ING Direct 2013 Annual Report Download - page 362

Solvency II, if implemented, will effect a full revision of the insurance industry’s solvency framework and prudential regime and will impose
group-level supervision mechanisms. On 14 November 2013, the EC announced that an agreement had been reached between the
European Parliament, the EC and the European Council on the ‘Omnibus II Directive’, which, once adopted, will amend certain aspects of
the original Solvency II Directive. Notably, the proposal for the Omnibus II Directive contains important provisions that would allow the
insurance industry to continue offering long-term guaranteed products (typically life insurance policies being paid out in a lump sum when
the policyholder reaches a certain age or in the form of annuities) and ensure that insurance companies in general and life assurance
companies in particular can match these long-term liabilities with investments in long-term assets, such as infrastructure projects. The
European Parliament and the EC further agreed that the new rules of Solvency II (including the amendments introduced by the Omnibus II
Directive) should apply as of 1 January 2016. In addition, the EC is continuing to develop the detailed rules that will complement the
high-level principles of the Solvency II Directive, referred to as ‘implementing measures’. The implementing measures are not currently
expected to be finalised until the Omnibus II Directive has entered into force. There continues to be uncertainty regarding the timeline and
final outcome of this process, and we are unable to predict precisely how the regulations resulting from such initiatives and proposals
could affect the insurance industry generally or our results of operations, financial condition and liquidity in particular. Significant efforts
towards establishing a more cohesive and streamlined European supervisory framework, including the establishment of the European
Systemic Risk Board and the EIOPA, may also affect the Group’s operations.
Theoretical Solvency Criterion regulation in the Netherlands (also known as Solvency 1.5)
In anticipation of the more risk-based approach under Solvency II, the Dutch legislator has, inter alia, subjected Dutch life insurance
companies to the Theoretical Solvency Criterion (‘TSC’) (also known as Solvency 1.5), which reflects a minimum solvency margin required in
certain stress scenarios. The TSC is calculated on an annual basis, and the scenario analysis is based on specific risks, including interest rate
risk, equity risk, spread risk, property risk, longevity risk and mortality risk. The TSC applies to NN’s life insurance business in the Netherlands.
If the solvency position of the relevant NN life insurance entity is below the TSC, DNB is entitled to require that a declaration of no objection
be obtained from DNB before making any distributions of capital (including dividends) and reserves to the Company. In determining whether
to give that approval, DNB must be satisfied that the life insurance company will have sufficient available regulatory capital for at least the
following 12 months. Available regulatory capital is determined on a market-based basis under the Dutch Financial Supervision Act and is
therefore subject to fluctuations. There is a risk that the entities that conduct NN’s life insurance business may not meet the TSC and that
DNB may not permit those entities to distribute dividends or reserves to the Company. This could affect the Company’s ability to meet its
obligations to its creditors. In addition, the TSC may make it more difficult for NN to attract capital than those of its peers that are not
subject to such similar requirements under their local laws. DNB has used, and may use, its discretionary powers to give instructions on the
application of the Company’s funds to strengthen the capital position of its Dutch regulated subsidiaries to levels above minimum regulatory
capital requirements, which has affected, and will affect, the ability of the Company to meet its obligations to its creditors. The TSC is also
relatively new legislation and there is uncertainty as to how it will be interpreted and implemented by DNB, with the risk that DNB interprets
and implements the requirements in a manner that is more onerous for NN Group than NN Group currently anticipates.
EU Insurance Guarantee Scheme
In July 2010, the EC released a white paper detailing the need to establish minimum levels of protection for consumers of life and non-life
insurance products in the event that insurance companies in the EU with which they do business were to become insolvent. Though the
mechanisms for providing any such protections remain under review by the EC, the European Parliament and the Member States, the EC
may currently be considering providing this protection by (i) mandating the creation of (or harmonisation of existing) national-level
insurance guarantee schemes and/or (ii) implementing an EU-wide insurance guarantee scheme, which such scheme(s) may require
significant prefunding by insurance companies. As of 31 December 2013, no legislative proposal has been made at the EU level. However,
the implementation of an insurance guarantee scheme requiring significant levels of prefunding (or, in the event that prefunding is not
required, the occurrence of circumstances requiring the commencement of event-driven contributions) may have a material and adverse
impact on the liquidity, financial condition and operations of companies engaged in the insurance business, including us.
Single Supervisory Mechanism
In October 2013, the European Council adopted a single supervisory mechanism (‘SSM’), to be composed of national competent
authorities and the European Central Bank (‘ECB’), as part of the prospective EU banking union. In the SSM, a significant part of the
prudential regulatory powers will be transferred from national authorities of the participating Member States to the ECB and that the ECB
will assume direct responsibility for a significant part of the prudential supervision of ING Bank and its holding company, ING Group. On
23 October 2013, the ECB announced details of a comprehensive assessment of large banks to be conducted in cooperation with national
supervisory authorities of Member States participating in the SSM. The assessment, which consists of a risk assessment, an asset quality
review and a stress test, started in November 2013 and is expected to be conducted over a twelve-month period in preparation of the ECB
assuming full responsibility for supervision as part of the SSM in November 2014. ING Bank is among the seven Dutch institutions to be
covered by the assessment (out of more than 120 institutions overall). The SSM will create a new system of financial supervision for
countries within the Eurozone, with the possibility of non-Eurozone Member States participating by means of close cooperation. While it is
at this stage difficult to identify what exact impact the SSM will have on ING Bank and ING Group, it is expected that the SSM will have a
significant impact on the way ING’s banking operations are supervised in Europe.
Dodd-Frank Act
On 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘Dodd-Frank’ or ‘Dodd-Frank Act’) was signed into
law in the U.S. The Dodd-Frank Act effects comprehensive changes to the regulation of financial services in the U.S. and has implications
Risk factors continued
360 ING Group Annual Report 2013