ING Direct 2013 Annual Report Download - page 332

Risk management continued NN Group
Risk measurement
NN determines economic capital for the market and credit risks of the separate account business in aggregate through direct modelling or
applying a hedge effectiveness ratio.
The table below sets out the economic capital for the market and credit risk of the separate account businesses as at 31 December 2013
and 2012, respectively.
Economic capital for the separate account businesses
2013 2012
Variable annuity 591 812
Separate account guaranteed group pension
business in the Netherlands 264 101
Other separate account business (unit linked) 217 187
Diversification benefit –108 –170
Total 964 930
The decrease in the variable annuity economic capital was due to a weakening JPY over the course of 2013. The increase in economic
capital in the group pension business in the Netherlands was mainly due to changes in the hedging position over the course of the year.
Considering that the size of the group pension business in the Netherlands is EUR 10.9 billion, the overall risk on this portfolio remains
relatively low and well-hedged. The increase in assets under management of the funds underlying the other separate account business
resulted in a higher present value of future fee income and therefore higher risk capital related to this future fee income.
LIQUIDITY RISK
Liquidity risk is the risk that one of NN’s entities does not have sufficient liquid assets to meet its financial obligations when they become
due and payable, at reasonable cost and in a timely manner. Liquidity in this context is the availability of funds, or certainty that funds will
be available without significant losses, to honour all commitments when due.
Risk profile
NN identifies two related liquidity risks: funding liquidity risks and market liquidity risks. Funding liquidity risk is risk that a company will
have the funds to meet its financial obligations when due. This risk is in particular relevant for NN Bank. Market liquidity risk is the risk that
an asset cannot be sold without significant losses. The connection between market and funding liquidity stems from the fact that when
payments are due, and not enough cash is available, investment positions need to be converted into cash. When market liquidity is low,
this would lead to a loss.
Risk mitigation
NN Liquidity Management Principles include the following:
• Interbank funding markets should be used to provide liquidity for day-to-day cash management purposes;
• A portion of assets must be invested in unencumbered marketable securities that can be used for collateralised borrowing or asset sales;
• Strategic asset allocation should reflect the expected and contingent liquidity needs of liabilities; and
• Adequate and up-to-date contingency liquidity plans should be in place to enable management to act effectively and efficiently in times
of crisis.
NN defines three levels of Liquidity Management. Short-term liquidity, or cash management covers the day-to-day cash requirements
under normal business conditions and targets funding liquidity risk. Long-term liquidity management considers business conditions, in
which market liquidity risk materialises. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation.
Two types of liquidity crisis events can be distinguished: a market event and an NN specific event. These events can be short-term or
long-term and can both occur on a local, regional or global scale.
Risk measurement
Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in the base case and under several
stressed scenarios. The liquidity risk metrics indicate that liquidity resources would be sufficient to meet expected liquidity uses under the
scenarios tested. NN does not hold a specific economic capital for liquidity risk in its insurance economic capital model as liquidity is
sufficiently available in the insurance business units.
330 ING Group Annual Report 2013