ING Direct 2011 Annual Report Download - page 273

Risk management continued
ING Insurance US
Non-Financial Risk Dashboard
The Non-Financial Risk Dashboard (NFRD) is a quarterly report that is a quarterly report that is discussed at the meetings of the Supervisory
Board, AIH Executive Committee and ING Insurance US management bodies. The NFRD provides management at all organisational levels
with information on their key operational, compliance and legal risks. The NFRD is based on defined risk tolerance and a clear description
of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
Stress Testing
ING Insurance US complements its regular risk reporting process with (ad hoc) stress tests. Stress testing examines the effect of exceptional
but plausible scenarios on the capital position for ING Insurance US. Stress testing can be initiated internally or on certain request from
external constituents.
RISK TYPE DESCRIPTION
ING Insurance US measures the following main types of risks that are associated with its business risk:
• Insurance risk – risks such as mortality and morbidity associated with the claims under insurance policies it issues/underwrites;
specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims.
• Market risk – the risk of potential loss due to adverse movements in market variables. Market risks include interest rate, equity,
real estate, implied volatility, credit spread, and foreign exchange risks.
• Credit risk – the risk of potential loss due to default by ING Insurance US debtors (including bond issuers) or trading counterparties.
• Business risk – the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These
fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal
efficiency, and as such strategic risk is included in business risk.
• Liquidity risk – the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable
cost andin a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
• Operational risk – the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems
or from external events. It includes reputation risk, as well as legal risk.
• Compliance risk – the risk of damage to ING Insurance US’s integrity as a result of failure (or perceived failure) to comply with relevant
laws, regulations, internal policies, procedures and ethical standards.
INSURANCE RISK
Insurance risks are comprised of actuarial and underwriting risks such as mortality, longevity, morbidity etc. which result from the pricing
and acceptance of insurance contracts.
The table below shows the main risk categories for insurance risks within ING Insurance US. IFRS Earnings sensitivities are defined on a
shock scenario at the 90% confidence level.
Description Key Drivers
Mortality Within mortality risk there are two main parts:
– Positive mortality risk exists when more insureds dying than expected,
leading to higher claims than expected.
– Negative mortality risk exists when insureds live longer than expected,
leading to higher claims than expected (moderate shocks are not
material to the P&L).
The largest earnings sensitivity to positive mortality
risk arises in the Retail Life insurance business.
Morbidity Morbidity or Health insurance covers insurance indemnifying or
reimbursing losses (e.g. loss of income) caused by illness or disability,
orfor expenses of medical treatment necessitated by illness or disability.
Morbidity risk comprises the risk of variability of size, frequency and time
to payment of future claims, development of outstanding claims and
allocated loss adjustment expenses (ALAE) for morbidity product lines
over the remaining contract period.
Earnings sensitivity to morbidity risk
(e.g.sickness, disability, accidental death,
workers’ compensation, medical insurance)
ispresent in the Employee Benefits business.
Sensitivities
Mortality and morbidity sensitivities are calculated on a diversified basis at a 10% level assuming a normal probability distribution of results
and aspecified mortality/morbidity scenario to calibrate the distribution. The largest contribution to the mortality sensitivity comes from
theRetail Life business while the morbidity exposure relates for a large part to the Employee Benefit business.
IFRS Earnings Sensitivities for Insurance Risks
US Excl. CB-VA CB-VA
2011 2010 2011 2010
Mortality –19 –16 –7 –3
Morbidity –49 –48 00
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
271ING Group Annual Report 2011