ING Direct 2009 Annual Report Download - page 229

ING Insurance
The following table provides the Economic Capital breakdown by business line with diversification benefits proportionally allocated to the
business lines.
Economic Capital break-down by ING Insurance business line
2009 2008
Insurance Americas 9,705 6,049
Insurance Asia/Pacific 2,256 2,817
Insurance Europe 3,969 2,985
Corporate Line Insurance (1) 2,175 1,831
Total insurance operations 18,105 13,682
(1) Corporate Line includes funding activities at ING Insurance level, explicit internal transactions between business unit and Corporate Line, managed by Capital
Management, and corporate reinsurance. The responsibility (and risk) of free assets located within the business line for which there is no explicit transfer via a
Corporate Line transaction remain at the business unit level.
While the figures above are shown by business line, the diversification of risks across ING businesses is calculated across business units.
Total diversification between ING Insurance’s business units and the Corporate Line Insurance is 32% for 2009 (39% in 2008).
Insurance Americas is the largest user of Economic Capital. Improved modelling of interest rate guarantees embedded in liabilities and
credit spread risk on assets has increased EC exposure. Asia Pacific exposure dropped partially due to divested business units in Australia
and New Zealand. Economic Capital in Asia/Pacific and Europe has now an equal balance for financial and non-financial risks, while capital
in Americas is still primarily driven by interest rate, credit spread and client fund related equity risk. The Corporate Line risk relates mostly to
foreign exchange translation risk related to the potential loss of market value surplus in non-EUR denominated business units.
ING INSURANCE – MARKET RISKS
ING Insurance is exposed to market risk to the extent to which the market value of surplus can be adversely impacted due to movements
in financial markets; these include interest rates, equity prices, implied volatilities of options, foreign exchange rates and Real Estate prices.
Changes in financial market prices impact the market value of ING’s current asset portfolio and hedging derivatives directly as well as the
calculated market value of ING’s insurance liabilities. The following table provides information on Economic Capital split by risk category:
Economic Capital insurance market risks
2009 2008
Interest rate risk 4,244 2,739
Credit spread risk 1,914 880
Equity risk 1,836 1,293
Real Estate risk 239 252
Implied volatility risk 1,451 1,857
Foreign exchange risk 1,868 1,434
Total 11,552 8,455
Interest rate risks are the largest market risks for ING Insurance. Interest rate risks are most significant in the United States. In general, the
primary risk is to falling interest rates. The table shows a notable increase in the interest rate risk during 2009 mainly as a consequence of
the improved modelling of interest rate guarantees in US variable annuities.
Credit spread risk relates to potential increases in credit spreads from investments in fixed income securities. Real Estate risk exists mostly in
the Netherlands and relates in a large part to direct Real Estate investments. Implied volatility risk is the risk that market values of assets or
liabilities change due to movements in market option prices. In general, ING is exposed to increases in implied volatility as the guarantees
provided to customers become more expensive. Foreign exchange risk is small in the business units. Hence, most of the exposure relates to
the risk of change in the market value surplus of non-EUR businesses.
The equity risk has become more dominant due to unwinding of hedging activities, relating to both direct and indirect exposure and a
higher equity value due to the market recovery in 2009. Direct exposure relates to the holding of shares and is most significant for ING in
the Netherlands. Indirect exposure relates to the potential loss of fee income from unit linked, variable annuity, and pension fund business
across all regions. Direct exposure represents approximately 25% of the equity risk, after taking the hedge positions into account.
The credit spread risk has become more dominant due to higher credit spread shocks applied to our assets and improved risk modelling of
structured bond assets.
ING continues to manage the market and credit risks resulting from its global Insurance operations by setting Market Value at Risk (MVaR)
limits. On at least an annual basis, ALCO Insurance sets an aggregate MVaR limit for ING Insurance and sub-limits for each of the business
lines, which are ultimately allocated to the business units. The MVaR limit is measured in a manner consistent with the Economic Capital
measure, i.e. based on a 99.95% confidence level over a one-year horizon.
2.1 Consolidated annual accounts
Risk management (continued)
ING Group Annual Report 2009 227