ING Direct 2008 Annual Report Download - page 208

2.1 Consolidated annual accounts
A critical aspect of risk management is that all new products are designed, underwritten and priced appropriately. This is explicitly
covered by the Standard of Practice for the Product Approval and Review Process (PARP). This standard includes requirements related to
risk profile, traditional and value-oriented pricing metrics and targets, and documentation. In addition to insurance and market risks, the
requirements refer to operational risk, legal and compliance risk, etc. For these risks, the IRM network works closely together with the
other relevant risk departments. The PARP also includes requirements to assess sensitivities to changes in financial markets, insurance risk
(e.g. mortality and claims development), compliance risks and operational risks, as well as assessment of the administration and
accounting aspects of the product.
Other standards prescribe quarterly insurance risk reporting, ALM procedures and reporting, actuarial and economic assumption setting,
reserve adequacy testing and embedded value measurement and reporting, amongst others.
ING Insurance has developed an Economic Capital approach similar to that used within ING Bank as one of its core risk measurement
tools. More details on the Economic Capital model are described below. In 2007, ING Insurance introduced ECAPS, a new intranet-based
Economic Capital reporting system which is based on replicating portfolio techniques. The ECAPS system provides a well controlled and
automated basis for Economic Capital and risk reporting, and also provides greatly enhanced market risk analysis tools for business units
and corporate reporting purposes. ECAPS relies on an innovative replicating portfolio methodology. CIRM expects this system to be the
foundation of its internal fair value and solvency model, including the calculation of capital requirements following the introduction of
Solvency II. Through 2008 the system has been enhanced and functionality expanded.
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following:
Market Value at Risk (MVaR) limits that provide the fundamental framework to manage the market and credit risks resulting from •
the Insurance operations’ asset/liability mismatch;
Credit risk concentration limits;•
Mortality concentration limits;•
Catastrophe and mortality exposure retention limits for its insurance risk; and•
Investment and derivative guidelines.•
More information on some of these limits is included in the sections below.
Reserve adequacy
CIRM instructs and supervises all ING entities to ensure that the total insurance liabilities of ING Insurance (both reserves and capital) are
tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. This is
done by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin, ensuring that the reserves
remain adequate based on current assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields
on existing assets and new money and reinvestment rates. For new money and reinvestments long-term best estimate assumptions are
taken into account, although current new money rates are used for the short-term reinvestments. For most products stochastic testing is
required, taking the 90% point as the testing outcome. In the case where deterministic testing is used the 90% confidence level is
achieved by subtracting risk margins of 20% of the best-estimate interest rates or 1%, whichever is higher.
ING’s policy for reserve adequacy testing is disclosed in the ’Principles of valuation and determination of results’ section. As of 31 December
2008 (and 31 December 2007), reserves for ING’s insurance businesses in aggregate are adequate at a 90% confidence level. All business
lines are adequate on a stand alone basis at a 90% confidence level as well. However, as a result of the severe economic downturn
during late 2008 and its effects on products that are sensitive to interest and equity markets movements, the net insurance liabilities for
US retail annuity products and ING Life Japan were insufficient at both the 90th percentile and 50th percentile level of the stochastic test.
For US retail annuity the inadequacy was EUR 1.6 billion (90th percentile) and EUR 0.6 billion (50th percentile). For ING Life Japan the
inadequacy was EUR 0.4 billion at the 90th percentile and less than EUR 0.1 billion at the 50th percentile. In both cases management
is investigating various actions to improve the reserve adequacy, including de-risking the variable annuity products.
Risk management (continued)
ING Group Annual Report 2008
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