ING Direct 2004 Annual Report Download - page 70

68 ING Group Annual Report 2004
contracts, including traditional whole life and term life insurance contracts, are based on best estimate assumptions including
margins for adverse deviations. The assumptions are set initially at the policy issue date and remain constant throughout the
life of the policy, except in case of loss recognition.
Insurance provisions for universal life, variable life and annuity contracts, unit linked contracts, etc. are generally set equal to
the balance that accrues to the benefit of the policyholders. Certain variable annuity products contain minimum guarantees on
the amounts payable upon death and/or maturity. The insurance provisions include the impact of these minimum guarantees,
taking into account the difference between the potential minimum benefit payable and the total account balance, expected
mortality and surrender.
Claims reserves on non-life insurance are determined on a case-by-case basis, based on the facts known at the time provisions
are established, and are periodically adjusted to recognise the estimated ultimate cost of a claim. In addition, so-called “IBNR”
reserves are set to recognise the estimated cost of losses that have occurred but which have not yet been notified.
Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance business that are deferred and
amortised. The deferred costs, all of which vary with and are primarily related to the production of new and renewal business,
consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses. DAC is
amortised over the life of the underlying contracts. Included in DAC is also Value of Business Acquired (VOBA), which is in
nature similar to DAC. VOBA is an asset that represents the present value of estimated net cash flows embedded in the
contracts of an acquired company, which existed at the time the company was acquired by ING Group.
For traditional life insurance contracts DAC is amortised over the premium payment period in proportion to the premium
revenue recognition.
For flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross
profits. Amortisation is adjusted retrospectively when estimates of current or future gross profits to be realised from a group of
products are revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on flexible
insurance contracts the approach is that in determining the estimate of future gross profits ING assumes the short-term and long-
term separate account growth rate assumption to be the same. The growth rate assumption is currently 8.5% gross (7.5% net).
Higher/lower expected profits – e.g. reflecting stock market performance and a changed level of assets under management – may
cause a lower/higher amortisation of DAC due to the catch-up of amortisation in old and future years. This process is known as DAC
unlocking. The impact of the DAC unlocking is recorded in the profit and loss account of the period in which the unlocking occurs.
The adequacy of the Provision for life policy liabilities net of DAC and VOBA is evaluated each year, using a prudent confidence
level. If it is determined using a best estimate (50%) confidence level that a shortfall exists at a business unit, it is immediately
recorded in the profit and loss account.
In each case, the establishment of insurance provisions and DAC is an inherently uncertain process, involving assumptions about
factors such as court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns and
other factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends.
Provisions for loan losses
Management regularly assesses the adequacy of the provisions for loan losses by performing ongoing evaluations of the loan
portfolio. A formal analysis of specifically identified loans takes place every quarter, including evaluation of economic risks
associated with each loan, the current financial condition of the borrower, the economic environment in which the borrower
operates, the level of delinquent loans and the value of collateral. Credit ratings are assigned to the borrowers by allocating
all outstanding loans into various Risk Rating categories on a regular basis.
In determining the amount of the provisions, corporate loans are assessed on a case-by-case basis and the following factors
are considered:
– the financial standing of the customer, including a realistic assessment of the likelihood of repayment of the loan within an
acceptable period and the extent of ING Group’s commitments to the customer;
– the realisable value of any security for the loan;
– the costs associated with obtaining repayment and realisation of any such security.
For certain homogeneous groups of small personal and corporate loans, provisions are assessed using statistical techniques.
ING Group also maintains an unallocated provision for loan losses that is required to adequately capture various subjective and
judgmental aspects of credit risk assessment that are not considered on an individual basis. Considerable judgement is exercised
in determining the extent of the provision and is based on the management’s evaluation of the risk in the portfolio, current
ACCOUNTING PRINCIPLES FOR THE CONSOLIDATED
BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
OF ING GROUP (continued)
2.1
ANNUAL ACCOUNTS