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Allianz Annual Report 2012

Annual Report 2012    Allianz Group Credit spread risk Our internal model framework fully acknowledges the risk of declining market values for our fixed income assets – such as bonds – due to the widening of credit spreads. How- ever, for internal risk management and appetite, we take into account the underlying economics of our business model – for example, the fact that the cash flows of our in- suranceliabilitiesaretoalargedegreepredictable,limiting to a large extent the risk that we are forced to sell these bonds prior to maturity at a loss and allowing us to keep the bonds as a long-term investor till the maturity date. As a consequence,wereflectthisinourmodelusing aCounter Cyclical Premium approach and view the more relevant risk to be credit default rather than credit spread. Credit risk The ­Allianz Group monitors and manages credit risk expo- sures and concentrations with the aim of ensuring that it is able to meet policyholder obligations when they are due, and to maintain adequate capital and solvency positions for the operating entities and the Group as a whole. This objective is supported by the internal credit risk model and the Group-wide country and obligor group limit manage- mentframework(CRisP)asdescribedunderConcentration of risks. The ­Allianz Group’s internal credit risk capital model is an integral part of the overall internal risk capital framework. It measures credit risk as the potential economic loss in the value of our portfolio due to changes in the credit quality of our counterparts (“migration risk”) or the inability or un- willingness of the counterparty to fulfill contractual obliga- tions (“default risk”). The model is centrally developed, parameterized and controlled. Group-wide credit data is collectedfollowingacentralizedprocessandusingstandard obligor and obligor group mappings. Our internal credit risk capital model covers counterparty risk and country risk. Counterparty risk arises from our fixed income investments, cash positions, derivatives, structured transactions, receivables from ­Allianz agents and other debtors – as well as reinsurance recoverables and credit insurance.1 Country risk exposure is calculated as cross-border exposure to all obligors domiciled abroad from each operating entity perspective. 1 Exposures to the national governments of OECD and EEA states are modeled as risk free in the credit risk internal model, if the exposure is issued in the local currency of the govern­ ment. This is in line with the EIOPA’s advice on Level 2 Implementation Measures on Solvency II. The internal credit risk capital model is a state-of-the-art tool which provides bottom-up analysis. The major drivers of credit risk for each instrument are exposure at default, ratings, seniority, collateral and maturity. Additional para­ meters assigned to obligors are migration probabilities and obligor asset correlations reflecting dependencies within the portfolio. Ratings are assigned to single obligors via an internal rating approach which is based on long- term ratings from rating agencies. It is dynamically adjusted using market implied ratings and the most recent infor­ mation. The loss profile of a given portfolio is obtained through a Monte-Carlo simulation taking into account interdepen- dencies and exposure concentrations per obligor or seg- ment. To reflect portfolio specific-diversification effects, the loss profiles are calculated at different levels of the ­Allianz Group structure (pre-diversified). They are then fed into the overall internal risk capital model for further aggre­gation across sources of risk to derive Group-diversi- fied internal credit risk capital. For the Life/Health segment, credit risk is typically linked to fixed income securities, whereas the Property-Casualty segment has a significant exposure to reinsurance counter­ parts as well. In the life business, policyholder participa- tion plays a significant role for credit risk assessment since potential losses from credit events can be shared to a certain extent with the policyholder. The credit insurance business of Euler Hermes is integrated in the ­Allianz Group model to capture the concentration and diversification effects. Cash positions and strategic partnerships are main drivers for the credit risk of the Corporate and Other segment. Credit risk related to our banking operations is not considered to be significant at the Group level. C Group Management Report Risk Report and Financial Control 184 Risk Report 214 Controls and Procedures 199

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