ING Direct 2008 Annual Report Download - page 188

2.1 Consolidated annual accounts
Risk types
ING’s risk profile measures the following main types of risks that are associated with its business activities:
Credit risk: the risk of potential loss due to default by ING’s debtors (including bond issuers) or trading counterparties;•
Market risk: the risk of potential loss due to adverse movements in market variables, such as equity prices, real estate prices, interest •
rates and foreign exchange rates. These four market risks cover all market risks identified in ING’s businesses;
Insurance risk: risks such as mortality, morbidity and property and casualty 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.
Operational and business risk are summarised as other risks in the risk profile:
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems •
or from external events. It includes the risk of reputation loss, as well as legal risk; whereas strategic risks are not included;
Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs. These fluctuations can occur because •
of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency.
The above risk metrics do not cover liquidity risk: the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they
fall due, at reasonable cost and in a timely manner. ING has a separate liquidity management framework in place to manage this risk.
This framework is discussed in the respective Liquidity Risk section below.
A description of the models, and underlying assumptions and key principles used by ING for calculating Earnings at Risk, Capital at Risk
and Economic Capital is provided in the Model Disclosure section below.
Given the October 2008 announced sale of ING Life Taiwan to Fubon Financial Holdings Co Ltd, this business is excluded from all 2008
risk disclosures in this section. The sale has been finalised on 11 February 2009.
Earnings at Risk
The level of Earnings at Risk (EaR) provides insight into the level of risk ING can absorb relative to its earnings capacity. The risk appetite
set by the Executive Board defines the maximum potential reduction in IFRS earnings over the next year during a moderate (i.e. ‘1 in 10’)
stress scenario as a percentage of forecast (pre tax) earnings over the next 12 months. Since ING does not disclose forecast earnings, the
table below provides the Earnings at Risk per risk type compared to actual full year underlying earnings.
Earnings at Risk by risk type (Group diversified)
Credit and
Transfer Market Insurance Other risks Total
Earnings
2008
EaR/Earnings
2008
2008 Interest Rate Equity Real Estate FX
ING Bank 2,034 247 168 291 35 265 3,040 449 677%
ING Insurance 282 27 395 321 86 13 149 1,273 –1,235 –103%
Total ING Group 2,316 274 563 612 121 13 414 4,313 –786 –549%
Earnings at Risk by risk type (Group diversified)
Credit and
Transfer Market Insurance Other risks Total
Earnings
2007
EaR/Earnings
2007
2007 Interest Rate Equity Real Estate FX
ING Bank 1,140 233 112 475 22 223 2,205 4,967 44%
ING Insurance 62 93 328 405 113 34 154 1,189 6,110 19%
Total ING Group 1,202 326 440 880 135 34 377 3,394 11,077 31%
Looking back at 2008, ING undershot its expected earnings by more than the Earnings-at-Risk number. The reason for this is twofold.
First, the market events that we have seen in the second half of the year clearly surpassed the ‘1 in 10’ confidence level, hence resulting
in higher losses.
Second, specific impairment rules on the available for sale debt securities, whereby securities are written down to market value, even if
credit losses are much smaller, are not reflected in the dashboard. This concerns especially the impairments taken on the ALT-A portfolio
where impairments amounts were significantly higher than estimated underlying credit losses.
Over 2008, ING’s Earnings at Risk profile increased. The increase is mainly driven by equity and credit risk. The increase in credit risk is
driven by credit migration and expected addition of provisions for defaulted loans. The increase in equity risk is caused by higher
impairment risk: due to sustained low stock prices more equities are approaching the impairment thresholds. This means that despite the
substantial reduction in Capital-at-Risk (next paragraph), earnings at the end of 2008 were more exposed to further stock market declines.
The January 2009 divestment of ING Canada was taken into account for the determination of EaR, since the dashboard is forward looking.
Risk management (continued)
ING Group Annual Report 2008
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