ING Direct 2008 Annual Report Download - page 212

2.1 Consolidated annual accounts
ING INSURANCE – LIQUIDITY RISK
As with other ING Insurance market risk, liquidity risk falls under the supervision of the ALCO function. Liquidity risk is the risk that ING
Insurance or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner.
ING Insurance monitors structural, tactical and contingency liquidity risk and tests adverse scenarios to measure its resiliency against these
risks. The severe economic downturn in late 2008 has caused liquidity risk to increase substantially. To manage these risks, ING Insurance
has increased its allocation to liquid assets.
ING INSURANCE – INSURANCE RISKS
General
Actuarial and underwriting risks are risks such as mortality, longevity, morbidity, adverse motor or home claims development, etc., which
result from the pricing and acceptance of insurance contracts. In general, these risks cannot be hedged directly in the financial markets
and tend to be mitigated by diversification across large portfolios. They are therefore primarily managed at the contract level through
standard underwriting policies, product design requirements as set by ING’s IRM function, independent product approval processes and
risk limitations related to insurance policy terms and conditions agreed with the client.
Measurement
For portfolio risks which are not mitigated by diversification, the risks are managed primarily through concentration and exposure limits
and through reinsurance and/or securitisation. Aggregate portfolio level limits and risk tolerance levels are set in reference to potential
losses stemming from adverse claims in ING’s insurance portfolios which are reviewed annually by the ING Group Executive Board.
ING Group has established actuarial and underwriting risk tolerance levels in specific areas of its insurance operations as described below.
For non-life insurance, risk tolerance levels are set by line of business for catastrophic events (e.g. natural perils such as storms,
earthquakes and floods) and for individual risks.
For the main non-life units (in the Benelux and Canada) the risk tolerance for property and casualty (P&C) business is generally set
at 2.5% of the Group’s expected after-tax earnings. For 2008, this translated into an aggregated (pre-tax) risk tolerance level of
EUR 265 million for the Benelux (2007: EUR 235 million). For Canada the pre-tax risk tolerance level is set at EUR 244 million (derived
from the above mentioned EUR 265 million, but allowing for outside interests) (2007: EUR 214 million). For the first half of 2008 the
risk tolerance limit of EUR 265 million also applied to Mexico.
In order to determine how much reinsurance protection is required in each of the regions, these risk tolerance limits are compared to
the estimated maximum probable loss resulting from catastrophic events with a 1 in 250 probability of occurrence which is in line with
industry practice. The maximum probable loss estimates for Fire business are based on risk assessment models that are widely accepted
in the industry.
For the smaller non-life units, the (pre-tax) risk tolerance level for catastrophe related events for 2008 was set at EUR 5 million
(2007: EUR 5 million) per event per business unit.
With respect to life business, ING Group’s (pre-tax) risk tolerance level for 2008 was set at EUR 22 million (2007: EUR 22 million)
per insured life for mortality risk. While life insurance risks are considered to be naturally diversifiable by virtue of each life being
a separate risk, group contracts may result in significant exposures. For potential losses, resulting from significant mortality events
(e.g. pandemics or events affecting life insurance contracts involving multiple lives), ING applies a separate risk tolerance level which
equalled EUR 1,100 million in 2008 (2007: EUR 750 million). The potential impact of pandemics continues to be modelled by ING
based on studies published by respected international organisations.
Overall exposures and concentrations are actively managed within limits and risk tolerance levels through the purchase of external
reinsurance from approved reinsurers in accordance with ING’s reinsurance credit risk policy. Particularly for the property and casualty
portfolio, ING purchases protection which substantially mitigates ING’s exposure due to natural catastrophes. ING believes that the credit
risks to which it is exposed under reinsurance contracts are minor, with exposures being monitored regularly and limited by a reinsurance
credit risk policy.
For catastrophic losses arising from events such as terrorism, ING believes that it is not possible to develop models that support inclusion
of such events in underwriting in a reliable manner. The very high uncertainty in both the frequency and severity of these events makes
them, in ING’s opinion, uninsurable. For the non-life business, losses that result from these events are generally not covered unless
required by law. In various countries industry pools have been established to mitigate the terrorism risk to which the individual insurers
are nevertheless still exposed. ING participates in such pools.
Risk management (continued)
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