ING Direct 2008 Annual Report Download - page 253

Because we also operate in markets with less developed judiciary and dispute resolution systems, in the event of disputes
in these markets, the quality and the effectiveness of such systems could have an adverse effect on our operations and net
results.
In the less developed markets in which we operate, judiciary and dispute resolution systems may be less developed. As a result in case of
a breach of contract we may have difficulties in making and enforcing claims against contractual counterparties and, if claims are made
against us, we might encounter difficulties in mounting a defence against such allegations. If we become party to legal proceedings in a
market with an insufficiently developed judiciary system, it could have an adverse effect on our operations and net result.
Because we are a financial services company and we are continually developing new financial products, we might be faced
with claims that could have an adverse effect on our operations and net result if clients’ expectations are not met.
When new financial products are brought to the market, communication and marketing aims to present a balanced view of the product
(however there is a focus on potential advantages for the customers). Whilst we engage in a due diligence process when we develop
products, if the products do not generate the expected profit, or result in a loss, or otherwise do not meet expectations, customers may
file claims against us. Such claims could have an adverse effect on our operations and net result.
Ratings are important to our business for a number of reasons. Among these are the issuance of debt, the sale of certain
products and the risk weighting of Bank assets. Downgrades could have an adverse impact on our operations and net
results.
We obtain credit ratings from Standard & Poor’s, Moody’s and Fitch. While we aim to maintain a senior unsecured rating of AA, each of
the rating agencies reviews its ratings and rating methodologies on a recurring basis and may decide on a downgrade at any time. In the
event of a downgrade the cost of issuing debt will increase, having an adverse effect on net results.
Claims paying ability, at the Group or subsidiary level, and financial strength ratings are factors in establishing the competitive position of
insurers. A rating downgrade could elevate lapses or surrenders of policies requiring cash payments, which might force us to sell assets at
a price that may result in realised investment losses. Among others, total invested assets decreases and deferred acquisition costs might
need to be accelerated, adversely impacting earnings. A downgrade may adversely impact relationships with distributors of our products
and services and customers, which may affect new sales and our competitive position.
Our Bank assets are risk weighted. Downgrades of these assets could result in a higher risk weighting which may result in higher capital
requirements and thus a need to deleverage. This may impact net earnings and the return on capital, and may have an adverse impact
on our competitive position.
Our business may be negatively affected by a sustained increase in inflation.
A sustained increase in the inflation rate in our principal markets would have multiple impacts on ING and may negatively affect our
business, solvency position and results of operations. For example, a sustained increase in the inflation rate may result in an increase in
market interest rates which may (i) decrease the value of certain fixed income securities we hold in our investment portfolios resulting in
reduced levels of unrealised capital gains available to us which could negatively impact our solvency position and net income, (ii) result
in increased surrenders of certain life & savings products, particularly, those with fixed rates below market rates, and (iii) require us, as
an issuer of securities, to pay higher interest rates on debt securities we issue in the financial markets from time to time to finance our
operations which would increase our interest expenses and reduce our results of operations. A significant and sustained increase in
inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets
generally. A sustained decline in equity markets may (i) result in impairment charges to equity securities that we hold in our investment
portfolios and reduced levels of unrealised capital gains available to us which would reduce our net income and negatively impact our
solvency position, (ii) negatively impact performance, future sales and surrenders of our unit-linked products where underlying
investments are often allocated to equity funds, and (iii) negatively impact the ability of our asset management subsidiaries to retain and
attract assets under management, as well as the value of assets they do manage, which may negatively impact their results of operations.
In addition, in the context of certain property & casualty risks underwritten by our insurance subsidiaries (particularly ‘long-tail’ risks),
a sustained increase in inflation with a resulting increase in market interest rates may result in (i) claims inflation (i.e., an increase in the
amount ultimately paid to settle claims several years after the policy coverage period or event giving rise to the claim), coupled with (ii)
an underestimation of corresponding claims reserves at the time of establishment due to a failure to fully anticipate increased inflation
and its effect on the amounts ultimately payable to policyholders, and, consequently, (iii) actual claims payments significantly exceeding
associated insurance reserves which would negatively impact our results of operations. In addition, a failure to accurately anticipate higher
inflation and factor it into our product pricing assumptions may result in a systemic mis-pricing of our products resulting in underwriting
losses which would negatively impact our results of operations.
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ING Group Annual Report 2008