ING Direct 2002 Annual Report Download - page 73

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The percentages shown by risk category reflect all diversification effects, including risk reduction
between the risk categories. Diversification effects as a result of combining bank and insurance
activities are not taken into account.
Credit risk is the risk of losses due to the inability of borrowers and counterparties to meet their
repayment commitment.
Market risk is the risk of losses due to unfavourable market movements. This includes all
trading and non-trading activities.
Transfer risk is the risk of losses due to the inability of a borrower or counterparty to obtain
foreign currency to meet its financial obligations.
Business risk is the risk of losses due to unfavourable changes in business volumes, margins and
costs.
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal
processes, people and systems or from external events.
EMBEDDED VALUE
Embedded value is an indicator of the economic value creation as a consequence of selling and
managing long-term contracts such as life insurance, annuities and pensions. It is defined as the
present value of the future earnings arising from the business on the books at the valuation date
plus the free portion of capital and surplus. The value of new business provides insight into the
expected profitability of the 2002 new sales. Underlying assumptions (expenses, interest rates,
mortality, lapse, etc.) reflect best estimates of future expected experience. Future earnings are
discounted at a rate representing the cost of capital.
At the end of 2002, the total embedded value of ING’s life insurance operations was EUR 23,279
million compared to EUR 25,827 million at year-end 2001. The decrease mainly reflects the impact of
lower stock prices, credit-related losses and lower currency exchange rates versus the euro.
The value of new business written during 2002 was EUR 519 million, a substantial increase over
the 2001 level of EUR 336 million (revised). During 2002 ING invested EUR 1,841 million to write new
life insurance business. The overall rate of return expected on this investment is 11.5%. This compares
to an overall return of 11.2% in 2001. The expected internal rate of return in developing markets is
15.4%.
Annual Report 2002 · ING Group70
Financial information
ECONOMIC CAPITAL BREAKDOWN BY RISK CATEGORY
as a percentage of total
2002 2001
Credit risk 44% 42%
Market risk 19% 19%
Transfer risk 6% 7%
Business risk 17% 18%
Operational risk 14% 14%
Total 100% 100%