ING Direct 2002 Annual Report Download - page 58

Annual Report 2002 · ING Group 55
Risk Management
budgeted 2003 pre-tax results for the insurance
operations has been estimated. A simultaneous
decrease in interest rates of 1% from current
levels would have a negative effect of 4% (2002:
2%) on budgeted pre-tax results for the
insurance operations for 2003. A simultaneous
increase in interest rates of 1% from current
levels would have a positive effect of 3% (2002:
2%) on budgeted pre-tax results for the
insurance operations for 2003.
EQUITY RISK The insurance operations
are exposed to movements in equity markets
since they have an impact on the level of
charges deducted for unit-linked and variable
business. A 10% decrease in stock market prices
would lower the pre-tax budgeted result for the
insurance operations in 2003 by 9% (2002: 3%).
Once the revaluation reserve is nil, any further
decrease in stock-market prices will increase the
9%. The impact of a 10% change in equities
increased over 2001, generally because of a
change in accounting methodology and growth
assumptions used in the amortisation of the
DAC for the US variable business.
The continued weak equity markets have
their impact on the capital base of ING
Insurance and insurance business units,
particularly those that have a significant exposure
in equity investments, i.e. business units in the
Benelux. The solvency ratio of ING insurance
stands at 169% of EU target surplus as of 31
December 2002. The nature of ING’s current
insurance investments (which include EUR 11
billion equity and EUR 7.2 billion in real estate)
mean that this ratio has been subject to
significant fluctuations in recent months.
Currently, the most desirable mix of assets is
studied to support reserves and target surplus,
not only from a profit and loss account
perspective but also from a balance sheet and
cost and use of capital perspective.
FOREIGN EXCHANGE RISK Foreign
exchange risk in the investments backing the
insurance liabilities is dealt with in the invest-
ment management processes. Locally required
capital levels are invested in home currencies in
order to satisfy regulatory requirements and to
support local insurance business regardless of
currency movements. These capital levels may
affect the consolidated balance sheet when
translated to euros. Depending on hedging costs
and the capital exposure, up to 85% of the capital
over locally required margins is currency-hedged.
Liquidity Risk
ING closely monitors its liquidity risk to maintain
an adequate cushion to meet its financial liabilities
when due. Liquidity risk is managed at Group
and local level by a combination of existing invest-
ment mandates, guidelines for asset & liability
management, specific limits for certain business
units and treasury policies and procedures.
Actuarial and underwriting risks
Regarding insurance risks ING is exposed to life
and non-life risks. Life risks include a broad
range of participating and non-participating
traditional life products, unit-linked, fixed and
variable annuities, universal life, group life and
pension products and guaranteed investment
products. Non-life risks includes all lines of non-
life business – fire, automobile, accident and
health, third party liability and disability.
Actuarial risks arise with respect to the
adequacy of insurance premium rate levels and
provisions with respect to insurance liabilities
and capital base, taking into consideration the
supporting assets (fair and book value, currency
and interest sensitivity), changes in interest rates
and exchange rates and developments in
mortality, morbidity, non-life claims frequency
and amounts, lapses and expenses as well as
general market conditions. Specific attention is
given to the adequacy of provisions for the life
business, considering the low interest rate levels
in a number of countries in which ING operates.
For those insurance contracts that contain high
interest rate guarantees stochastic modelling is
used to assess the risk of these guarantees.
Consequently pricing reflects the cost of the
guarantees and appropriate reserves are
established accordingly. ING is of the opinion
that its insurance provisions are adequate.
Underwriting risks are inherent in the
process whereby applications submitted for
insurance coverage are reviewed. The maximum
underwriting exposure is limited through
exclusions, cover limits and reinsurance.
ING Insurance’s actuarial and underwriting
risks are controlled at ING Group level, with the
Corporate Insurance Risk Management Depart-
ment being responsible for monitoring the
actuarial and underwriting risk as defined above.
Corporate Insurance Risk Management provides
guidelines for product design, reserving, under-
writing, pricing criteria and reinsurance strategy.
Its responsibilities also include the monitoring of
risk profiles and the review of insurance-related
risk control and asset and liability management.
 
A 10% decrease in stock
market prices would lower
the insurance pre-tax result
by 9% in 2003. Once the
revaluation reserve is nil,
any further decrease in
stock-market prices will
increase the 9%.
—
The insurance actuarial and
underwriting risks are
controlled at Group level
With regard to operational
risk a quarterly incident
reporting process was
implemented in 2002