talanx group annual report 2011 en

198
Financial statements Notes
General information
Talanx Group. Annual Report 2011
Accounting principles
and policies
Segment reporting Consolidation,
business combinations
Non-current assets held for
sale and disposal groups
The bonds, equities and real estate are clearly within the defined Group limits. Within the terms
of our company’s risk-carrying capacity and regulatory requirements, our holistic asset/liability
management systems endeavour to balance the investment goals of security, profitability, liquidity,
mix and spread. The main challenges to achieving these goals are market risks, default risks and
liquidity risks.
Market risks
The market risk consists primarily of the risk of changes in the market prices of fixed-income assets
and equities and the exchange rate risk associated with fluctuations in exchange rates where there
is no matching cover. This may necessitate value adjustments or lead to losses being realised when
financial assets are sold. A decline in the interest rate level can also reduce investment income.
One important means of monitoring and steering market price risks is constant analysis of the
value at risk (VaR), which is increasingly evolving from an assets-side measurement approach to
an asset/liability concept. The VaR defines the estimated maximum loss that will not be exceeded
within a given holding period (e.g. 10 days) and with a given probability (e.g. 95%).
The VaR is determined on the basis of historical data. As part of these calculations, the loss potentials
of both the total portfolio and individual sub-portfolios are monitored and limited. The
maximum loss potential is calculated based on a confidence level of 95% and a holding period of
ten days. This means that there is a 5% probability of this estimated loss potential being exceeded
within 10 days.
The input data for the calculation are the business in force, updated daily. The market data history
used for this risk analysis extends over 181 weeks. On this basis, 180 weekly changes are calculated
for each relevant market parameter, such as equity prices, exchange rates and interest rates, and
these are then used to establish the value at risk. Market observations from the recent past are
weighted more heavily by applying a decay factor in order to refine the sensitivity of the VaR model
to current volatility changes and hence improve the forecast quality. The time series used as the
basis for calculating the risk parameters are updated weekly, the market parameters of the oldest
week being removed and replaced by those of the current week. The risk model is then recalibrated
on the basis of the updated market data.