ING Direct 2008 Annual Report Download - page 92

2.1 Consolidated annual accounts
INSURANCE PROVISIONS, DEFERRED ACQUISITION COSTS (DAC) AND VALUE OF BUSINESS ACQUIRED (VOBA)
The establishment of insurance provisions, DAC and VOBA is an inherently uncertain process, involving assumptions about factors such as
court decisions, changes in laws, social, economic and demographic trends, inflation, investment returns, policyholder behaviour and other
factors, and, in the life insurance business, assumptions concerning mortality and morbidity trends. Specifically, significant assumptions
related to these items that could have a material impact on financial results include interest rates, mortality, morbidity, property and
casualty claims, investment yields on equity and real estate, foreign currency exchange rates and reserve adequacy assumptions.
The use of different assumptions about these factors could have a material effect on insurance provisions and underwriting expense.
Changes in assumptions may lead to changes in the insurance provisions over time. Furthermore, some of these assumptions can be volatile.
In addition, the adequacy of insurance provisions, net of DAC and VOBA, is evaluated regularly. The test involves comparing the
established insurance provision with current best estimate assumptions about factors such as court decisions, changes in laws, social,
economic and demographic trends, inflation, investment returns, policyholder behaviour and other factors, and mortality and morbidity
trends. The use of different assumptions in this test could lead to a different outcome.
Insurance provisions also include the impact of minimum guarantees which are contained within certain variable annuity products. This
impact is dependent upon the difference between the potential minimum benefits payable and the total account balance, expected
mortality and surrender rates. The determination of the potential minimum benefits payable also involves the use of assumptions about
factors such as inflation, investment returns, policyholder behaviour, and mortality and morbidity trends. The use of different assumptions
about these factors could have a material effect on insurance provisions and underwriting expense.
The process of defining methodologies and assumptions for insurance provisions, DAC and VOBA is governed by ING Insurance risk
management governance as described in the ‘Risk management’ section.
See the ‘Risk management’ section for a sensitivity analysis of net result and shareholders’ equity to insurance, interest rate, equity,
foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably
likely at the balance sheet date.
LOAN LOSS PROVISIONS
Loan loss provisions are recognised based on an incurred loss model. Considerable judgement is exercised in determining the extent
of the loan loss provision (impairment) and is based on the management’s evaluation of the risk in the portfolio, current economic
conditions, loss experience in recent years and credit, industry and geographical concentration trends. Changes in such judgements
and analyses may lead to changes in the loan loss provisions over time.
The identification of impairment and the determination of the recoverable amount are an inherently uncertain process involving various
assumptions and factors including the financial condition of the counterparty, expected future cash flows, observable market prices and
expected net selling prices.
Future cash flows in a portfolio of financial assets that are collectively evaluated for impairment are estimated on the basis of the
contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those
in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions
that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical
period that do not exist currently. Current observable data may include changes in unemployment rates, property prices and commodity
prices. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience.
FAIR VALUES OF REAL ESTATE
Real estate investments are reported at fair value; all changes in fair value are recognised directly in the profit and loss account. The fair
value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values represent the estimated
amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’s-
length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. The
valuations are based on the assumption that the properties are let and sold to third parties based on the actual letting status. The
valuations are based on discounted cash flow analysis of each property. The discounted cash flow analyses are based on calculations
of the future rental income in accordance with the terms in existing leases and estimations of the rental values when leases expire.
For each reporting period every property is valued either by an independent valuer or internally. Indexation is used when a property is
valued internally. The index is based on the results of the independent valuations carried out in that period. Market transactions and
disposals are monitored as part of the procedures to back test the indexation methodology. Valuations performed earlier in the year are
updated if necessary to reflect the situation at year end.
Accounting policies for the consolidated balance sheet
and profit and loss account of ING Group (continued)
ING Group Annual Report 2008
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