ING Direct 2009 Annual Report Download - page 232

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In order to determine how much reinsurance protection is required these risk tolerance levels are compared to the estimated maximum
probable loss resulting from catastrophic events with a 1 in 250 probability of occurrence which is in line with industry practice. The
maximum probable loss estimates for Fire business are based on risk assessment models that are widely accepted in the industry.
For the smaller non-life units, the (pre-tax) risk tolerance level for catastrophe related events for 2009 was set at EUR 5 million
(2008: EUR 5 million) per event per business unit.
With respect to life business, ING Group’s (pre-tax) risk tolerance level for 2009 was set at EUR 22 million (2008: EUR 22 million) per
insured life for mortality risk. 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 potential losses, resulting from significant mortality events (e.g. pandemics
or events affecting life insurance contracts involving multiple lives), ING applies a separate risk tolerance level which equalled EUR 1,100
million in 2009 (2008: EUR 1,100 million). The potential impact of pandemics continues to be modelled by ING based on studies published
by respected international organisations.
Due to substantial lower earnings, ING is currently reviewing the way to set risk tolerance levels for insurance risks in the future. ING is
considering whether these risk limits should be derived from Economic Capital and Available Financial Resources at Risk.
Overall exposures and concentrations are actively managed within limits and risk tolerance levels through the purchase of external
reinsurance from approved reinsurers in accordance with ING’s reinsurance credit risk policy. Particularly for the property and casualty
portfolio, ING purchases protection which substantially mitigates ING’s exposure due to natural catastrophes. ING believes that the credit
risks to which it is exposed under reinsurance contracts are minor, with exposures being monitored regularly and limited by a reinsurance
credit risk policy.
For catastrophic losses arising from events such as terrorism, ING believes that it is not possible to develop models that support inclusion of
such events in underwriting in a reliable manner. The very high uncertainty in both the frequency and severity of these events makes them,
in ING’s opinion, uninsurable. For the non-life business, losses that result from these events are generally not covered unless required by
law. In various countries industry pools have been established to mitigate the terrorism risk to which the individual insurers are nevertheless
still exposed. ING participates in such pools.
The following table provides an overview of the Economic Capital for insurance risks, split into mortality risk, morbidity risk and risk related
to P&C products:
Economic Capital Insurance risks
2009 2008
Mortality 981 781
Morbidity 505 483
P&C 180 293
Total 1,666 1,557
The mortality risk relates to the potential for increasing deaths (life risk) or decreasing deaths (longevity risk). This risk relates to a potential
mortality catastrophe or to changes in long term mortality rates. As noted, ING manages these risks via limits and external reinsurance.
Morbidity risk relates to disability products in the Netherlands and some health riders sold in Asia. Finally, property and casualty risk exists
primarily in the Benelux.
Through scenario analyses, ING Insurance measures the sensitivity of pre-tax earnings of the insurance operations to an increase/decrease
of the insurance risk factors over a one year period. These changes to earnings can relate to realised claims or any other profit item that
would be affected by these factors. ING assumes that not all the shifts presented below will happen at the same time.
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on pre-tax IFRS earnings, projected one year forward
from the calculation. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confidence level
projected through to 31 December 2010.
Earnings sensitivities for Insurance risks
2009 2008
Mortality –39 –61
Morbidity –113 –105
P&C –42 –49
The table above presents figures after diversification between insurance risks and diversification across business units of ING Insurance.
The largest earnings sensitivity to P&C claims relates to health and P&C claims in the Netherlands. Earnings sensitivity from Mortality and
Morbidity is more evenly spread over the regions.
Risk management (continued)
2.1 Consolidated annual accounts
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