ING Direct 2011 Annual Report Download - page 262

Risk management continued
ING Insurance Eurasia
CREDIT RISK
The main credit risk for ING Insurance Eurasia stems from the bond portfolio. This risk is largely measured through the credit spread risk
economic capital that is part of the market risk methodology. The spread risk captures differences in risk (and diversification) between
rating classes and regions, but does not capture idiosyncratic risk. This name-specific risk is measured in the Credit Default model, using
every bond issuer’s probability of default (PD) and stressed loss given default (LGD). For corporate bonds, the idiosyncratic risk is also
managed with rating based issuer & lending limits that prevent large exposures in one (group of related) single name(s). An outright loss
given default limit serves as the final backstop for corporate exposures. Government exposures are separately monitored. The credit risk
profile is monitored and reported in the Investment Risk Dashboard.
Given the size of the portfolio, term loans (including private placements) are a much smaller source of credit risk for ING Insurance Eurasia.
These exposures are also included in the issuer & lending limit monitoring. Residential mortgages and policy loans form the retail credit risk
exposures of ING Insurance Eurasia. Credit risks are contained through underwriting criteria and the availability of collateral.
The third source of credit risk is the claims on counterparties from OTC derivatives, money market lending and reinsurance.
• Derivatives transactions are only allowed under an ISDA-master agreement with Credit Support Annex, ensuring that ING Insurance
Eurasia receives collateral from its counterparty for the total positive marked-to-market value of all bilateral derivative contracts
betweenING Insurance Eurasia and that counterparty. In case the net marked-to-market is negative, collateral must be posted with
thecounterparty.
• Money market lending is only done with banks of good credit standing. ING Insurance Eurasia maintains money market limits for each
of these banks. The counterparties are continuously monitored for developments that could warrant lowering the limit.
• Reinsurance credit risk is the risk that one of ING Insurance Eurasia’s reinsurers fails to pay timely, or fails to pay at all, valid claims that
were reinsured by ING Insurance Eurasia with that reinsurer. ING Insurance Eurasia mitigates this risk by diversifying its reinsurance
exposure over various well rated reinsurers, and by requiring collateral for reinsurance contracts that could lead to reinsurance exposures
above a minimum threshold.
Within ING Insurance Eurasia, the goal is to maintain a low-risk, well diversified credit portfolio that meets or exceeds market based
benchmark returns. ING Insurance Eurasia has a policy of maintaining a high quality investment grade portfolio while avoiding large risk
concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits
for individual borrowers and certain asset classes.
Model disclosure
The table below shows the main risk categories for credit 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
Credit Default Impact of a default of counterparties on IFRS earnings
AFR & IFRS earnings sensitivities (1):
– Measured by the impact of multiplying the Historical Cost, the
Probability of Default, and the Loss Given Default (stressed by 15%).
– Impaired assets are shocked as per the Credit Spread methodology.
IFRS Earnings and EC: General account assets
inall regions, mostly bond investments and
lending portfolio.
Credit Spread See Market Risk section.
(1) In order to avoid double counting Credit Default Risk is only captured for IFRS earnings, while Credit Spread Risk is only measured for AFR. This assumes
Credit Default Risk for mortgages and concentration does not have a material Impact on the AFR.
ECONOMIC CAPITAL
Economic Capital ING Insurance Eurasia (99.5% undiversified) by Risk Category
2011 2010
Credit Default Risk 606 627
Sensitivities
IFRS Earnings sensitivities for Insurance Credit Risks
2011 2010
Credit Default –160 –236
260 ING Group Annual Report 2011