ING Direct 2009 Annual Report Download - page 249

Model Disclosures
Economic Capital Model
The ING Economic Capital calculation is calculated based on a ‘Surplus-at-Risk’ concept. ‘Surplus-at-Risk’ is calculated based on the steps:
Calculate the complete balance sheet (all assets and liabilities) on a Market Value basis;•
Generate Monte-Carlo shock scenarios for all of the relevant risk factors (market and non-market);•
Recalculate the complete balance sheet (all assets and liabilities) on a Market Value basis for each shock scenario. For practical purposes, •
the MVM is not recalculated under shock scenarios;
Calculate the 99.95% worst case decrease in the Market Value Surplus over all the shock scenarios. This value will be the EC. Note that •
the shock scenario resulting in the Economic Capital will differ by business unit, business line, and at an ING Insurance level.
In 2007, ING Insurance introduced ECAPS as an intranet-based Economic Capital reporting system utilising replicating portfolio techniques.
The ECAPS system provides a well controlled and automated basis for Economic Capital and risk measurement. Each business unit enters
the risk characteristics of its assets and liabilities into the ECAPS system on a regular basis. These risk characteristics are then translated to a
uniform basis in the form of replicating portfolios of standardised financial instruments. Based on the constellation of replicating portfolios
(including representations of non-market risks), the ECAPS system then is capable of calculating Economic Capitals at every level of
aggregation. The following is a brief description of the model.
Automated retrieval of all current and historical market data•
500 Risk scenarios sent to each business unit to locally develop •
stochastic asset and liability cash flows
20,000 Real World Monte-Carlo scenarios for Economic •
Capital calculation
Actuarial software used to produce the stochastic cash flows •
by scenario
Business units upload stochastic asset and liability cash flows •
for optimised replicating portfolio
Non-market risk capitals calculated in accordance with ING •
Standards of Practice submitted to ECAPS for risk aggregation
Capture the risk profile of the financial component of insurance •
liabilities by mapping onto a small set of standard financial
instruments
Standard instruments contain discount bond, swaption, •
callable bonds, equity forward/option and FX option
Find a replicating portfolio that matches the cash flows •
as closely as possible for the 500 paths
Replicating portfolio used to capture the risk profile •
of Insurance assets and liabilities
EC market shocks and diversification benefits from •
Monte-Carlo scenarios
Non-market risk aggregation•
Total diversified EC•
1. Market Data and Scenario Generation
2. Stochastic Cash flows and Non-market Risk Capital
3. Replicating Portfolio
4. Economic Capital Calculation
2.1 Consolidated annual accounts
Risk management (continued)
ING Group Annual Report 2009 247