Business Risk Measurement

Business risks consist of operational risks and cost risks.

Operational risks
These are the risks of losses resulting from inadequate or failed internal processes, people and systems or from external events. The definition includes legal risk, whereas strategic risk and reputational risk are excluded in accordance with Basel II.

Cost risks
These risks consist of unanticipated fluctuations in earnings arising from a decline in income without a corresponding decrease in expenses and include the risk of budget deficits resulting from lower revenues or higher costs than budgeted. Within our Life/Health segment we also evaluate lapse risks.

Allocated internal risk capital by business segment(1)
– total portfolio before minority interests –

As of December 31,				2006				2005
				€ mn				€ mn
Property-Casualty
Business risks				1,941				1,927
Life/Health
Business risks				1,509				1,190
Banking
Business risks				570				550
Asset Management
Business risks				2,605				2,474
Corporate
Business risks				91				80
Total				6,716				6,221

Allianz has developed an operational risk framework for the Allianz Group that focuses on early recognition and pro-active management of operational risks. The framework defines roles and responsibilities, risk processes and methods and has been implemented at the major Allianz Group companies. Local risk managers implement this framework within the respective operating units. The operating units identify and evaluate relevant operational risks and control weaknesses through a bottom-up approach via self-assessment.

Complementing our pro-active local management approach, operational losses are collected in a central loss database and an analysis of the causes for significant losses is used to enable the operating units to implement measures to avoid or reduce future losses. The measures adopted may include revising processes, improving failed or inappropriate controls, installing comprehensive security systems and strengthening emergency plans. This structured reporting is designed to provide comprehensive and timely information to senior management of the relevant local operating units.