ING Direct 2011 Annual Report Download - page 310

those currently experienced. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper
exercise of our rights under such contracts. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral
tend to increase in times of market stress and illiquidity.
Any of these developments or losses could materially and adversely affect our business, financial condition, results of operations, liquidity
and/or prospects.
Reinsurers
Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life
businesses. This protection is bought through reinsurance arrangements in order to reduce possible losses. Because in most cases we must
pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such
amounts. As a percentage of our net reinsurance exposure as of 31 December 2011, the greatest exposure after collateral to an individual
external reinsurer was approximately 21%, approximately 47% related to four other external reinsurers and the remainder of the
reinsurance exposure related to various other reinsurers. The inability or unwillingness of any one of these reinsurers to meet its financial
obligations to us, or the insolvency of our reinsurers, could have a material adverse effect on our net results and our financial results.
Market conditions observed over the last year may increase the risk of loans being impaired. We are exposed to declining
property values on the collateral supporting residential and commercial real estate lending.
We are exposed to the risk that our borrowers (including sovereigns) may not repay their loans according to their contractual terms and
that the collateral securing the payment of these loans may be insufficient. We may continue to see adverse changes in the credit quality
of our borrowers and counterparties, for example as a result of their inability to refinance their indebtedness, with increasing
delinquencies, defaults and insolvencies across a range of sectors. This may lead to impairment charges on loans and other assets, higher
costs and additions to loan loss provisions. A significant increase in the size of our provision for loan losses could have a material adverse
effect on our financial position and results of operations.
Economic and other factors could lead to further contraction in the residential mortgage and commercial lending market and to further
decreases in residential and commercial property prices which could generate substantial increases in impairment losses.
Interest rate volatility and other interest rate changes may adversely affect our profitability.
Changes in prevailing interest rates may negatively affect our business including the level of net interest revenue we earn, and for our
banking business the levels of deposits and the demand for loans. In a period of changing interest rates, interest expense may increase at
different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. Changes in
the interest rates may negatively affect the value of our assets and our ability to realize gains or avoid losses from the sale of those assets,
all of which also ultimately affect earnings.
Declining interest rates may result in:
• life insurance and annuity products being relatively more attractive to consumers due to minimum guarantees with respect to such
products that are frequently mandated by regulators;
• increased premium payments on products with flexible premium features;
• a higher percentage of insurance and annuity contracts remaining in force from year-to-year, potentially resulting in greater claims
coststhan we expected and creating asset liability duration mismatches;
• addition to provisions for guarantees included in life insurance and annuity contracts, as the guarantees become more valuable
topolicyholders;
• lower investment earnings because the interest earnings on our fixed income investments will likely have declined in parallel with
market interest rates on our assets recorded at fair value;
• reserve strengthening by affecting the results of our reserve adequacy testing;
• higher prepayment or redemption of mortgages and fixed maturity securities in our investment portfolios as borrowers seek to borrow
at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates;
• lower profitability as the result of a decrease in the spread between interest rates charged to policyholders and returns on our
investment portfolios;
• lower profitability since we may not be able to fully track the decline in interest rates in our savings rate.
Risk factors continued
308 ING Group Annual Report 2011