ING Direct 2011 Annual Report Download - page 311

In addition, certain statutory capital and reserve requirements are based on formulas and models that consider interest rates, and an
extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must
maintain to support statutory reserves.
Rapidly increasing interest rates may result in:
• decrease the demand for loans;
• increase in policy loans, and withdrawals and surrenders of life insurance policies and fixed annuity contracts 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;
• prepayment losses if prepayment rates are lower than expected or if interest rates increase to rapidly to adjust the accompanying hedges.
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. Going forward the Dutch Deposit Guarantee Scheme
will change from an ex-post scheme, where we contribute after the failure of a firm, to an ex-ante scheme where we pay yearly
contributions to ensure the scheme holds a target level of fund regardless of whether any failures occur. The costs associated with
potential future yearly contributions are today unknown, but given our size may be significant.
RISKS RELATED TO THE GROUP’S BUSINESS, OPERATIONS, AND REGULATORY ENVIRONMENT
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, either directly as a counterparty or as a credit support provider to affiliate counterparties.
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, liabilities, 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. Hedging strategies involve transaction costs and other costs,
and 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.
Our hedging strategy additionally relies on the assumption that hedging counterparties remain able and willing to provide the hedges
required by our strategy. Increased regulation, market shocks, worsening market conditions (whether due to the ongoing Euro crisis or
otherwise), and/or other factors that affect or are perceived to affect the financial condition, liquidity and creditworthiness of ING may
reduce the ability and/or willingness of such counterparties to engage in hedging contracts with us and/or other parties, affecting our
overall ability to hedge our risks and adversely affecting our business, operations, financial condition and liquidity.
Risk factors continued
1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
309ING Group Annual Report 2011