ING Direct 2008 Annual Report Download - page 209

ING INSURANCE RISK PROFILE
Economic Capital ING Insurance
The objective of the ING Insurance Economic Capital framework is to achieve an advanced risk and capital measurement and management
structure that:
Covers all the risks in the business units and is applied consistently across all risks and business units;•
Facilitates and encourages adequate risk and capital management, including the proper pricing of products and sound capital •
allocation decisions.
The ING Insurance Economic Capital model is based on a 99.95% one-year Value at Risk framework. It is important to note that since
industry practice relating to Economic Capital is still evolving and moreover Solvency II standards are still under discussion, ING Insurance
models are expected to evolve as a result. Solvency II currently calls for a 99.5% Value at Risk standard for internal models which is a
lower risk threshold than used in ING’s model.
The ING Insurance Economic Capital model is described in more detail in the Model Disclosure section.
Economic Capital disclosures relating to ING Insurance include diversification benefits that arise within ING Insurance. The following table
provides an Economic Capital break down by risk category with diversification benefits proportionally allocated to the risk types:
Economic Capital break-down ING Insurance by risk category (1)
2008 2007
Credit risk (including Transfer risk) 891 1,021
Market risk 8,455 15,258
Insurance risk 1,557 3,293
Other risks (2) 2,779 3,627
Total insurance operations 13,682 23,199
(1) The Economic Capital outcomes do not reflect any potential tax benefit resulting from the loss that occurs under the specified circumstances.
(2) Other risk includes operational risk as well as business risk (covering expense risk and lapse risk).
Total diversification across these risk types is 34% for 2008 (31% for 2007).
The Economic Capital for ING Insurance is mostly related to market risks, both hedgeable and non-hedgeable. Overall, Economic Capital
and risk profile reduced significantly during 2008. The primary change came from selling the Taiwan business (EUR 5.7 billion). In addition
there were several changes to the risk profile in various businesses from de-risking, which included selling and hedging equity exposures,
closing interest rate positions by investing longer, and entering (forward starting) receiver swaps and swaptions.
Also the EC model has been changed to reflect the illiquidity in the insurance portfolios resulting from current dislocated markets.
The change is described in more detail in the model disclosure section.
The following table provides the Economic Capital breakdown by business line with diversification benefits proportionally allocated
to the business lines.
Economic Capital break-down by ING Insurance business line
2008 2007
Insurance Americas 6,049 6,541
Insurance Asia/Pacific 2,817 7,033
Insurance Europe 2,985 5,890
Corporate Line Insurance (1) 1,831 3,735
Total insurance operations 13,682 23,199
(1) Corporate Line includes funding activities at ING Insurance level, explicit internal transactions between business unit and Corporate Line, managed by Capital
Management, and corporate reinsurance. The responsibility (and risk) of free assets located within the business line for which there is no explicit transfer via a
Corporate Line transaction remain at the business unit level.
While the figures above are shown by business line, the diversification of risks across ING businesses is calculated across business units.
Total diversification between ING Insurance’s business units and the Corporate Line Insurance is 39% for 2008 (33% in 2007).
The sale of ING Life Taiwan and recent developments in the financial markets have distorted last years balance between the regions.
The Taiwan sale decreases capital needs in both Asia/Pacific (EUR 4.0 billion) and Corporate Line (EUR 1.7 billion). Americas is now
the largest user of Economic Capital. De-risking measures brought Americas otherwise increased capital need down by EUR 1 billion.
Europe saw some substantial de-risking over the year. Most listed direct equity exposures are now sold or mostly hedged, and interest
rate risk was reduced substantially. Economic Capital in Asia/Pacific and Europe has now an equal balance for financial and non-financial
risks, while capital in Americas is still primarily driven by interest rate, credit spread and client fund related equity risk.
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ING Group Annual Report 2008