Insurance contracts

12 Months Ended

Dec. 31, 2021

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Insurance contracts

34 Insurance contracts

34.1 Underwriting risk

Aegon’s earnings depend significantly upon the extent to which actual claims experience differs from the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, Aegon may be required to change best estimate assumptions for future claims which could increase the required reserves for these future claims, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the statement of financial position and are being amortized into the income statement over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs should there be an expectation of unrecoverability. This could have a materially adverse effect on Aegon’s business, results of operations and financial condition.

Sources of underwriting risk include policyholder behavior (such as lapses, surrender of policies or partial withdrawals), policy claims (such as mortality, longevity or morbidity) and expenses. For some product lines, Aegon is at risk if policy lapses increase as sometimes Aegon is unable to fully recover upfront expenses in selling a product despite the presence of commission recoveries or surrender charges and fees. There are also products where Aegon is at risk if lapses decrease, for example where this would result in a higher utilization rate of product guarantees. For mortality and morbidity risk, Aegon sells certain types of policies that are at risk if mortality or morbidity increases, such as term life insurance and accident insurance, Aegon also sells certain types of policies that are at risk if mortality decreases (longevity risk) such as annuity products. Aegon is also at risk if expenses are higher than the expenses assumed beforehand by management and that were priced into the products.

Aegon monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is performed on earnings and reserve movements in order to understand the source of any material variation in actual results from what was expected. Aegon’s units also perform experience studies for underwriting risk assumptions, comparing Aegon’s experience to industry experience as well as combining Aegon’s experience and industry experience based on the depth of the history of each source to Aegon’s underwriting assumptions. Where policy charges are flexible in products, Aegon uses these analyses as the basis for modifying these charges, with a view to maintain a balance between policyholder and shareholder interests. Aegon also has the ability to reduce expense levels over time, thus mitigating unfavorable expense variation.

Another way to mitigate underwriting risk is through reinsurance. Aegon uses reinsurance to primarily manage and diversify risk, limit volatility, improve capital positions, limit maximum losses and gain access to reinsurer support. While the objectives and use can vary by region due to local market considerations and product offerings, the use of reinsurance is coordinated and monitored globally.

The key areas where reinsurance is used is to reduce our exposure to mortality and morbidity risk primarily through a combination of quota-share and Excess of Loss reinsurance. Also, Excess of Loss reinsurance is used to limit our exposure to large losses on non-life business. In addition, in recent years in the Netherlands, we have used longevity reinsurance to manage our longevity exposure in line with our Risk Appetite, and Aegon the Netherlands entered into a new contract taking the level of longevity reinsurance to around 40% in December 2021.

In order to minimize its reinsurer defaults exposure, Aegon regularly monitors the creditworthiness of its reinsurers, and where appropriate, arranges additional protection through letters of credit, trust agreements and over-collateralization. For certain agreements, funds are withheld for investment rather than relying on the reinsurer to meet investment expectations. Default exposure is further reduced by using multiple reinsurers within certain reinsurance agreements.

External reinsurance counterparties are, in general, major global reinsurers. At the same time, local reinsurers are utilized to ensure a balance for local capacity and diversification.

Sensitivity analysis of net result and shareholders’ equity to various underwriting risks is shown in the table that follows. Aegon’s best estimate assumptions already include expected future developments and the sensitivities represent an increase or decrease of lapse rates, mortality rates and morbidity rates, compared to Aegon’s best estimate assumptions. These underwriting sensitivities were run using a permanent shock applied to all of Aegon’s products, exposed to an increase and to a decrease in the rates. The table below indicates that the morbidity sensitivity has the largest impact and in aggregate, Aegon is exposed to a decrease in mortality rates.

Sensitivity analysis of net result and shareholders’ equity to changes in various underwriting risks

	2021						2020
Estimated approximate effect	On shareholders’ equity			On net result			On shareholders’ equity			On net result
20% increase in lapse rates		70			71			(151	)		156
20% decrease in lapse rates		(67	)		(72	)		47			(157	)
5% increase in mortality rates		(83	)		(90	)		52			344
5% decrease in mortality rates		33			48			(217	)		(354	)
10% increase in morbidity rates		(213	)		(205	)		(225	)		(235	)
10% decrease in morbidity rates		99			96			134			140

34.2 Insurance contracts for general account

	2021		2020
Life insurance		110,691		109,062
Non-life insurance
- Unearned premiums and unexpired risks		6,548		6,117
- Outstanding claims		2,247		2,120
- Incurred but not reported claims		816		881
Incoming reinsurance		4,120		3,965
At December 31		124,422		122,146

	2021		2020
Non-life insurance:
- Accident and health insurance		9,374		8,887
- General insurance		237		231
Total non-life insurance		9,611		9,118

Movements during the year in life insurance:	2021			2020
At January 1		109,062			109,310
Portfolio transfers and acquisitions		(26	)		(29	)
Gross premium and deposits – existing and new business		6,033			6,758
Unwind of discount / interest credited		4,037			3,725
Insurance liabilities released		(9,490	)		(9,557	)
Changes in valuation of expected future benefits		(1,635	)		1,918
Loss recognized as a result of liability adequacy testing		(236	)		903
Shadow accounting adjustments		(1,821	)		1,419
Net exchange differences		4,713			(5,842	)
Transfer (to) / from reinsurance assets		36			(12	)
Transfer (to) / from insurance contracts for account of policyholders		-			465
Other		17			3
At December 31		110,691			109,062

The LAT deficit per December 31, 2021 in Aegon the Netherlands amounted to EUR 5.2 billion (2020: EUR 7.0 billion), which was partially offset by the shadow loss recognition of EUR 3.0 billion (2020: EUR 4.5 billion), resulting in a net deficit of EUR 2.2 billion (2020: EUR 2.5 billion).

During 2021, the net LAT deficit of Aegon the Netherlands reduced by EUR 0.3 billion, which is recorded in the income statement. The net LAT deficit was positively impacted by the impact of higher interest rate of EUR 0.7 billion (2020: EUR 1.5 billion negative) and positive credit spread movements (tightened mortgage spreads and liquidity premium) of EUR 0.4 billion (2020: EUR 0.3 billion negative). This was partly offset by other unfavorable impacts (model and assumptions updates and portfolio changes) totaling EUR 0.9 billion (2020: EUR 1.0 billion positive).

As a result of the current deficit, changes in the LAT of Aegon the Netherlands, triggered by up or down movements in interest rates, are directly recognized in the income statement. However, net result is less sensitive to interest rate movements as the results from interest rate hedging are also recognized in net result.

Furthermore, as a result of the current negative LAT deficit position, results are volatile due to changes in credit spreads as these are not hedged. Please find below the estimated sensitivities on shareholders’ equity and on net result, for up and down shocks for credit spreads, mortgage spreads for the bond and mortgage portfolio and liquidity premium shocks for general account insurance liabilities.

Sensitivity analysis of net result and shareholders’ equity	Estimated approximate effects on net result			Estimated approximate effects on shareholders’ equity
2021
Shift up 50 basis points - Bond credit spreads		(192	)		(2,418	)
Shift down 50 basis points - Bond credit spreads		169			2,387
Shift up 50 basis points - Mortgage spreads		(444	)		(401	)
Shift down 50 basis points - Mortgage spreads		452			496
Shift up 5 basis points - Liquidity premium		136			178
Shift down 5 basis points - Liquidity premium		(148	)		(104	)
2020
Shift up 50 basis points - Bond credit spreads		(185	)		(1,998	)
Shift down 50 basis points - Bond credit spreads		172			1,873
Shift up 50 basis points - Mortgage spreads		(449	)		(449	)
Shift down 50 basis points - Mortgage spreads		476			477
Shift up 5 basis points - Liquidity premium		162			159
Shift down 5 basis points - Liquidity premium		(164	)		(161	)

Movements during the year in non-life insurance:	2021			2020
At January 1		9,118			9,190
Disposals		(25	)		-
Portfolio transfers and acquisitions		1			6
Gross premiums – existing and new business		1,508			1,551
Unwind of discount / interest credited		479			499
Insurance liabilities released		(992	)		(1,080	)
Changes in valuation of expected future claims		(36	)		77
Change in unearned premiums		(731	)		(724	)
Change in unexpired risks		-			2
Incurred related to current year		670			670
Incurred related to prior years		267			259
Release for claims settled current year		(269	)		(257	)
Release for claims settled prior years		(757	)		(860	)
Shadow accounting adjustments		(153	)		385
Change in IBNR		(59	)		117
Net exchange differences		592			(709	)
Other		(1	)		(6	)
At December 31		9,611			9,118

Movements during the year in incoming reinsurance:	2021			2020
At January 1		3,965			4,385
Gross premium and deposits – existing and new business		1,276			1,306
Unwind of discount / interest credited		192			203
Insurance liabilities released		(1,562	)		(1,656	)
Changes in valuation of expected future benefits		(36	)		66
Shadow accounting adjustments		(7	)		8
Loss recognized as a result of liability adequacy		(3	)		10
Net exchange differences		296			(358	)
Other		(1	)		2
At December 31		4,120			3,965

34.3 Insurance contracts for account of policyholders

Insurance contracts for account of policyholders	2021			2020
At January 1		135,441			135,710
Portfolio transfers and acquisitions		(547	)		(64	)
Gross premium and deposits – existing and new business		5,532			7,030
Unwind of discount / interest credited		14,994			13,858
Insurance liabilities released		(13,199	)		(10,160	)
Fund charges released		(1,680	)		(1,644	)
Changes in valuation of expected future benefits		(145	)		(266	)
Transfer (to) / from insurance contracts		783			(465	)
Net exchange differences		8,144			(8,558	)
Other		1			-
At December 31		149,323			135,441