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Allianz Annual Report 2012

Annual Report 2012    Allianz Group Major failures and disasters which could cause a severe disruption to our working environment, facilities and per- sonnel, represent significant operational risks for the ­Allianz Group and its operating entities. Our Business Con- tinuity Management (BCM) framework strives to protect critical business functions from these shocks and enables themtocarryouttheircoretasksontimeandatthehighest standard. Regularly enhanced, BCM activities and knowl- edge are embedded in the company’s culture. Dedicated minimum-security standards are in place for IT systems across the ­Allianz Group to ensure the proper use and protection of the Group’s information assets. With re- spect to financial statements, our internal control system is designed to mitigate operational risks.1 In general, we aim to reduce process failures by clearly documenting and sharing relevant methods, procedures, structures and pro- cesses across the Group. Comprehensive and timely docu- mentation across the Group is one of the fundamental principles of the ­Allianz Group Risk Policy. As described under Risk governance structure, the Group’s Legal and Compliance department seeks to mitigate legal and regulatory risks with the support of other departments. Other Risks There are certain risks that cannot be fully quantified across the Group using our internal risk capital model. For these risks, we also pursue a systematic approach with re- spect to identification, analysis, assessment and monitor- ing. In general, the risk assessment is based on qualitative criteria or scenario analyses. The most important of these other risks include strategic, liquidity and reputational risk. Strategic risk Strategic risk is the risk of an unexpected negative change in the company’s value, arising from the adverse effect of management decisions regarding business strategies and their implementation. This risk reflects the compatibility between strategic goals, the business strategies and the resources deployed to achieve those goals. Strategic risk also includes the risk of management failing to effectively analyze and react to external factors (e.g. market condi- tions), which could affect the future direction of the rele- vant operating entity or the Group as a whole. 1 For additional information regarding our internal control over financial reporting, please refer to the chapter Controls and Procedures from page 214 onwards. These risks are evaluated and analyzed quarterly in the same way as reputational risk as described below. The Board of Management of ­Allianz SE formulates the business objectives. Strategic goals are translated into a three-year business plan, which is approved by the Supervisory Board of ­Allianz SE. To ensure proper implementation of these goals,strategiccontrolsarecarriedoutbymonitoringrespec­ tive business targets. We also constantly monitor market and competitive conditions, capital market requirements, regulatory conditions, etc. to decide whether to make stra- tegic adjustments. In addition, strategic decisions are dis- cussed in various Board of Management level committees (e. g. Group Capital Committee, Group Risk Committee, Group Finance Committee). The assessment of the associ- ated risks is a fundamental element of these discussions. For example, merger and acquisition transactions are sub- ject to review by the Group Finance Committee if the size exceeds the defined thresholds set for the type of trans­ action. Liquidity risk Liquidity risk has two aspects: the risk that short-term cur- rent or future payment obligations cannot be met or can only be met on the basis of altered conditions, and the risk that in the event of a company liquidity crisis, refinancing is only possible at higher interest rates or by liquidating assets at a discount. Liquidity risk can arise primarily if there are mismatches in the timing of cash payments and funding obligations. However, it does not include the risk of a change in market prices due to a worsening of the mar- ket liquidity of assets, as this is a component of market risk analyzed through our internal risk capital model (e. g. the assumed volatility of real estate investments takes histori- cal observations into account). Funding risk, a particular form of liquidity risk, arises when the necessary liquidity­ to fund illiquid asset positions cannot be obtained at the expected terms and when required. Detailed information regarding ­Allianz Group’s liquidity risk exposure, liquidity and funding – including changes in cashandcashequivalents–isprovidedinthechapterLiquid­ ity and Funding Resources starting on page 175 and notes 17, 23, 24 and 43 to the consolidated financial statements. At the Group level, liquidity risks arise mainly from the capi- tal requirements of subsidiaries and the necessary refi- nancing of expiring financial liabilities.  175   Liquidity and Funding Resources 208