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Allianz Annual Report 2013

3 – Use of estimates and assumptions Theprecedingnote2describestheaccountingpoliciesthatthe­Allianz Group follows in preparing its consolidated financial statements. The section below describes how certain reported figures can be sig- nificantly affected by the use of estimates and assumptions, and the processes the ­Allianz Group has in place to control the judgments which are made. Both sides of the ­Allianz Group’s balance sheet have a high degree of estimation and numerous assumptions embedded in the valuation of assets and liabilities. The estimation process and selec- tion of appropriate assumptions requires significant judgment to be applied and management decisions to be taken in order to establish appropriate values for these assets and liabilities. Any change in the assumptions and estimates could, in certain circumstances, signifi- cantly affect the reported results and values because the range of reasonable judgment in some cases may be very large. The ­Allianz Group understands the degree of impact that these judgments may have and has established a strong system of governance as well as controls, procedures and guidelines to ensure consistency and soundness over these judgments. Subsidiaries of the ­Allianz Group are required to establish con- trols which promote a culture of good judgment and sound decision- making around accounting estimates. These include providing train- ing programs, hiring people with the right background for the job (i.e. certified or experienced accountants, actuaries and finance profes- sionals), and providing formalized policies and procedures manuals for accounting and internal controls. At the ­Allianz Group level, processes and committees have been established to ensure sound judgment and consistent application of the ­Allianz Group’s standards. Furthermore, the ­Allianz Group has a culturethatisstronglycommittedtoreliability,encouragesopenand transparent discussions, provides a venue for asking questions and admitting mistakes, recognizes experts and expertise, and respects the four eyes principle of review. Committees, none of which are chaired by the CFO of the ­Allianz Group, ensure that judgmental deci- sions and selection of assumptions are discussed in an open setting among experts and that inconsistencies are identified and resolved. Complex accounting areas that are especially sensitive to the estimates and assumptions are described in the following sections. RESERVES FOR LOSS AND LOSS ADJUSTMENT EXPENSES, Reserves for INSURANCE AND INVESTMENT CONTRACTS AND DEFERRED ACQUISITION COSTS As of 31 December 2013, the ­Allianz Group reported:1 −− reserves for loss and loss adjustments expenses of € 66,566 mn mainly for the Property-Casualty operations, including run-off business and reinsurance business assumed, −− reserves for insurance and investment contracts of € 404,072 mn mainly for the Life/Health operations and −− deferred acquisition costs of € 22,203 mn. Life/Health reserves are dependent on estimates and assumptions, especially on the life expectancy of an insured individual (mortality and longevity risk) and on the development of interest rates and investment returns (asset-liability mismatch risk). These assump- tions also have an impact on the presentation of costs arising from the origination of insurance business (acquisition costs and sales inducements) and the value of acquired insurance business (PVFP). To ensure consistency in the application of actuarial methods and 1 Please refer to note 2 Summary of significant accounting policies. For further details, please refer to note 12 Deferred acquisition costs, note 19 Reserves for loss and loss adjustment expenses and note 20 Reserves for insurance and investment contracts. D Consolidated Financial Statements 127 Consolidated Balance Sheets 128 Consolidated Income Statements 129 Consolidated Statements of Comprehensive Income 130 Consolidated Statements of Changes in Equity 131 Consolidated Statements of Cash Flows 134 Notes to the Consolidated Financial Statements Annual Report 2013    Allianz Group 143 INCOME FROM FINANCIAL ASSETS AND LIABILITIES CARRIED AT FAIR VALUE THROUGH INCOME (NET) Income from financial assets and liabilities carried at fair value through income includes all investment income, and realized and unrealizedgainsandlossesfromfinancialassetsandliabilitiescarried at fair value through income. In addition, commissions attributable to trading operations and related interest expenses and transaction costs are included in this line item. Foreign currency gains and losses on monetary items are also reported within income from financial assets and liabilities carried at fair value through income (net). FEE AND COMMISSION INCOME Fee and commission income primarily consists of asset management fees that are recognized when the service is provided. CLAIMS AND INSURANCE BENEFITS INCURRED Benefits charged to expense consist of claims and insurance benefits incurred during the period, including benefit claims in excess of pol- icy account balances and interest credited to policy account balances. Furthermore, it includes claim handling costs that are directly related to the processing and settlement of claims. Reinsurance recoveries are deducted from claims and insurance benefits. INCOME TAXES Income tax expense consists of current taxes on taxable income actually charged to the individual ­Allianz Group companies and changes in deferred tax assets and liabilities. Expense and income from interest and penalties to or from tax authorities are included in current taxes. Please refer to note 3, where the processes and controls for ensur- ing an appropriate use of estimates and assumptions are explained.

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