Sustainability Report 2021 04.5 Risk and opportunity management 01 Introduction The risks and opportunities • Group Audit forms the ‘Third Line of Defense’, 04.5.2 Natural catastrophe We use special Nat Cat modeling techniques posed by climate change require independently and regularly reviewing risk risk governance which combine portfolio data (e.g. geographic 02 Measuring and governance implementation and compliance location, characteristics of insured objects and managing sustainability the use and regular review of with risk principles, performing quality reviews The Group-wide risk management framework is their values) with simulated natural disaster of risk processes, and testing adherence to applicable to Natural Catastrophes (Nat Cat). scenarios to estimate the magnitude and 03 Strengthening our comprehensive framework business standards, including the internal Very specific processes and rules apply to frequency of potential losses. Where such models our foundation to ensure it is properly addressed control framework. the management of Nat Cat risks due to the do not exist, we use deterministic, scenario-based and applied. Early warning indicators are monitored and significance of relevance and potential exposure. approaches to estimate potential losses. 04 Climate-related regularly reported to senior management through Main risk management processes covering Experts at Allianz Reinsurance – including financial disclosure risk dashboards, risk capital allocation and limit physical climate change adaptation include meteorologists, hydrologists, geophysicists, 04.1 Highlights 04.5.1 Overarching risk consumption reports to identify when climate pricing risks, portfolio management, exposure and geographers and mathematicians – model 04.2 Governance governance aspects become material. Supplemented by risk management, risk consulting, claims handling around 50 Nat Cat scenarios for Allianz Group. 04.3 Strategy quarterly updates, senior management decides and governance. Data is captured using best-in-class standards 04.4 Strategy resilience, stress-tests and Climate change risks and adaptation to the the risk management strategy and related actions. Each operating entity is responsible for controlling to map a range of perils and regions. In past climate scenario analysis resulting impacts have been integral to our risk years, these were used to conduct stress-tests 04.5 Risk and opportunity management management process for many years and our A key tool is the Allianz Risk Capital Model which its exposure to individual catastrophes and for for floods in Germany as well as wildfires in the 04.6 Targets and metrics approach continues to improve. All processes assesses natural catastrophe events for the defining local reinsurance requirements based U.S. and Australia. The results provide the basis and rules are codified in the Allianz Standards upcoming year on subsidiary and Group level. on local risk appetite and capital position. for group-wide risk monitoring, risk limits and 05 Our universal principles and Functional Rules. Compliance with these Another important instrument is the yearly Top The respective cover is provided by Allianz SE subsequent business decisions. The top three rules is mandatory. Our risk management Risk Assessment which helps to identify and or one of its subsidiaries. perils contributing to Nat Cat risk for Allianz Group and adaptation processes and rules cover all remediate significant threats to financial results, At Group level, the Board of Management reviews in the past four years were windstorms in Europe, insurance and underwriting-specific processes. operational viability, reputation and delivery of and approves the risk appetite. The reinsurance floods in Germany and earthquakes in Australia. strategic objectives, regardless of whether they division is responsible for designing and Climate risks are addressed as part of an can be quantified or not. This includes immediate implementing Group catastrophe protections We also conduct selected stress-scenario overarching qualitative and quantitative risk risks for the company and emerging risks which within given exposure limits. These covers take analysis on Nat Cat risks like hail or windstorms reporting and controlling framework: may arise from technological developments, various forms and aim to protect the Group to be used in risk steering. Nat Cat models are • As a general principle, responsibility for the new or changing environmental risks and socio- against excessive losses from major natural regularly updated according to the latest scientific ‘First Line of Defense’ rests with business demographic changes. Climate-related factors catastrophes. We measure, monitor and steer information. We are continuously improving the managers in the related Allianz Group are included in Top Risk Assessments which are risk based on an approved internal model which inclusion of global Nat Cat hazard information, undertaking. They are responsible for the risks conducted at both operating entity and Group quantifies the potential adverse development including climate, into underwriting decisions. taken and the returns from their decisions. level. Relevant emerging risks are discussed by of own funds. All relevant P&C insurance and • The ‘Second Line of Defense’ consists of the Group Finance and Risk Committee or the reinsurance portfolios are considered. independent global oversight functions Group Underwriting Committee. Following that, – Risk, Actuarial, Compliance and Legal. underwriting opportunities or mitigation measures These support the Group Board of are implemented where necessary. Management in defining the risk frameworks For more details on these risk management within which the business can operate. processes please see the Risk and Opportunity Report on pages 97 – 115 of the Allianz Group Annual Report 2021. 82