ING Direct 2011 Annual Report Download - page 260

Risk management continued
ING Insurance Eurasia
ECONOMIC CAPITAL
Economic Capital ING Insurance Eurasia (99.5% undiversified) by Risk Category
2011 2010
Business Risk 3,011 2,979
MARKET RISK
ING Insurance Eurasia is exposed to market risk to the extent the market value of surpluses can be adversely impacted due to movements
in financial markets. Changes in financial market prices impact the market value of ING Insurance Eurasia’s asset portfolio andhedging
derivatives directly as well as through the calculated market value of the insurance liabilities.
Model disclosure
The table below shows the main risk categories for market risk within ING Insurance Eurasia. EC numbers are based on a 99.5% confidence
interval on a one-year horizon. IFRS and AFR sensitivities measurement is described in the table below.
Description Key Drivers
Interest Rate Impact of interest rate changes in assets and liabilities
AFR & IFRS earnings sensitivities:
– Measured by the impact of a 30% upwards and downwards shock
relative to the ten year swap rate. Minimum shock is floored at 50 basis
points and capped at maximum 150 basis points. Shocks are applied to
forward rates up to the last available tenor of the interest rate curve
IFRS Earnings: Guaranteed separate account
pension business in the Netherlands
AFR & EC: Duration gap for Traditional Life
products in Korea caused by non-availability
oflong duration assets and embedded options
in the guaranteed separate account pension
business in the Netherlands.
Equity Impact of changes in equity prices which impacts direct equity exposure
and loss of fee income from unit linked, Variable Annuity (VA), pension
and fund business.
AFR & IFRS earnings sensitivities:
– Measured by the impact of a 25% drop in equity prices
IFRS Earnings, AFR & EC: Direct equity exposure
and embedded options in guaranteed separate
account pension business in the Netherlands
and embedded options in VA business in Japan
FX Impact of losses related to changes in exchange rates
AFR & IFRS earnings sensitivities:
– Measured by the impact of a 10% up and down movement of
currencies compared to the euro
IFRS Earnings: Translation risk of IFRS earnings
from non-Euro businesses
AFR & EC: Translation risk of market value
surplus from non-euro businesses
Implied Volatility
(Equity & Interest Rate) Impact of losses on assets and liabilities due to movements in the volatility implied from market option prices.
AFR & IFRS earnings sensitivities:
– For interest rate measured by the impact of a relative increase of 30%
in implied volatilities
– For Equity measured by the impact of a relative increase in implied
volatilities based on tenor: 80% for tenors less than 1 year, up 30%
for tenors between 1and 3 years, up 20% for tenors between 3–7
years and up 10% for tenors of 7 years and above.
NOTE: this impact was not disclosed in 2010 for IFRS earnings as it was
considered to be immaterial
IFRS Earnings, AFR & EC:
Embedded options in:
– traditional Life products in Korea
– guaranteed separate account pension
business in the Netherlands
– VA business in Japan
Credit Spread Impact of an increase in credit spreads on investments in fixed income
securities offset by movements in the liquidity premium on the liabilities.
AFR & IFRS earnings sensitivities:
– Measured by the impact of a relative increase based on multiplying
duration by a rating based shock (e.g. single A shock is 110 basis
points).
– AAA and AA rated government bonds and home government bonds
in local currency (for example KRW government bonds in Korea) are
excluded, exception only applicable to Greek bonds.
– Shocks for structured credit are 50% higher than for corporate and
government bonds.
– Liquidity premium is shocked by 50 basis points up to a certain tenor
depending on the currency (e.g. EURO 15 years, USD 30 years)
In order to avoid double counting Credit Default Risk is only captured for
IFRS earnings, while Credit Spread Risk is only measured for AFR. The only
exception is impaired assets for which Credit Spread risk is measured for
IFRS earnings.
IFRS: Impaired assets in Greece.
AFR & EC: Debt securities in all regions. Liquidity
premium offset primarily in the Benelux
Real Estate Price Risk Impact of the value of Real Estate assets because of a change in earnings
related to Real Estate activities and/or a change in required investor yield
AFR & IFRS earnings sensitivities:
– For AFR this is measured by the impact of a 15% drop in real estate
prices for all real estate holdings
– For IFRS Earnings this is measured by the impact of a 15% drop in real
estate prices only for the minority holdings and direct for all real estate
revalued through P&L. Other holdings will be included in case of a
possible impairments caused by the drop in prices
IFRS Earnings, AFR & EC: Real estate holdings
inthe Benelux
258 ING Group Annual Report 2011