ING Direct 2004 Annual Report Download - page 167

ING Group Annual Report 2004 165
ING INSURANCE
ACTUARIAL AND UNDERWRITING RISK
GENERAL
ING is engaged in the business of selling life and non-life insurance products. Life products include a broad range of traditional
life, unit-linked, annuities, universal life, group life, pension, and guaranteed investment contracts. Non-life products include
all lines of non-life business – fire, automobile, accident and health, third-party liability and disability.
Risks from these insurance products arise with respect to the adequacy of insurance premium rate levels and provisions
with respect to insurance liabilities and capital position. The risks in these products are primarily market, credit, actuarial
and underwriting risks. ING regularly monitors the adequacy of provisions for the insurance business at a prudent level.
ING believes its insurance provisions are adequate.
Actuarial and underwriting risks are managed through product design requirements, risk limitations, and management of
concentrations. Underwriting risks are covered in the process whereby applications submitted for insurance coverage are
reviewed. The maximum underwriting exposure is limited through exclusions, cover limits and reinsurance.
MEASUREMENT
ING Group has established actuarial and underwriting risk limits in specific areas of its insurance operations. For our material
non-life units (in The Netherlands, Belgium, Canada, Mexico) the risk tolerance is generally set at 2.5% of the Group’s after-tax
earnings. For 2004, the amount was set to EUR 160 million pre-tax, consistent with 2003. The assessment of potential losses in
this business is done on the basis of 1 in 250 events. With respect to the fire-line of business this assessment is based upon risk
assessment models that are widely accepted in the industry. For our smaller non-life units, the risk tolerance level for 2004 was
set at EUR 3.8 million pre-tax per event per business unit.
With respect to life business the risk tolerance for events effecting multiple lives is not limited. While life-insurance risks are
considered to be naturally diversifiable by virtue of each life being a separate risk, group contracts may result in significant
exposures. For new group contracts underwriting guidelines have been revised, particularly for concentrations of risk by
city and/or building. ING made its own assessment and believes that the potential loss from a significant mortality event
occurring in the normal course of our business will not exceed an amount higher than approximately 12% of the Groups
after-tax earnings. This translates into a pre-tax benchmark of EUR 750 million. ING Group’s maximum risk retention per
insured life is set at EUR 22 million.
In case of the existence of exposures higher than the risk tolerance as defined above, appropriate procedures are in place,
including third-party reinsurance covers. Particularly for the property and casualty portfolio, ING purchases protection through
which the exposure due to natural catastrophes is substantially mitigated. ING believes that the credit risks to which it is
exposed under reinsurance contracts are minor.
Regarding catastrophic losses arising from man-made events such as terrorism, ING believes that it is not possible to develop
a business model that takes into account the possibility of very high losses resulting from man-made events. For our non-life
business, losses that result from man-made events are generally not covered unless required by law. In various countries industry
pools are established to mitigate the terrorism risk to which the individual insurers are nevertheless still exposed. ING
participates in such pools.
CREDIT RISK
GENERAL
ING Insurance is exposed to credit risk through the purchase of fixed income assets in support of insurance liabilities and capital.
As with other risk types, the proper balance between risk and return must be managed.
ALCO Insurance sets the constraints for the overall asset allocation of the insurance activities including credit risk. These limits
are set by rating class and average credit quality. Issuer limits are determined based on the obligor’s rating and the maximum
economic capital at risk. These limits are managed in the region where the parent company is domiciled. In addition each
insurance company has one or more investment mandates that specify credit-risk appetite by issuer, type and quality.
MEASUREMENT
For the investment portfolios backing the insurance liabilities, ING’s policy is to maintain a well diversified credit fixed-income
investment portfolio across companies and industries. Also, there is a spread across instruments.