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Allianz Annual Report 2012

Annual Report 2012    Allianz Group Risk 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 in- surance and asset management activities. These include financial market, credit, insurance, operational, business and strategic risks. The three largest risks in terms of their contribution to ­Allianz’s internal model risk capital results are: −− Financial market risk, especially interest rate risk driven by the duration mismatch between assets and liabilities for long-term savings products; −− Credit and credit spread risk, again driven by the assets backing long-term savings products; −− Property & Casualty premium risk, which is driven by natural and man-made catastrophes as well as accident year claims uncertainty. ­Allianz’s risk profile is relatively stable over time, being driven by ­Allianz’s risk appetite and steered by our risk management practices and limits – which are described in greater detail later in this report. However, in 2012 ­Allianz continued to be exposed to two externalforceswhichadverselyaffectedourriskprofileand would not normally be associated with our core operating activities: the European sovereign debt crisis and regulatory developments – especially the European solvency directive, Solvency II. The European sovereign debt crisis The financial repression caused by the European sovereign debt crisis continued and has led to an increase in financial market volatility and risk premia as well as to lower risk free interest rates. Although the situation had stabilized by the end of 2012, many of the root causes of the crisis remain unresolved and markets could fluctuate widely again in the future. The heightened market volatility and low interest rateenvironmentmaycontinuetohaveadverseimplications for ­Allianz’s risk profile through our business development, asset values and the value of our liabilities. In addition to continuously monitoring these develop- ments, our management has responded decisively to these external events. During 2012, we executed a derisking ­program focused primarily on our peripheral sovereign ­exposures and our exposure to financial institutions. Further­more, we developed and implemented operational contingency planning for ­Allianz SE and its operating enti- ties. Finally, we made adjustments to our product design and pricing in the Life/Health segment with respect to guarantees and surrender conditions. Looking forward, our robust action to deal with the Euro crisis has bolstered our financial and operational resilience to strong shock scenar­ ios. Continuous monitoring remains a priority to ensure the sustained effectiveness of our contingency measures. Regulatory developments Although details of future regulatory requirements, espe- cially Solvency II and those defining systemically relevant financial institutions, are becoming clearer, the final rules are still evolving. As well as leading to delays in the intro- duction of the Solvency II framework, the lack of final rules for both Solvency II and systemically relevant financial insti­tutions creates uncertainties for our business and in terms of the ultimate capital requirements for ­Allianz. Inaddition,duetothemarketvaluebalancesheetapproach, the Solvency II regime is expected to lead to higher volatility in regulatory capital requirements compared to Solvency I, specifically with regard to long-term asset accumulation and savings products in the life insurance segment. There- fore, product design, investment strategies and hedging programs will likely need to be adapted throughout the industry to mitigate this volatility.  377  Risk Appetite 184