C _ Group Management Report Liquidity risk Environmental, Social and Governance (ESG) issues may emerge Liquidity risk is defined as the risk that current or future payment in all risk categories. The management of the reputational risk aspects obligations cannot be met or can only be met on the basis of adversely is supported by a dedicated Group ESG Board and Global altered conditions. Liquidity risk can arise primarily if there are Sustainability Office1, which help steer the integration of ESG aspects mismatches in the timing of cash in- and outflows. into core investment and insurance activities. Significant ESG and Each legal entity of the Allianz Group manages liquidity risk other reputational risks identified in the course of business are locally, using asset/liability management systems designed to ensure escalated to experts from Group Communications and Reputation, that assets and liabilities are adequately matched. Local investment Group Risk, and Global Sustainability for assessment and decision- strategies particularly focus on the quality of the investments and making, with the GFRC acting as the ultimate escalation/decision- ensure a significant portion of liquid assets (for example, high-rated making body. government bonds or covered bonds) in the portfolios. In the course of For further details on our key ESG integration processes, please liquidity planning, liquidity sources (for example, cash from refer to the sections “ESG Integration Approach” and “Climate Change investments and premiums) and liquidity needs (for example, Strategy” in the Non-Financial Statement. payments due to insurance claims and expenses) are reconciled under a best-estimate plan, as well as under adverse idiosyncratic and Climate change systemic liquidity scenarios, to allow for a group-wide consistent view Climate change has the potential to materially affect the global on liquidity risk. These analyses are performed at legal entity level and economy and our business, especially in the long run. Risks arising from are monitored by the Group. climate change can already be seen today and their relevance will An identical liquidity stress-testing framework is applied at increase over the mid- and long-term. Allianz SE. Major contingent liquidity requirements arise mainly from market risk scenarios for Allianz SE and its subsidiaries, from the non- The most significant risks that have a material impact on our business, availability of external capital markets, and from reinsurance risk or we expect will have in the future, are: scenarios for Allianz SE. In addition, the cash position of the Group cash pool investment − Physical risks: These can for instance be acute and chronic, such as portfolio is monitored and forecast on a daily basis and is subject to an rising temperatures, extreme weather events, rising sea levels, absolute minimum liquidity threshold and an absolute target liquidity intensifying heatwaves and droughts, or a change in vector-borne threshold. Both thresholds are defined for the Allianz SE cash pool in diseases, with impacts on property, life or health. order to be protected against short-term liquidity crises. − Transitional risks: These risks result from the cross-sectoral The liquidity planning process addresses future potential liquidity structural change stemming from the transition towards a low- needs and aims to manage available liquidity sources in an efficient carbon economy. Transitional risks include changes in climate and effective manner. The annual and high-level three-year cash flow policy, technology, or market sentiment, and the impact of this on plan for Allianz SE and the Holding and Treasury reportable segment the market value of financial assets as well as the impact from of Allianz SE reflects the overall operating, financing, and investing climate change litigation. strategy of the Allianz Group. The annual liquidity plan for Allianz SE and for the Holding and Treasury reportable segment is subject to the These risks impact Allianz’s business in two key ways: approval of the Board of Management. Liquidity planning is constantly monitored and regularly reported to the Board of − As an insurer providing insurance policies, e.g., covering fatality Management via the GFRC. and health impacts, property damage or litigation claims, and through changes in the sectors and business models it underwrites. Reputational risk − As a large-scale institutional investor with significant stakes in Allianz’s reputation as a well-respected and socially aware provider of various economies, companies, infrastructure, and real estate that financial services is influenced by our behavior in a range of areas such might be affected by the physical impact of climate change and as product quality, corporate governance, financial performance, by the transition to a low-carbon economy. This can directly customer service, employee relations, intellectual capital, and influence the ability of assets to generate long-term value. corporate responsibility. Reputational risk is the risk of an unexpected drop in the value of We address immediate risks from climate change factors following the the Allianz SE share price, the value of the in-force business, or the management approach for the primary underlying risks (i.e., financial value of future business caused by a decline in our reputation in risks, premium or reserve risks, reputational risks, etc.), e.g., building on internal or external stakeholders’ judgment. our long-term expertise in the modeling of extreme weather events or The identification and assessment of reputational risks is part of analyzing emission profiles of our proprietary investments. For the annual Top Risk Assessment process. As part of this process, senior example, the carbon footprint of our investee companies reported in management approves the risk management strategy for the most our climate disclosure serves as a starting point for an analysis of the significant risks facing the company, including those with a potentially exposure to emissions pricing. Our commitment to align our severe reputational impact. proprietary investment portfolio to 1.5°C climate scenarios is an effective means to address our transition risk exposure over the years. As another example, as part of our reputational risk management we 1_The Allianz Group Environmental, Social, Governance (ESG) Board and the Global Sustainability Office environmental, social, and governance aspects in corporate governance and decision-making processes are constituted as advisors to the Board of Management of Allianz SE and will further elevate at the Allianz Group. In 2022, the Group ESG Board was renamed as the Group Sustainability Board. 104 Annual Report 2021 − Allianz Group