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Allianz Annual Report 2012

Annual Report 2012    Allianz Group 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 busi­ ness model. Diversification helps us manage our risks effi­ ciently by limiting the economic impact of any single event and by contributing to relatively stable results and risk profile in general. As discussed in the Diversification and correlation assumptions section, the degree to which diver­ sification can be realized depends not only on the correla­ tion between risks but also on the relative concentration level of those risks. Therefore, our aim is to maintain a bal­ anced risk profile without any disproportionately large risks. At the Group level, we identify and measure concentration risks consistently across business segments in terms of pre-diversified internal risk capital and in line with the risk categories covered by our internal risk capital model. Within theindividualcategories,weusesupplementaryapproaches to manage concentration risks, which are described in the remainder of this section. In the subsequent sections, all risks are presented on a pre-diversified and Group-diversi­ fied basis and concentrations of single sources of risk are discussed accordingly. With respect to investments, top-down indicators – such as strategic asset allocation benchmarks – are defined and closely monitored to ensure balanced investment port­ folios. Financial VaR limits are in place for the Life/Health and Property-Casualty segments at the Group level. They are based on the internal risk capital model, complement­ ed by standalone interest rate and equity sensitivity limits, in order to protect the economic capital position and man­ age peak risks. To avoid disproportionately large risks that might accumu­ late and have the potential to cause substantial losses (e.g. natural catastrophes or credit events) we closely monitor those risks on a standalone basis (i.e. before the diversifica­ tion effect) within a global limit framework. For example, the Management Board of ­Allianz SE has im­ plemented a framework of natural catastrophe limits at both operating entity and Group levels in an effort to reduce potential earnings volatility and restrict potential losses from single events as well as on an annual aggregate basis. The limits are defined on a net basis and on an occurrence   376  Financial VaR probability of 0.4 % – which corresponds to a frequency of one in 250 years. They are subject to an annual review. Tradi­ tional reinsurance coverage and dedicated financial trans­ actions at Group level are examples of two instruments to mitigate the peak risks and limit the potential adverse im­ pact on our financial results and shareholders’ equity (e. g. severe natural catastrophe losses). In 2012, for example, we renewed the risk swaps by which we exchange European windstorm, U.S. hurricane and earthquake risks – which are among our largest natural catastrophe exposures – for Japanese typhoon and earthquake risks, to which we have less exposure as our Property-Casualty operations are smaller in this region. In addition, we have in place a num­ ber of catastrophe bonds, protecting us against U.S. hurri­ cane and earthquake risks. For credit risk concentration, we run a Group-wide country and obligor group limit management framework (CRisP 1), which is based on data used by the investment and risk ex­ perts at the Group and the operating entity levels. It forms the basis for discussions on credit actions and provides notification services for a quick and broad communication of credit-related decisions across the Group. By implementing and performing clearly-defined processes we ensure that exposure concentrations and uses of limits are appropriately monitored and managed. The limit framework covers counterparty concentration risk that is related to credit and equity exposures. It is the ultimate responsibility of the Board of Management to decide upon maximum country and obligor exposure limits from the Group’s perspective (i.e. the maximum con­ centration limit). This limit takes into account the ­Allianz Group’s portfolio size and structure as well as our overall risk strategy. In order to assess and monitor concentration risk, stan­ dardized CRisP reports are provided quarterly to senior management of the Group and operating entities. These present the top 100 obligor group concentrations and their contribution to the credit risk of the respective portfolio. The Board of Management delegates authorities for limit setting and modification to the Group Risk Committee and Group CRO by clearly defining maximum limit amounts. All limits are subject to annual review and approval according to the delegated authorities. 1 Credit Risk Platform. C Group Management Report Risk Report and Financial Control 184 Risk Report 214 Controls and Procedures 195

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