ING Direct 2009 Annual Report Download - page 205

ING Group
The main differences and similarities between the risk metrics are illustrated below;
Earnings at Risk Capital at Risk Economic Capital
Confidence interval 90% 90% 99.95% (based on AA target rating)
Stressed metric IFRS earnings Value Value
Deviation from IFRS earnings before market volatilities
and risk costs (over the next year)
Current net asset value based on
fair values (over the next year)
Current net asset value based on
fair values (over the next year)
Interpretation Potential IFRS earnings reduction during a
‘moderate’ stress scenario (i.e. 1 in 10)
Potential value reduction of net value
during a ‘moderate’ stress scenario
(i.e. 1 in 10)
Potential value reduction of net value
during a ‘severe’ stress scenario
(i.e. 1 in 2000)
When interpreting the Earnings and Capital at Risk metrics it is important to note that these are not loss estimates of a specific adverse
scenario. Further, the metrics do not take into account discretionary management intervention in a specific crisis situation, and are based
on instantaneous shock scenarios.
The methodology for the risk metric Earnings at Risk was upgraded during 2009 to more closely align with accounting rules. In particular,
the impairment risk component was improved. The methodology now also takes into account potential impairments on goodwill, and
better incorporates of impairments on debt securities. The approximate impact of these changes is an increase of EUR 900 million on total
EaR level.
The revised risk appetite framework that will be implemented in 2010 will include some new metrics, like for instance Risk Weighted
Assets at Risk for ING Bank, and Local Solvency at Risk for ING Insurance. The new metrics combined with the existing metrics will provide
a better understanding of the movement in capital ratios in a moderate (i.e. ‘1 in 10’) stress scenario.
Risk types
ING’s financial risk profile measures the following main types of risks that are associated with its business activities:
Credit risk: the risk of potential loss due to default by ING’s debtors (including bond issuers) or trading counterparties;•
Market risk: the risk of potential loss due to adverse movements in market variables, such as equity prices, real estate prices, •
interest rates and foreign exchange rates. These four market risks cover all market risks identified in ING’s businesses;
Insurance risk: risks such as mortality, morbidity and property and casualty associated with the claims under insurance policies •
it issues/underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims;
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems •
or from external events. It includes the risk of reputation loss, as well as legal risk; whereas strategic risks are not included;
Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These •
fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal
efficiency.
The business risk methodology for ING Bank was revised during 2008 and the first quarter of 2009. The methodology was changed to
more closely align with the methodology used for ING Insurance and to make sure that the volumes, margins and cost fluctuations were
better reflected than in the previous methodology. The new business risk methodology for Bank consists of three components, (i) volume/
margin risk, (ii) expense risk, and (iii) client behaviour risk. The new methodology was implemented during the first quarter of 2009, after
approval by the ORRC.
The above risk metrics do not cover liquidity risk: the risk that ING or one of its subsidiaries cannot meet its financial liabilities, at
reasonable cost and in a timely manner, when they fall due. ING has a separate liquidity management framework in place to manage
this risk. This framework is described below in the Liquidity Risk section of ING Bank and ING Insurance respectively.
A description of the models, underlying assumptions and key principles used by ING for calculating Earnings at Risk, Capital at Risk and
Economic Capital is provided in the Model Disclosure section at the end of the risk management section.
Earnings at Risk
The level of Earnings at Risk (EaR) provides insight into the level of risk ING can absorb relative to its earnings capacity. The below two
tables show the EaR figures per risk type, split between Bank and Insurance and combined for ING Group. The levels shown are
undiversified levels for ING Bank and ING Insurance, meaning that the diversification between Bank and Insurance is not yet included in
these figures. This diversification benefit is shown separately. The row ‘Bank-Insurance diversification %’ shows the benefit of combining
the Bank and Insurance EaR figures. For example: the 1% for Credit and Transfer Risk indicates that the Group figure for Credit & Transfer
Risk is 1% lower than the Bank and Insurance figures for Credit and Transfer Risk combined. Similarly the column ‘Inter-risk diversification
%’ shows the diversification benefit derived from combining the different risk types at the Bank, Insurance or Group level respectively. This
presentation format differs from the format in the 2008 annual report and as such the figures are different from those shown last year.
Since this is only a different representation the final figure for ING Group has not changed.
2.1 Consolidated annual accounts
Risk management (continued)
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