ALLIANZ GROUP 84 As providers of financial services, we consider risk management one  of our core competencies. Risk management is therefore an integrated part of our controlling process. We identify and measure, aggregate and manage risks. The result of this process determines how much capital is allocated to the Group’s various divisions. In our business, successful management essentially means con- trolling risks in order to increase the value of the Allianz Group on a sustained basis. Therefore, the Board of Management of Allianz AG formulates the business objectives and allocates the capital resources of the Allianz Group according to return-on- investment and risk criteria. Our risk-control strategy assigns re- sponsibility for risk management to the local entities, so that these can adjust to changing risk situations in a timely manner and in close proximity to their markets. At the same time, the operating units thereby meet the applicable legal requirements at their respective locations. Management of the Allianz Group through risk capital We control our activities through our respective local compa- nies. The most important parameters used in our risk-oriented controlling process are Economic Value Added (EVA ® ) and risk capital. Risk capital is used as a hedge against unexpected losses. In fiscal 2003, a risk model based on the concept developed by the Standard & Poor’s rating agency was used for the value-oriented control of our insurance companies. For the control of Dresdner Bank, we used our own internal model. This decentralized approach is complemented by centralized responsibility. Thereby, we account for the fact that in addition to local risks, we must also control global risks. Their accumu- lation can result in a considerable increase of our potential risk exposure. They are therefore centrally controlled by Group Risk Control. Our cumulated control covers all business segments of the Allianz Group. In fiscal 2003, we further improved and tested our internal model for insurance companies. It enables us to systematically evaluate internal data by means of models based on the theory of probability. This process takes into account the special char- acteristics of our local units as well as the specific nature of their risks. Portfolio effects are also incorporated into our risk analy- ses. In the course of fiscal 2004, we will convert the value- oriented control of our insurance companies to risk capital, which will be calculated by means of our internal model. In addition, Group Risk Controlling develops methods and processes for risk assessment and control on a group-wide basis. On this basis, Group Controlling assesses the Allianz Group’s risk exposure on the basis of local and global risks. Risk manage- ment activities are supervised by both internal and external auditors. Premium risks Premium risks are controlled primarily with the help of actuarial models used to calculate premiums and mon- itor claim patterns. In addition, we issue guidelines for con- cluding insurance contracts. In life insurance, we essentially concentrate on biometric risks – e. g., life expectancy, disability and illness. We also focus on risks that could arise from future policy cancellations. In the reporting year, we introduced the Group Risk Policy, which strengthens our decentralized risk controlling. This pol- icy established minimum requirements that are binding for all operational units. Since the beginning of 2003, a Group Risk Committee makes sure that the capital allocations and the risk profile of the Allianz Group are fully transparent. It is composed of members of the Board of Management of Allianz AG and chaired by our Chief Risk Officer. The mission of this committee is to promote the development of a comprehensive risk culture in the Allianz Group and to further improve our risk controlling processes. Its tasks also include the timely information of the Board of Manage- ment about risk-relevant developments and the coordination of appropriate countermeasures. Natural disasters such as earthquakes, storms and floods represent a special challenge for risk management. To control such risks, we use special modeling techniques. They involve the compilation of data about our portfolio, for instance the geo- graphic distribution of insurance amounts, with natural disaster scenarios in order to estimate the potential damage. The use of these simulation techniques was further expanded in the re- porting year.  EVA$^{® }$is a registered Trademark of Stern Steward & Co. Risk controlling in the insurance business Responsibilities