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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 117 also occur in the opposite direction, therefore being beneficial and leading to additional profit, e.g. a lower morbidity rate than expected will most likely result in lower expenses. Business risk Businessrisksincludecostrisksandpolicyholderbehaviorrisks.Cost risks are associated with the risk that expenses incurred in administer- ing policies are higher than expected, or that new business volume decreases to a level that does not allow ­Allianz to absorb its fixed costs. Policyholder behavior risks are risks related to the unpredict- ability and adverse behavior of policyholders in exercising their different contractual options: early termination of contracts, surren- ders, partial withdrawals, renewals and annuity take-up options. Assumptions on policyholder behavior are set according to accepted actuarial methods and are based on our own historical data to the extent available, otherwise they are based on industry data or expert judgment. Allocated internal business risk capital by business segment (total portfolio before tax and non-controlling interests) pre-diversified, € mn as of 31 December 2013 2012 Property-Casualty 992 1,020 Life/Health 3,743 3,424 Asset Management – – Corporate and Other – – Total Group internal credit risk capital 4,735 4,444 Share of total Group internal risk capital 11.2 %  9.9 % Business risk remained mostly stable in 2013. Small changes specifi- cally in the Life/Health business segment were mainly driven by changes in business volume and best estimate assumptions. Asforunderwritingrisks,apositivedeviationfromtheunderlying parameters will lead to additional returns. For example, lower than expected expenses in our Property-Casualty business will lead to an improved combined ratio. Operational risk Operational risks represent losses resulting from inadequate or failed internal processes, from personnel and systems, or from external events – including legal and compliance risk but excluding losses from strategic and reputational risk. Operational risk remained mostly stable in the course of 2013. Small changes were driven by refinements in exposure coverage. Allianz has developed a Group-wide consistent operational risk management framework that focuses on the early recognition and proactive management of operational risks in all business and sup- porting functions. The framework defines roles and responsibilities, risk processes and methods and has been implemented in our major operating entities. Local risk managers ensure this framework is implemented in their respective operating entities. These identify and evaluate relevant operational risks and control weaknesses via a structured self-assessment. Furthermore, operational risk events are collected in a central loss database. An analysis of the causes of signif‑ icant losses is carried out to provide comprehensive and timely infor- mation to senior management and operating entities so they can implement measures aimed at avoiding or reducing future losses. Allocated internal operational risk capital by business segment (total portfolio before tax and non-controlling interests) pre-diversified, € mn as of 31 December 2013 2012 Property-Casualty 1,268 1,287 Life/Health 917 914 Asset Management 586 576 Corporate and Other 385 249 Total Group internal credit risk capital 3,156 3,026 Share of total Group internal risk capital 7.4 % 6.7 % Major failures and disasters which could cause a severe disruption to our working environment, facilities and personnel represent signifi- cant operational risks for the ­Allianz Group and its operating entities. Our Business Continuity Management (BCM) framework strives to protect critical business functions from these shocks and enables them to carry out their core tasks on time and at the highest standard. Regularly enhanced, BCM activities and knowledge are embedded in the company’s risk management processes. Dedicated minimum-security standards are in place for IT sys- temsacrossthe­AllianzGrouptoensuretheproperuseandprotection of the Group’s information assets. With respect to financial state- ments, our internal control system is designed to mitigate opera- tional risks.1 In general, we aim to reduce operational failures by document- ing and sharing relevant methods, procedures, structures and pro- cesses in a comprehensive and timely manner across the Group, which is one of the fundamental principles of the ­Allianz Group Risk Policy. By measuring our operational risk and further developing miti- gation actions to manage the root causes we see the opportunity to reduce our operational risk exposure. Other Risks There are certain risks that cannot be fully quantified across the Group using our internal risk capital model. For these risks, we also pursue a systematic approach with respect to identification, analysis, 1 For additional information regarding our internal control over financial reporting, please refer to the chapter Controls over Financial Reporting and Risk Capital from page 123 onwards.

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