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Allianz Annual Report 2013

Annual Report 2013    Allianz Group140 PRINCIPLES OF ACCOUNTING FOR INSURANCE, INVESTMENT and reinsurance CONTRACTS Insurance and investment contracts Insurance contracts under which the ­Allianz Group accepts signifi- cant insurance risk and investment contracts with discretionary par- ticipating features are accounted for under the insurance accounting provisions of US GAAP as at first-time adoption of IFRS 4 on 1 January 2005 when IFRS 4 does not provide specific guidance. Investment con- tracts without discretionary participation features are accounted for as financial instruments in accordance with IAS 39. Reinsurance contracts The ­Allianz Group’s consolidated financial statements reflect the effects of ceded and assumed reinsurance contracts. Assumed rein­ surance refers to the acceptance of certain insurance risks by the ­Allianz Group that other companies have underwritten. Ceded rein­ surance refers to the transfer of insurance risk, along with the respec- tive premiums, to one or more reinsurers who will share in the risks. When the reinsurance contracts do not transfer significant insur- ance risk, deposit accounting is applied as required under the related reinsuranceaccountingprovisionsofUSGAAPorunderIAS39.Assumed reinsurance premiums, commissions and claim settlements, as well as the reinsurance element of technical provisions are accounted for in accordance with the conditions of the reinsurance contracts and with consideration of the original contracts for which the reinsur- ance was concluded. Insurance liability adequacy testing Liability adequacy tests are performed for each insurance portfolio on the basis of estimates of future claims, costs, premiums earned and proportionate investment income. For short-duration contracts, a premium deficiency is recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policy- holders, capitalized DAC, and maintenance expenses exceeds related unearned premiums while considering anticipated investment income. For traditional long-duration contracts and limited-payment contracts, if actual experience regarding investment yields, mortality, morbidity, terminations or expense indicate that existing contract liabilities, along with the present value of future gross premiums, will not be sufficient to cover the present value of future benefits and to recover capitalized DAC, a premium deficiency is recognized. For other long-duration contracts, if the present value of esti- mated gross profits or margins, plus unearned revenue liability if applicable,willnotbesufficienttorecovercapitalizedDAC,apremium deficiency is recognized. Please refer to note 3, where the processes and controls for ensuring an appropriate use of estimates and assumptions are explained. UNEARNED PREMIUMS For short-duration insurance contracts, like most of the property and casualtycontracts,premiumstobeearnedinfutureyearsarerecorded as unearned premiums. These premiums are earned in subsequent periods in relation to the insurance coverage provided. Amounts charged as consideration for origination of certain long-duration insurance contracts (i.e. initiation or front-end fees) are reported as unearned revenue which are included in unearned premiums. These fees are recognized using the same amortization methodology as DAC. RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES Reserves are established for the payment of losses and loss adjust- ment expenses (LAE) on claims which have occurred but are not yet settled. Reserves for loss and loss adjustment expenses fall into two categories:casereservesforreportedclaimsandreservesforincurred but not reported losses (IBNR). Case reserves for reported claims are based on estimates of future payments that will be made with respect to claims, including LAE relating to such claims. The estimates reflect the informed judg- ment of claims personnel based on general insurance reserving prac- ticesand knowledgeofthenatureand valueofa specific typeof claim. These case reserves are regularly re-evaluated in the ordinary course of the settlement process and adjustments are made as new informa- tion becomes available. IBNR reserves are established to recognize the estimated cost of losses that have occurred but where the ­Allianz Group has not yet been notified. IBNR reserves, similar to case reserves for reported claims, are established to recognize the estimated costs, including expenses, necessary to bring claims to final settlement. The ­Allianz Group relies on its past experience, adjusted for current trends and any other relevant factors to estimate IBNR reserves. IBNR reserves are estimates based on actuarial and statistical projections of the expect- ed cost of the ultimate settlement and administration of claims. The analyses are based on facts and circumstances known at the time, predictions of future events, estimates of future inflation and other societal and economic factors. Trends in claim frequency, severity and time lag in reporting are examples of factors used in projecting the IBNR reserves. IBNR reserves are reviewed and revised periodically as additional information becomes available and actual claims are reported. In general, reserves for loss and loss adjustment expenses are not discounted, except when payment amounts are fixed and timing is reasonably determinable. Discounted loss reserves as well as their unwinding are presented within reserves for insurance and invest- ment contracts to better reflect the nature of the reserves and to only reflect the net underwriting result within the key performance indi- cator combined ratio.

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