ING Direct 2013 Annual Report Download - page 330

Risk management continued NN Group
Risk mitigation
The FX risk at the local entity level is mitigated by limiting investment to the local currency assets. The exceptions are Japan Life, where
USD and EUR assets are held to diversify the portfolio and the FX risk is managed through rolling FX forward contracts and in the large
general account portfolio of Netherlands Life. The FX risk at the holding level is managed using FX forward contracts.
Risk measurement
Economic capital for foreign exchange risk decreased from EUR 377 million at year-end 2012 to EUR 213 million at year-end 2013 primarily
due to the weakening of the yen in 2013.
MARKET AND CREDIT RISK: SEPARATE ACCOUNT
The separate account businesses are those in which the policyholder bears the majority of the market and credit risk. NN’s earnings from
the separate account businesses are primarily driven by fee income. However, in the case of variable annuities and the guaranteed separate
account pension business in the Netherlands, NN retains risk associated with the guarantees provided to its policyholders. Businesses in
this category are (i) the variable annuities (VA) portfolio, (ii) the group pension business in the Netherlands for which guarantees are
provided, and (iii) other separate account business, primarily the unit linked business.
Variable annuity portfolio
Risk profile
Variable annuity business overview, 2013
Number of
policies
Account
Value (1)
Net Amount
at Risk (2)
Additional IFRS
Reserve for
Guarantee
Average
Remaining
Years
Variable Annuity Japan GMAB 299,563 11,575 458 811 3.2
Variable Annuity Japan GMDB (3) 46,743 3,112 205 57 7.1
Variable Annuity Europe 40,931 1,238 33 25 7.2
(1) The Account value is the value of the underlying funds which belong to the policyholder.
(2) The net amount at risk is the difference between the guaranteed minimum value and the account value, for those policies where the guaranteed
value exceeds the account value.
(3) The Additional IFRS reserve for the guarantees backing the GMDB block as of 1 January 2014 is EUR 219 million higher (total EUR 276 million)
due to the application of fair value accounting.
Variable annuity business overview, 2012
Number of
policies
Account
Value (1)
Net Amount
at Risk (2)
Additional IFRS
Reserve for
Guarantee
Average
Remaining Years
Variable Annuity Japan GMAB 317,402 13,150 2,841 3,064 4.2
Variable Annuity Japan GMDB 60,050 3,744 1,346 253 9.5
Variable Annuity Europe 44,330 1,147 47 78 7.5
(1) The Account value is the value of the underlying funds which belong to the policyholder.
(2) The net amount at risk is the difference between the guaranteed minimum value and the account value, for those policies where the guaranteed
value exceeds the account value.
From a risk management perspective, NN distinguishes three blocks of variable annuities:
• Guaranteed minimum accumulation benefit (GMAB) products of Japan Closed Block VA: Under this type of variable annuity, a
minimum guaranteed benefit is paid upon death or at maturity of the policy at the end of the initial investment period. The survival
guarantee is only available up until the original policy term, mainly 10 years, and cannot be changed. The minimum guaranteed benefit
is either a single premium or an amount which may lock-in at a higher guarantee level depending on the product. The GMAB product
was sold from 2005 until 2009 in Japan through banks and security brokers. The guarantees of this product were highly in the money
but with the improving stock markets in Japan and the weakening of the JPY, have moved closer to at-the-money. The volatility risks of
the options and guarantees increase when the option is at the money and closer to maturity.
• Guaranteed minimum death benefit (GMDB) products of Japan Closed Block VA: Under this type of variable annuity, a
minimum guaranteed benefit is paid upon the death of the policyholder. The GMDB product has a generally predefined term of 10
years and provides the option to extend the guarantee of the policy during the investment phase up to age 90, and in the case of some
policies, also allow further extension to whole of life. At death, the product pays a maximum of the guaranteed value and the account
value. During the insured period, the client can receive the maximum of the minimum guaranteed benefit and the account value at
death or at survival after the term of the product. There are different funds underlying the policyholder account value, including
Japanese equity, Japanese bond, global equity and global bond funds. The value of the minimum guarantee depends on the level and
volatility of equity, bond and foreign exchange markets.
• VA products of Insurance Europe: NN has been selling VA products in Europe since 2008, including in Belgium, Italy, Luxembourg,
Poland, Spain and Hungary. The products mostly have minimum guaranteed living benefits such as survival benefit or withdrawal benefits.
328 ING Group Annual Report 2013