ING Direct 2004 Annual Report Download - page 170

168 ING Group Annual Report 2004
ALM risk – Foreign-exchange risk Foreign-exchange risk in the investments backing ING’s insurance liabilities is dealt with in the
investment-management processes. An immaterial portion of the investment portfolio backing insurance liabilities is invested in
assets of a different currency than the liabilities. Locally required capital levels are invested in local currencies in order to satisfy
regulatory requirements and to support local insurance business regardless of currency movements. These capital levels may
affect the consolidated balance sheet when translated to euros. Depending on hedging costs and the capital exposure, ING may
hedge the capital over locally required margins. The sensitivity to net profit and shareholder equity have been estimated and
are shown in the accompanying table.
FOREIGN-CURRENCY SENSITIVITY
Effect on ING Insurance Net profit Effect on ING Insurance Shareholders’ equity
2004 2003 2004 2003
10% Increase of Euro versus all other currencies -5% -132 -6% -114 -6% -1,041 -5% -986
10% Decrease of Euro versus all other currencies 7% 162 7% 140 7% 1,271 7% 1,204
The sensitivity represents a one-time increase/decrease in the Euro as of 31 December.
The net profit sensitivity reflects the related effect on net income for the following year.
ALM risk – Real estate risk Real Estate risk exists in some of the investment portfolios of ING Insurance, most significantly in the
Netherlands. ING Insurance is exposed to the risk of decreasing real estate prices to the extent these cannot be shared with
contract holders in participating insurance plans. Through scenario analyses ING Insurance measures the potential changes in
the expected earnings of the insurance operations over the next 12 months resulting from an instantaneous increase/decrease
in real estate markets of 10%. In addition, ING has estimated the impact to the 31 December shareholders equity of ING
Insurance from such a change in real estate markets.
REAL ESTATE SENSITIVITY
Effect on ING Insurance Net profit Effect on ING Insurance Shareholders’ equity
2004 2003 2004 2003
Increase of real estate of 10% 0% 0 0% 0 3% 595 3% 623
Decrease of real estate of 10% 0% -1 0% -2 -3% -595 -3% -621
The sensitivity represents a one-time increase/decrease in real estate markets as of 31 December.
The net profit sensitivity reflects the related effect on net income for the following year.
Liquidity risk Liquidity problems arise if an insurance business does not have enough cash or liquid assets to meet its cash
obligations. Demands for funds can usually be met through ongoing normal operations, premiums received, the sale of
assets or borrowing. Unexpected demands for liquidity may be triggered by a credit-rating downgrade, negative publicity,
deterioration of the economy, reports of problems of other companies in the same or similar lines of business, significant
unanticipated policy claims, or other unexpected cash demands from policyholders.
Liquidity risk decreases as the time frame allowed for generating cash increases. Longer time frames allow for more assets
to mature and increase the probability of finding a buyer for some of the company’s non-maturing or less liquid assets or
securing external financing. Expected liquidity demands within ING Insurance are managed through a combination of treasury,
investment and asset-liability management guidelines, which are monitored on an ongoing basis. Unexpected liquidity demands
are managed through a combination of product design, diversification limits on liabilities, investment strategy, systematic
monitoring and advance contingency planning. During 2003, Corporate Insurance Risk Management issued formal guidelines
requiring all insurance businesses to regularly assess, monitor and report on their liquidity risk profile. The guidelines require an
analysis of liabilities that increase liquidity risk, a review of the investment portfolio to ensure adequate liquidity, and analysis
of the expected asset-and-liability cash flows in regards to the ability of the business to meet cash demands.
RISK MANAGEMENT
(continued)
2.3
ADDITIONAL FINANCIAL
INFORMATION