ING Direct 2009 Annual Report Download - page 231

ING Insurance
Earnings sensitivities
Complementing Economic Capital, which is based on a market value analysis, ING Insurance also measures risk based on IFRS earnings.
More specifically, using scenario analysis, ING Insurance measures the potential sensitivity of realised pre tax earnings of the insurance
operations to an increase/decrease in different risk factors over a full year. These earnings sensitivities are used as input into the ING Group
Earnings at Risk measure, where these sensitivities are fully diversified with the Bank. Interpretation of the underlying earnings sensitivities
must be done individually as ING does not assume that all of the scenarios presented below will happen concurrently.
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on pre-tax IFRS earnings, projected one year forward
from the calculation date. Therefore the table below provides earnings sensitivities to an instantaneous shock at the 90% confidence level
projected through to 31 December 2010.
Earnings sensitivities for insurance market risks
2009 2008
Interest rate (1% up) –222 –67
Interest rate (1% down) 270 82
Equity (25% (US 15%) down) –814 –795
Real Estate (8% down) –434 –533
Foreign Exchange (10% worst case) –224 –224
The table presents figures before diversification between risks and business units. For interest rate risk, we present the effect of a parallel
shock of 1% across all regions is determined and take the sum of the shocks is presented. For the Japan business, a shock of 0.5% is
applied since this business operates in a lower interest rate environment. Foreign exchange risk includes the sum of both local business
currency risk plus translation risk for earnings of non-Euro business units.
The table shows that Real Estate fluctuations can have a relatively large impact on earnings since most price volatility is fully reflected in
earnings for Real Estate investments. The impact on earnings of interest rates and equity price changes are normally lower than the
economic and shareholder’s equity impact given the fact that current accounting rules are not fully market value based. The sensitivity
results reflect the impacts of asymmetric accounting, whereby the hedges must be marked-to-market through earnings while the liability
value is not marked-to-market through earnings.
Earnings sensitivities provide an indicator of future earnings that are at risk in case markets deteriorate. Earnings can deteriorate
significantly when certain thresholds have been reached for impairment and DAC unlocking. At the moment the increase in equity
Earnings Sensitivity – despite de-risking – is driven by DAC unlocking and negative revaluations being close to hitting or at impairment
triggers. Offset from the hedging programs existing at year end is taken into account.
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 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) 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 2009, this translated into an aggregated (pre-tax) risk tolerance level of EUR 190 million for the
Benelux (2008: EUR 265 million).
2.1 Consolidated annual accounts
Risk management (continued)
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