ING Direct 2009 Annual Report Download - page 277

to provisions for guarantees included in life policies, as the guarantees become more valuable to policy holders. During a low interest rate
period, our investment earnings may be lower 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. Declining interest rates may also affect the results of our reserve
adequacy testing which may in turn result in reserve strengthening. In addition, mortgages and fixed maturity securities in our investment
portfolios will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be
required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our
profitability may suffer as the result of a decrease in the spread between interest rates charged to policyholders and returns on our
investment portfolios.
Conversely, in periods of rapidly increasing interest rates, policy loans, and withdrawals and surrenders of life insurance policies and fixed
annuity contracts may increase as policyholders choose to forego insurance protection and seek higher investment returns. Obtaining cash
to satisfy these obligations may require us to liquidate fixed maturity investments at a time when market prices for those assets are
depressed because of increases in interest rates. This may result in realised investment losses. Regardless of whether we realize an
investment loss, these cash payments would result in a decrease in total invested assets, and may decrease our net income. Premature
withdrawals may also cause us to accelerate amortisation of deferred policy acquisition costs, which would also reduce our net income.
We may incur losses due to failures of banks falling under the scope of state compensation schemes.
In the Netherlands and other jurisdictions deposit guarantee schemes and similar funds (‘Compensation Schemes’) have been implemented
from which compensation may become payable to customers of financial services firms in the event the financial service firm is unable to
pay, or unlikely to pay, claims against it. In many jurisdictions in which we operate, these Compensation Schemes are funded, directly or
indirectly, by financial services firms which operate and/or are licensed in the relevant jurisdiction. As a result of the increased number of
bank failures, in particular since the fall of 2008, we expect that levies in the industry will continue to rise as a result of the Compensation
Schemes. In particular, we are a participant in the Dutch Deposit Guarantee Scheme, which guarantees an amount of EUR 100,000 per
person per bank (regardless of the number of accounts held). The costs involved with making compensation payments under the Dutch
Deposit Guarantee Scheme are allocated among the participating banks by the Dutch Central Bank, De Nederlandsche Bank N.V. (the
‘DNB’), based on an allocation key related to their market shares with respect to the deposits protected by the Dutch Deposit Guarantee
Schemes. Given our size we may incur significant compensation payments to be made under the Dutch Deposit Guarantee Scheme, which
we may be unable to recover from the bankrupt estate. The ultimate costs to the industry of payments which may become due under the
Compensation Schemes, remains uncertain although they may be significant and these and the associated costs to us may have a material
adverse effect on our results of operations and financial condition.
We may be unable to manage our risks successfully through derivatives.
We employ various economic hedging strategies with the objective of mitigating the market risks that are inherent in our business and
operations. These risks include currency fluctuations, changes in the fair value of our investments, the impact of interest rate, equity
markets and credit spread changes and changes in mortality and longevity. We seek to control these risks by, among other things, entering
into a number of derivative instruments, such as swaps, options, futures and forward contracts including from time to time macro hedges
for parts of our business.
Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from risks associated
with those fluctuations. Our hedging strategies also rely on assumptions and projections regarding our assets, general market factors and
the credit worthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities
may not have the desired beneficial impact on our results of operations or financial condition. Poorly designed strategies or improperly
executed transactions could actually increase our risks and losses. If we terminate a hedging arrangement, we may also be required to pay
additional costs, such as transaction fees or breakage costs. There have been periods in the past, and it is likely that there will be periods in
the future, during which we have incurred or may incur losses on transactions, perhaps significant, after taking into account our hedging
strategies. Further, the nature and timing of our hedging transactions could actually increase our risk and losses. In addition, hedging
strategies involve transaction costs and other costs. Our hedging strategies and the derivatives that we use and may use may not
adequately mitigate or offset the risk of interest rate volatility, and our hedging transactions may result in losses.
Because we use assumptions about factors to determine the insurance provisions, deferred acquisition costs (‘DAC’) and
value of business added (‘VOBA’), the use of different assumptions about these factors may have an adverse impact on our
results of operations.
The establishment of insurance provisions, including the impact of minimum guarantees which are contained within certain variable
annuity products, the adequacy test performed on the provisions for life policies and the establishment of DAC and VOBA are inherently
uncertain processes involving assumptions about factors such as court decisions, changes in laws, social, economic and demographic
trends, inflation, investment returns, policyholder behaviour (e.g., lapses, persistency, etc.) and other factors, and, in the life insurance
business, assumptions concerning mortality, longevity and morbidity trends.
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2.4 Additional information
Risk factors (continued)