C _ Group Management Report review and evaluate social and environmental effects, including The risk capital required is defined as the difference between the climate change issues, arising from our business activities and business current portfolio value and the portfolio value under adverse relations through the ESG business integration approach described conditions at the 99.5 % confidence level. As we consider the impacts above. of a negative or positive event on all risk sources and covered On a forward-looking basis, we consider risks from climate businesses at the same time, diversification effects across products and change factors under emerging risks, where we closely monitor the regions are taken into account. The results of our Monte Carlo development of the risk landscape supported by selective analyses on simulation allow us to analyze our exposure to each source of risk both our portfolios. In this regard we are developing different approaches separately and in aggregate. We also analyze several pre-defined towards scenario analysis to further educate our understanding of stress scenarios representing historical events, reverse stress tests, and how climate change risks may unfold in the future. adverse scenarios relevant for our portfolio. Furthermore, we conduct Climate change also creates opportunities – be it in connection ad-hoc stress tests on a monthly basis to reflect current political and with financing a low-carbon and climate-resilient future, e.g., by financial developments and to analyze specific non-financial risks investing in renewable energy, energy efficiency in real estate, and more closely. electric vehicle infrastructure, or by providing insurance solutions to protect against physical climate impacts and to support low-carbon Coverage of the risk capital calculations business models. The Allianz Group’s internal model to calculate our Solvency Capital For more information on the impact of Allianz’s activities on the Requirement (SCR) covers all major insurance operations2. This climate, please refer to the section “Environmental Matters” in the includes both relevant assets (including fixed-income, equities, real Non-Financial Statement. estate, and derivatives) and liabilities (including the run-off of all current and planned technical provisions as well as deposits, issued 1 debt and other liabilities). For with-profit products in the Life/Health Internal risk capital framework business segment, the options and guarantees embedded in insurance contracts – including policyholder behavior – are taken We define internal risk capital as the capital required to protect us into account. against unexpected, extreme economic losses, and which forms the Smaller related undertakings in the European Economic Area basis for determining our Solvency II regulatory capitalization. On a which are not covered by the internal model are reflected with their quarterly basis, we calculate and consistently aggregate internal risk standard formula results. At the Group level, the Solvency Capital capital across all business segments. We also project risk capital Requirements for smaller insurance undertakings outside the requirements regularly between reporting periods in times of financial European Economic Area with only immaterial impact on the Group’s market turbulence. risk profile are accounted for by means of book value deduction3 . Risk capital related to our European banking operations is allocated to the Corporate and Other business segment and For the management of our risk profile and solvency position, we utilize calculated based on the approach applied by banks in accordance an approach that reflects the Solvency II rules in that it comprises our with the local requirements resulting from the Basel regulation (Basel approved internal model covering all major insurance operations. standards). As the impact on the Group’s total Solvency Capital Other entities are reflected based on standard formula results, others Requirement is minor, risk management for the banking operations is under the deduction and aggregation approach as well as on sectoral not discussed in greater detail. or local requirements for non-insurance operations, in accordance with For our Asset Management business segment, we assign internal the Solvency II framework. risk capital requirements based on sectoral regulatory capital requirements. The Asset Management business is affected mainly by Internal model operational risks. However, since most of our Asset Management Our internal model is based on a VaR approach using a Monte Carlo business is not located in the eurozone, at Group level its participation simulation. Following this approach, we determine the maximum loss value bears a foreign exchange rate risk. Our Asset Management in portfolio value in scope of the model within a specified timeframe operations are covered by local risk functions which are running risk- (“holding period”, set at one year) and probability of occurrence controlling processes, including qualitative risk assessments, set up by (“confidence level”, set at 99.5 %). We simulate risk events from all risk the respective entities. In addition, Allianz Asset Management GmbH categories (“sources of risk”) modeled, and calculate the portfolio provides oversight over the local activities through its control functions value based on the net fair value of assets minus liabilities, including and ensures that the reporting and assurance requirements as defined risk-mitigating measures such as reinsurance contracts or derivatives, by Allianz Group are met. Due to the particular importance of under each scenario. operational risks for the Asset Management business, a key task for the local risk management functions in the related entities is a regular monitoring of the internal controls attached to material processes, which is part of the Integrated Risk and Control System. Additional examples for these qualitative assessments include Top Risk Assessments, as well as challenged self-assessments of the maturity of 1_This section contains specific risk disclosures as required by IFRS 4 and IFRS 7 relating to the Notes to the 3_Under book value deduction, the book value of the respective entity is deducted from eligible Own Funds Consolidated Financial Statements. of the Group. 2_Allianz Life Insurance Company of North America is based on third-country equivalence. Annual Report 2021 − Allianz Group 105