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Allianz Annual Report 2013

C Group Management Report Risk and Opportunity Report and Financial Control 105 Risk and Opportunity Report 123 Controls over Financial Reporting and Risk Capital Annual Report 2013    Allianz Group 105 Risk and Opportunity Report −− The ­Allianz risk management approach is designed to add value by focusing on both risk and return. −− The ­Allianz Group is well capitalized and its solvency ratios are resilient. Allianz risk profile and management assessment Risk Profile Allianz is exposed to a variety of risks through its core insurance and asset management activities. These include financial market, credit, insurance,operational,businessandstrategicrisks.Thethreelargest risks in terms of their contribution to ­Allianz’s internal model risk capital results are: −− Financial market risk, especially interest rate risk, due to the duration mismatch between assets and liabilities for long-term savings products; −− Credit and credit spread risk, again driven by assets backing long-term savings products; −− Property-casualty premium and reserve risk, resulting from natural and man-made catastrophes as well as accident year claims uncertainty. Allianz’s risk profile is relatively stable over time as it is driven by ­Allianz’s risk appetite and steered by risk management practices and limits – which are described later in this report. However, ­Allianz continues to be exposed to two external forces which affect its risk profile and would not normally be associated with its core operating activities: the European sovereign debt crisis and regulatory developments – especially the European solvency directive, Solvency II. The European sovereign debt crisis The European sovereign debt crisis continues to have an impact on markets and has kept interest rates at low levels. Despite the stabili- zation of financial markets in 2013, many of the root causes of the crisis remain unresolved and markets could fluctuate widely again in the future, having adverse implications for ­Allianz’s balance sheet. In addition to continuously monitoring these developments, our management has responded decisively to these external events. During 2013, we continued to execute a derisking program focused primarily on peripheral European sovereign exposures and our expo- sure to global financial institutions. This is supported by operational contingency planning for ­Allianz SE and its operating entities, with scenario analysis being conducted regularly for both the United States and Europe. In addition, we further adjusted our product design and pricing in the Life/Health business segment with respect to guarantees and surrender conditions. Looking forward, our robust action to deal with the various crisis scenarios has bolstered our financial and operational resilience to strong shock scenarios. Con- tinuous monitoring remains a priority to ensure the sustained effec- tiveness of our contingency measures. Regulatory developments In July 2013, the Financial Stability Board designated ­Allianz as one of nine G-SII companies (Global Systemically Important Insurers). In November 2013, the European Trialogue process involving the Coun- cil of the E.U. and the European Parliament came to an agreement on the Solvency II “Omnibus II” directive, allowing the new risk-based solvency capital framework for Europe to proceed with a planned introduction date of January 2016. Although details of future regulatory requirements, especially Solvency II and those applying to G-SIIs, are becoming clearer, the final rules are still evolving. This creates some uncertainties for our business and in terms of the ultimate capital requirements for ­Allianz. In addition, due to the market value balance sheet approach, the Solvency II regime will lead to higher volatility in regulatory capi- tal requirements compared to Solvency I. Finally, the potential for a multiplicity of different regulatory regimes, capital standards and reporting requirements will increase operational costs. Management Assessment The ­Allianz Group’s management feels comfortable with the Group’s overall risk profile and has confidence in the effectiveness of its risk management framework to meet the challenges of a rapidly chang- ing environment as well as day-to-day business needs. This confi- dence is based on several factors which are outlined in more detail in the sections that follow and are summarized here: −− The ­Allianz Group is well capitalized and is comfortably meeting its internal and regulatory solvency targets as of 31 December 2013. In March 2013, Standard & Poor’s not only reconfirmed ­Allianz’s "AA" rating, but also improved the outlook back to

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