage individual exposures as well as credit risk concentrations. Its objective in managing credit risks is to maintain them within parameters that reflect its strategic objectives and risk tolerance. Sources of credit risks are assessed and monitored, and Zurich has policies to manage special risks within various subcategories of credit risk. To assess counterparty credit risk, Zurich uses the rating 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, Zurich assesses the reason for the inconsistencies and applies the lowest of the respective ratings unless other indicators of credit quality justify the assignment of alternative internal credit ratings. Zurich maintains counterparty credit risk databases that record external and internal sources of credit intelligence.
Risks that Zurich may not have sufficient liquidity to meet its obligations when they fall due, or would have to incur excessive costs to do so, are categorized as liquidity risks. Zurich's policy is to maintain adequate liquidity and contingent liquidity to meet its liquidity needs under both normal and stressed conditions.
Zurich has groupwide liquidity management policies and specific guidelines as to how local businesses have to plan, manage, and report their local liquidity. These include regularly conducting stress tests for all major carriers within Zurich.
The stress tests use a standardized set of internally defined stress events and are designed to provide an overview of the potential liquidity drain that Zurich would face if it had to recapitalize local balance sheets.