ING Direct 2009 Annual Report Download - page 228

ING Insurance
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following:
Market Value at Risk (MVaR) limits that provide the fundamental framework to manage the market and credit risks resulting from the •
Insurance operations’ asset / liability mismatch;
Credit risk concentration limits;•
Mortality concentration limits;•
Catastrophe and mortality exposure retention limits for its insurance risk; and•
Investment and derivative guidelines.•
More information on some of these limits is included in the sections below.
Reserve adequacy
CIRM instructs and supervises all ING entities to ensure that the total insurance liabilities of ING Insurance (both reserves and capital) are
tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. This is
done by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin, ensuring that the reserves remain
adequate based on current assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields on existing
assets and new money and reinvestment rates. For new money and reinvestments long-term best estimate assumptions are taken into
account, although current new money rates are used for the short-term reinvestments. For most products stochastic testing is required,
taking the 90% point as the testing outcome. In the case where deterministic testing is used the 90% confidence level is achieved by
subtracting risk margins of 20% of the best-estimate interest rates or 1%, whichever is higher.
ING’s policy for reserve adequacy testing is disclosed in the ’Principles of valuation and determination of results’ section. As of 31
December 2009 (and 31 December 2008), reserves for ING’s insurance businesses in aggregate are adequate at a 90% confidence level.
All business lines are adequate on a stand alone basis at a 90% confidence level, except business line Americas, that is inadequate by
EUR 1.6 billion (0.6 billion adequate as at 31 December 2008). The deterioration in reserve adequacy is largely driven by changes to
assumed surrender rates for certain US legacy retail annuity products.
ING INSURANCE RISK PROFILE
Economic Capital ING Insurance
The objective of the ING Insurance Economic Capital framework is to achieve an advanced risk and capital measurement and management
structure that:
Covers all the risks in the business units and is applied consistently across all risks and business units;•
Facilitates and encourages adequate risk and capital management, including the proper pricing of products and sound capital •
allocation decisions.
The ING Insurance Economic Capital model is based on a 99.95% one-year Value at Risk framework. It is important to note that since
industry practice relating to Economic Capital is still evolving and moreover Solvency II standards are still under discussion, ING Insurance
models are expected to evolve as a result. Solvency II currently calls for a 99.5% Value at Risk standard for internal models which is a lower
risk threshold than used in ING’s model.
The ING Insurance Economic Capital model is described in more detail in the Model Disclosure section.
Economic Capital disclosures relating to ING Insurance include diversification benefits that arise within ING Insurance. The following table
provides an Economic Capital break down by risk category with diversification benefits proportionally allocated to the risk types:
Economic Capital break-down ING Insurance by risk category (1)
2009 2008
Credit risk (including Transfer risk) 1,319 891
Market risk 11,552 8,455
Insurance risk 1,666 1,557
Other risks (2) 3,568 2,779
Total insurance operations 18,105 13,682
(1) The Economic Capital outcomes do not reflect any potential tax benefit resulting from the loss that occurs under the specified circumstances.
(2) Other risk includes operational risk as well as business risk (covering expense risk and lapse risk).
Total diversification across these risk types is 32% for 2009 (34% for 2008).
The Economic Capital for ING Insurance is mostly related to market risks, both hedgeable and non-hedgeable. Overall, Economic Capital
and risk profile increased during 2009. The primary change came from increased market risk, relating to a recovery in financial markets in
combination with improved modelling of interest rate and credit spread risk exposure. In addition, there were several changes to the risk
profile due to selling of business units and increases in business risk due to improved lapse risk modelling.
Risk management (continued)
2.1 Consolidated annual accounts
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