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Allianz Annual Report 2012

actuarial methods and assumptions in the Life/Health re- serving process, the ­Allianz Group has designed a two stage reserving process. In a first stage, Life/Health reserves are calculated by qualified local staff experienced in the busi- ness of the subsidiaries. Actuaries in the local entities also conduct tests of the adequacy of the premiums and re- serves to cover future claims and expenses (liability ade- quacy tests). The process follows Group-wide standards for applying consistent and plausible assumptions. The appro- priateness of the reserves and compliance with the Group- wide standards is confirmed by the local actuary. In a sec- ond stage, the ­Allianz Group Actuarial Department regularly reviews the local reserving processes, including the appropriateness and consistency of assumptions, and analyzes the movements of reserves. Any adjustments to reserves and other insurance related reporting items are reported to and analyzed together with the ­Allianz Group Reserve Committee. Property-Casualty reserves are particularly dependent on the use of estimates and judgment regarding the develop- ment of loss reserves. Similar to Life/Health, a two stage reserving process is in place. In a first stage, in each jurisdiction, reserves are calculated for individual lines of business, taking into consideration a wide range of local factors. This local reserving process be- gins with local reserving actuaries gathering data, typically dividing reserving data into the smallest possible homoge- neous segments, while maintaining sufficient volume to form the basis for stable projections. Once data is collected, they derive patterns of loss payment and emergence of claims based on historical data organized into develop- ment triangles arrayed by accident year versus develop- ment year. Loss payment and reporting patterns are se- lected based on observed historical development factors and also on the judgment of the reserving actuary using an understanding of the underlying business, claims process- es, data and systems as well as the market, economic, soci- etal and legal environment. Expected loss ratios are then developed, which are derived from the analysis of historical observed loss ratios, adjusted for a range of factors such as loss development, claims inflation, changes in premium rates, changes in portfolio mix and changes in policy terms and conditions. Using the development patterns and expected loss ratios described above, local reserving actuaries produce esti- mates of ultimate loss and allocated loss adjustment ex- penses using several methods, such as Loss Development or Chain-Ladder Method, Bornhuetter-Ferguson Method, or Frequency-Severity Methods. Using the above estimate of ultimate loss and LAE by acci- dent year – with respect to the origin year of losses – sub- sidiaries of the ­Allianz Group directly estimate the total loss and LAE reserves by subtracting cumulative payments for claims and LAE through the relevant balance sheet date. Finally, local reserving actuaries calculate the relevant IBNR reserves as the difference between −− the total loss and LAE reserves, and −− the case reserves as established by claims adjusters on a case-by-case basis. Estimates for the current accident year determine the loss ratios and profitability of the business of the most recent year. For all prior accident years the change in estimates is reported as a run-off – adverse or favorable – in the con- solidated income statement. As loss reserves represent estimates of uncertain future events, the local reserving actuaries determine a range of reasonably possible outcomes. To analyze the variability of loss reserve estimates, actuaries employ a range of meth- ods and approaches, including simple sensitivity testing using alternative assumptions, as well as more sophisti- cated stochastic techniques. The ­Allianz Group’s reserving standards require that all local reserve committees in ­Allianz subsidiaries meet quarterly to discuss and docu- ment reserving decisions as well as to select the best esti- mate of the ultimate amount of reserves within a range of possible outcomes and to document the rationale for that selection for the particular entity. In a second stage, the ­Allianz Group Actuarial department regularly reviews the local reserving processes, including the appropriateness and consistency of assumptions. Sig- nificant aspects are reported to the ­Allianz Group Reserve Committee to initiate actions when necessary. For Life/Health, as well as for Property-Casualty the central oversight process includes the following key components: Group-wide standards and guidelines: They define the re- serving practices which must be conducted by each subsid- iary including aspects of assumptions and estimates. This includes the organization and structure, data, methods, and reporting. The ­Allianz Group Actuarial Department monitors compliance with these standards and guidelines. Annual Report 2012    Allianz Group D Consolidated Financial Statements 219 Consolidated Balance Sheets 220 Consolidated Income Statements 221 Consolidated Statements of Comprehensive Income 222 Consolidated Statements of Changes in Equity 223 Consolidated Statements of Cash Flows 226 Notes to the Consolidated Financial Statements 245