C _ Group Management Report Furthermore, we validate the model and parameters through meaningful mark-to-market approach. For such assets we apply a sensitivity analyses, independent internal peer reviews, and, where mark-to-model approach. For some of our liabilities, the accuracy of appropriate, independent external reviews, focusing on methods for their values also depends on the quality of the actuarial cash flow selecting parameters and control processes. To ensure that the model estimates. Despite these limitations, we believe the estimated fair is validated adequately, we have established an Independent values are appropriately assessed. Validation Unit (IVU) within Group Risk, responsible for validating our internal model within a comprehensive model validation process. Any limitations identified during the validation process are remedied after In 2021, our internal model was further enhanced based on regulatory consultation with the Group regulator. Overall, we believe that our developments, model validation results, and the feedback received in validation efforts are effective and that the model adequately the course of our consultations with regulators. assesses the risks to which we are exposed. The net impact of regulatory and model changes on the The construction and application of the replicating portfolios Solvency II risk capital of the Group in 2021 was € (0.4) bn. This mentioned are subject to the set of replicating instruments that are reduction in SCR is mainly driven by the introduction of several major available and might be too simple or restrictive to capture all factors model changes affecting Allianz Group companies in the Life/Health affecting the change in value of liabilities. As with other model segment, together with a reduction of the ultimate forward rate (UFR) components, the replication framework is subject to independent by 15 basis points and a regulatory model change impacting the third validation and to suitability assessments as well as to stringent data country equivalent capital requirements. and process quality controls. Therefore, we believe that our liabilities In all subsequent sections, the figures including model changes are adequately represented by the replicating portfolios. will form the basis for the movement analyses of our risk profile in 2021. Since the internal model takes into account the change in the As our general capital steering continues to focus on the Solvency II economic fair value of our assets and liabilities, it is crucial to estimate ratio impacts excluding the application of transitional measures for the market value of each item accurately. For some assets and technical provisions, the figures in the following table exclude liabilities it may be difficult, if not impossible – notably in distressed transitional measures unless specifically stated. financial markets – to either obtain a current market price or apply a Allianz Group: Impact of regulatory and model changes – allocated risk according to the risk profile (total portfolio before non-controlling interests) € mn Market risk Credit risk Underwriting risk Business risk Operational risk Diversification Total 1 2 1 2 1 2 1 2 1 2 1 2 1 2 As of 31 December 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 2020 Property-Casualty 4,414 4,439 2,334 2,334 11,299 11,300 754 749 1,530 1,530 (6,922) (6,843) 13,409 13,508 Life/Health 20,760 21,264 3,234 3,241 652 652 2,294 2,255 1,446 1,442 (4,510) (4,534) 23,875 24,321 Corporate and Other 1,604 1,609 527 526 214 207 - - 363 363 (583) (651) 2,125 2,054 Total Group 26,778 27,313 6,095 6,101 12,165 12,159 3,048 3,004 3,339 3,335 (12,015) (12,028) 39,409 39,883 Tax (5,816) (5,879) Capital add-on 798 970 Third country equivalent 3,529 3,326 Sectoral requirement 2,650 2,650 Total Group 40,570 40,950 1_2020 risk profile figures adjusted based on the 2021 model changes impact. 2_2020 risk profile figures as reported previously. In 2021, the impact of model changes to our internal model concerned Business risk the following risk categories: The small increase in the business risk of Allianz Group was mainly driven by a major model change at the German health company Market risk Allianz Private Krankenversicherungs-Aktiengesellschaft. The overall decrease in market risk is almost exclusively driven by the net impact of several major model changes at the German Life/Health Capital add-ons companies Allianz Lebensversicherungs-Aktiengesellschaft and The reduction in the risk capital add-on for Allianz Group by € 0.2 bn to Allianz Private Krankenversicherungs-Aktiengesellschaft, together € 0.8 bn (2020: € 1.0 bn) is mainly driven by a decrease in the with the reduction of the UFR. These resulted in a decrease in the replication add-on reflecting a replication portfolio model change, market risk of Allianz Group by € 0.5 bn to € 26.8 bn (2020: € 27.3 bn). together with a lower add-on for cross effects primarily resulting from model changes at Allianz Lebensversicherungs-Aktiengesellschaft. Credit risk, underwriting risk and operational risk Model changes in 2021 did not have material impacts on net credit Third country equivalence risk, underwriting risk and operational risk. The capital requirements for Allianz Group companies under third country equivalent regimes increased by € 0.2 bn to € 3.5 bn (2020: Annual Report 2021 − Allianz Group 107