ING Direct 2011 Annual Report Download - page 257

Risk management continued
ING Insurance Eurasia
• Business Risk – Calculated by the business unit for Persistency, Expense and Premium-rerating Risk;
• Operational Risk – Calculated by a corporate risk model for all business units, in alignment with Solvency II Standard Formula.
EC Calculation and aggregation
For the EC calculation the risk system (ECAPS) uses 20,000 simulated scenarios of market risks, credit risk, business risk, operational risk,
life risk, morbidity risks and P&C risk. Diversification between risks is taken into account by a Gaussian Copula, allowing for different
marginal probability distributions at the risk driver level. To be more in line with Solvency II operational risk capital is treated as an add-on,
itisnot part of the diversification between risk types. The 20,000 scenarios are calibrated based on the historical time series of the market
risk drivers using at least 5 years of historical data. Volatilities and correlations are calibrated to represent the distribution on a quarterly
frequency. For each of the 20,000 scenarios the market value of assets and liabilities and the change in value of the Market Value Surplus
(MVS) is recalculated. Sorting the results and selecting the 99.5% worst change in MVS result provides the Economic Capital for the given
level of aggregation.
For EC calculation ING Insurance Eurasia uses a one-year time horizon. In practice, the EC model calculates instantaneous quarterly shocks,
which are annualised to determine the annualised EC. The quarterly shock is used as this stabilises the results and the shocks are within a
range that can be more credibly valued for assets and liabilities. A quarterly shock also proves to have more consistency in how correlations
between risk factors are defined and therefore align closer to actual risk processes and reporting cycles.
Risk profile
The following table presents the reconciliation from the EC 2010 for Insurance excluding US as reported in the Annual Report 2010, to the
comparable basis for ING Insurance Eurasia 2011. This reflects the changes in scope and methodology. For the remainder of the risk
management paragraph of ING Insurance Eurasia, the EC on a comparable basis to 2011 is used.
Economic Capital 2010 reconciliation
amounts in billions of euros 2010
As reported for ING Insurance excluding US in 2010 10.4
Exclude non-ING Insurance Eurasia entities –2.0
ING Insurance Eurasia 2010, before changes 8.4
Change pension funds fee business to statutory basis – 0.1
Change in models and methodology 3.0
ING Insurance Eurasia 2010, on a basis comparable to 2011 11.3
The exclusion of non-ING Insurance Eurasia entities mainly relates to the business in Latin America and the financial leverage of ING
Insurance excluding US that was considered in last year’s EC.
The fee-based pension funds business in Central and Eastern Europe is regulated by local sectoral rules rather than by Solvency II
regulations for insurance entities. AFR and EC of the fee-based pensions administration business were previously calculated using market
consistent valuation approach. This has been replaced by using the statutory net equity and required capital of the pension funds
administration companies. The impact on EC is EUR 0.1 billion.
ING Insurance Eurasia has carried out a review of the internal model in the context of a Solvency II gap analysis. In that review we
benchmarked our models against the Solvency II Standard Formula, the EIOPA consultation papers and comments of expert groups like CRO
Forum and Group Consultatif. In the Annual Report 2010 it was estimated that these changes would result in a material increase of EC
between EUR 1 billion and EUR 2 billion. During 2011 further refinements and analyses took place which on a comparable basis would lead
to an increase in the EC of 2010 of EUR 3.0 billion. The changes are related to equity risk (EUR 0.6 billion), operational risk (EUR 0.1 billion),
credit spread and illiquidity premium risk (EUR 1.3 billion), business risk (EUR 0.1 billion) and less diversification (EUR 0.9 billion). The Solvency
II legislative process is still ongoing. In particular, aspects determining the valuation of the policyholder liabilities and thereby the sensitivity
to market and other risk factors on the own funds are not yet settled. The Economic Capital model will continue to be updated to reflect
most recent market data, developments in best practices, and Solvency II legislation.
The following table provides the Economic Capital breakdown by business line with diversification benefits allocated to the business lines.
Economic Capital break-down ING Insurance Eurasia (99.5%) by business line
2011 2010
Insurance Benelux 3,988 5,075
Insurance Central & Rest of Europe 859 1,126
Insurance Asia/Pacific 2,919 2,759
Corporate Line Insurance Eurasia (1) 2,520 2,358
Total insurance Eurasia 10,286 11,318
(1) Corporate Line Insurance Eurasia includes funding activities at ING Insurance Eurasia level, explicit internal transactions between business unit and Corporate
Line Insurance Eurasia 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.
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
255ING Group Annual Report 2011