ING Direct 2011 Annual Report Download - page 274

Risk management continued
ING Insurance US
Mitigation
In general insurance risks cannot be (easily) hedged directly at the financial markets and tend to be mitigated by diversification across
large portfolios. They are therefore managed at the contract level through standard underwriting policies, product design requirements,
independent product approval processes and risk limitations related to insurance policy terms and conditions agreed with the client.
Risk not mitigated by diversification is managed through concentration and exposure limits and through reinsurance and/or securitisations:
• Tolerance limits for life insurance risk are set per insured life and significant mortality and morbidity events affecting multiple lives such
as pandemics;
• Reinsurance is used to manage tolerance levels according to the ING Insurance US reinsurance credit risk policy;
• Catastrophic losses resulting from events such as terrorism are considered to be uninsurable. ING Insurance US participates in industry
pools in various countries to mitigate this risk.
BUSINESS RISK
Business risk for insurance is essentially the risk insurance operations accept as consequence of choosing to be in the business. In practice
this can be defined as the exposure to the possibility that experience differs from expectations with respect to expenses, the run-off of
existing business (persistency/renewals), future premium rerating, etc. The calculation of Business Risk Capital is specified by the regulatory
capital methodology prescribed by the National Association of Insurance Commissioners (NAIC). ING Insurance US targets a capital level
equal to 425% of the Company Action Level specified by the NAIC.
MARKET RISK
ING Insurance US is exposed to market risk to the extent to which the market value of surpluses can be adversely impacted due
to movements in financial markets. Changes in financial market prices impact the market value of ING Insurance US’s current asset
portfolio and hedging derivatives directly as well as through the calculated market value of the insurance liabilities.
The sensitivities shown are calculated at business unit level and cover US domiciled insurance entities. The sensitivities are based
on moderate and simple to explain shocks to underlying risk factors. The following risk factors are taken into account:
Description Key Drivers
Interest Rate – Impact on assets and liabilities due to movements of interest rates
– Measured by the impact of a 1% upwards and downwards parallel
shift of US Treasury curve
Sensitivities of various guarantees (e.g. minimum
interest rate guarantees, and guaranteed living
benefits). CB-VA and GMIRs of insurance products
Equity – Impact of a drop in equity prices which impacts direct equity exposure
and loss of fee income from variable and equity linked
– Measured by the impact of a 25% drop in equity prices
Separate account and equity indexed business,
and direct equity exposure
Credit (Default and Spread
risk)
– Impact that credit default risk can have on credit impairment levels in
a “1 in 10” scenario (using “1 in 10” 1-year default rates by rating
category, combined with stressed “Loss Given Default” assumptions);
plus impact that a “1-in-10” increase in credit spreads levels can have
on previously impaired structured assets (re-impairment risk) and on
CDS transactions that are carried at market value
General account business
Implied Volatility
(Equity & Interest Rates)
– Impact of losses on assets and liabilities due to movements in the
volatility implied from market option prices.
– For interest rate – measured by the impact of a relative increase of
30% in implied swaption volatilities
– For equity – measured by the impact of a relative increase in implied
volatilities based on tenor – 80% for tenors less than 1 year, up 30%
for tenors between 1and 3 years, up 20% for tenors between 3–7
years and up 10% for tenors of 7 years and above
Embedded guarantees in business and
derivatives used to hedge equity exposures
FX – Impact of losses related to changes in real estates
– Measured by the worst case impact of a 10% up and down
movement for each currency
Translation risk of market value surplus
ofnon-USD businesses
Real Estate – Impact of losses related to changes in real estate
– Measured by impact of all real estate down 15%
Sensitivities
The stress events are described above. The ING Insurance US earnings sensitivities are dominated by credit, equity and interest rate
exposure.
ING Insurance US has no significant earnings sensitivity to Foreign Exchange Rates as ING Insurance US is managed on a local currency
basis and therefore there is no translation risk to the Group reporting currency included. There is no significant earnings exposure to
non-US currencies. From the ING Group perspective, there may be some translation risk between USD based operations and EUR basis.
ING Insurance US earnings sensitivies are shown in the tables below. Taking into account diversification between risk factors, ING
Insurance US (excluding CBVA) is exposed to a EUR1.0 billion decrease in expected IFRS Earnings within the context of the market and
non-market sensitivity analysis. The changes from 2010 to 2011 are the result of many factors including:
• Reduction in interest rates increasing exposure to further declines in rates due to product guarantees;
• Hedging programs, including various actions taken to reduce the risk of declining rates;
• Turnover of the asset portfolio; and
• Incorporation of mean reversion in DAC calculations by Retirement Services
272 ING Group Annual Report 2011