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Allianz Annual Report 2013

Annual Report 2013    Allianz Group110 Internal risk assessment Concentration of Risks As we are an integrated financial services provider offering a variety of products across different business segments and geographic regions, diversification is key to our business model. Diversification helps us manage our risks efficiently by limiting the economic impact of any single event and by contributing to relatively stable results and risk profile in general. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. At Group level, we identify and measure concentration risks con- sistently across business segments in terms of pre-diversified inter- nal risk capital and in line with the risk categories covered by our internal risk capital model. In the following sections, all risks are presented on a pre-diversified basis and concentrations of single sources of risk are discussed accordingly. With respect to investments, top-down indicators – such as stra- tegic asset allocation benchmarks – are defined and closely moni- tored to ensure balanced investment portfolios. Limits on financial risk are in place for the Life/Health and Property-Casualty business segments at Group level. They are based on the internal risk capital model, complemented by stand-alone interest rate and equity sensi- tivity limits, in order to protect the economic capital position. In addi- tion, the Group’s policy is to require each operating entity to match liabilities in congruent currencies with assets – as far as possible – and take local currency risks only within pre-defined limits. We also closely monitor concentrations and accumulation of non-market risks already on a stand-alone basis (i.e. before the diver- sification effect) within a global limit framework in order to avoid substantial losses from single events (e.g. natural catastrophes, credit events). In order to manage counterparty concentration risk, we run a Group-wide country and obligor group limit management frame- work (CRisP 1), which covers credit and equity exposures and is based on data used by the investment and risk experts at Group and operat- ing entity levels. This limit framework forms the basis for discussions on credit actions and provides notification services with a quick and broad communication of credit-related decisions across the Group. Clearly defined processes ensure that exposure concentrations and limit utilizations are appropriately monitored and managed. The setting of country and obligor exposure limits from the Group’s perspective (i.e. the maximum concentration limit) takes into account the ­Allianz Group’s portfolio size and structure as well as our overall risk strategy. 1 Credit Risk Platform. It is the ultimate responsibility of the Board of Management to decide upon limit budgets. The Board of Management delegates authorities for limit setting and modification to the Group Risk Com- mittee and Group Chief Risk Officer by clearly defining maximum limit amounts. All limits are subject to annual review and approval according to the delegated authorities. Quantifiable risks in the internal capital model The quantifiable risks that are considered in the risk model refer to market, credit, underwriting, business and operational risk. In the following sections, the evolution of the risk types in 2013 is explained. Market risk Asaninherentpartofourinsuranceoperations,wecollectpremiums from our customers and invest them in a wide variety of assets. Therefore, the ­Allianz Group holds and uses many different financial instruments. The resulting investment portfolios ultimately cover the future claims and benefits to our customers. In addition, we invest shareholders’ capital, which is required to support the risks underwritten. As the fair values of our investment portfolios depend on financial markets, which may change over time, we are exposed to market risks. In order to limit the impact of any of these financial market changes and to ensure that assets adequately back policyholder lia- bilities we have several measures in place. One of these, for example, is asset/liability management linked to the internal model frame- workincorporatingrisksaswellasreturnaspectsstemmingfromour insurance obligations. In addition, we are selectively using deriva- tives to either hedge our portfolio against adverse market move- ments or to reduce our reinvestment risk, e.g. by using forwards or swaptions. Furthermore, we have a limit system in place comprising global indicators like strategic asset allocation benchmarks, as well as more detailed limits, in order to operatively manage and limit risks. The limit system is defined at Group level separately for the Life/Health and the Property-Casualty business segments and is based on a variety of different risk measures including Financial VaR, equity and interest rate sensitivities as well as investment limits around a benchmark portfolio approved by the Board of Manage- ment. Our limit-setting process ensures that prevailing statutory restrictions regarding the composition of investments are taken into account. This means that in case certain investments are restricted by statutory requirements to a certain amount – e.g. a given percent- age of total investments – our internal limit referring to those invest- ments cannot exceed the required percentage. Most statutory restric- tions apply at local level, where processes ensure bottom-up that the statutory restrictions are binding constraints. Based on this process, guidelines are derived within the group center for certain invest- ments, e.g. concerning the use of derivatives, and the compliance with those is controlled by the respective risk and controlling func- tions.

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