ING Direct 2011 Annual Report Download - page 256

Risk management continued
ING Insurance Eurasia
Non-Financial Risks
To ensure robust non-financial risk management, which is also reflected in the risk tolerance levels, ING Insurance Eurasia monitors the
full implementation of risk policies, minimum standards and implementation guidelines. Business units have to demonstrate that the
appropriate steps have been taken to control their operational and compliance risk. ING Insurance Eurasia applies scorecards to measure
the quality of the internal control within a business unit. Scoring is based on the ability to demonstrate that the required risk management
processes are in place and effective within the business units.
Non-Financial Risk Dashboard
The Non-Financial Risk Dashboard (NFRD) is a quarterly report that is discussed at the MBI Eurasia and Risk Committee and sent to the
Supervisory Board for information. The NFRD provides management at all organisational levels information on their key operational,
compliance and legal risks. The NFRD is based on defined risk tolerance within the business and gives a clear description of the risks and
responses enabling management to prioritise and to manage operational, compliance and legal risks.
Stress Testing
ING Insurance Eurasia complements its regular risk reporting process for financial and non-financial risks with (ad hoc) stress tests. Stress
testing examines the effect of exceptional but plausible scenarios on the capital position of ING Insurance Eurasia. Stress testing can be
initiated internally or by external parties such as the Dutch Central Bank (De Nederlandsche Bank – DNB) and the European Insurance
and Occupational Pensions Authority (EIOPA).
ING INSURANCE EURASIA RISK PROFILE
Risk type description
ING Insurance Eurasia identifies the following main types of risk that are associated with its business:
• Insurance risk – risks such as mortality, morbidity, longevity and property and casualty associated with the claims under insurance
policies it issues/underwrites; specifically, the risk that premium rate levels and provisions are not sufficient to cover insurance claims;
• Business risk – risk driven by the possibility that experience deviates from expectations with respect to policyholder behaviour, expenses
and premium re-rating. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent in
strategy decisions and internal efficiency, and as such strategic risk is included in business risk;
• Market risk – the risk of potential losses due to adverse movements in market variables. Market risks include interest rate, equity,
real estate, implied volatility, credit spread including illiquidity premium, and foreign exchange risks;
• Credit risk – the risk of potential losses due to default by ING Insurance Eurasia debtors (including bond issuers) or trading counterparties
• Liquidity risk – the risk that ING or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and
in a timely manner. Liquidity risk can materialise both through trading and non-trading positions;
• Operational risk – the risk of direct or indirect losses resulting from inadequate or failed internal processes, people and systems
or from external events. It includes reputational risk, as well as legal risk;
• Compliance risk – the risk of damage to ING Insurance Eurasia’s integrity as a result of failure (or perceived failure) to comply with
relevant laws, regulations, internal policies, procedures and ethical standards.
ECONOMIC CAPITAL
Economic Capital (EC) within ING Insurance Eurasia is defined as the amount of additional assets to be held above the market value of
liabilities in order to ensure a positive surplus in case of adverse movements. The Economic Capital model is based on a 99.5% level of
confidence interval on a one-year time horizon.
Model disclosure
ING quantifies the impact of the following types of risk in its EC model:
• Market risk – Assets and Liabilities are replicated by the business units using a finite set of standard financial instruments. The set of
standard instruments consists of zero coupon bonds, market indices, equity forwards, swaptions, callable bonds, FX options and equity
options. Each unit is provided with 300 risk neutral and 200 risk volatile scenarios which are created for multiple equity indices and
exchange rates, consistent with a multi-currency dynamic term structure model. The risk volatile scenarios ensure that the replicating
portfolio is calibrated against enough extreme scenarios such that it can be used safely in Economic Capital calculations. Local actuarial
software uses these 500 scenarios to derive stochastic cash flows. Based on this a replicating portfolio is derived. The quality of the
replication is monitored by several statistical criteria, including R-squared, and benchmarked against market value sensitivities such as
duration, convexity and changes in value for larger interest rate and equity shocks. By including equity options, FX options and
swaptions in the replicating instruments ING Insurance Eurasia is able to incorporate implied volatility risk in the considered risk types.
Credit spread risk is captured through credit-risk-bearing zero coupon bonds in the set of replicating instruments;
• Credit default risk capital – Calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The EC is
calculated based on the following seven drivers: Probability of Default (measure of the standalone creditworthiness of individual
debtors), Exposure at Default (estimated size of the financial obligation at the moment of default in the future), Loss Given Default
(estimated recovery value of the underlying collateral or guarantees received (if any) and the unsecured part), Industry of the debtor,
Country of the debtor, Remaining tenor of the underlying transactions and Type of Assets;
• Insurance Risk – Calculated by the business unit for all sub-risks for Life, Morbidity and P&C Risk;
254 ING Group Annual Report 2011