Insurance contracts

12 Months Ended

Dec. 31, 2022

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 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


	2022 1)						2021 1)
Estimated approximate effect	On shareholders’ equity			On net result			On shareholders’ equity			On net result
20% increase in lapse rates		(1	)		1			108			109
20% decrease in lapse rates		(12	)		(16	)		(110	)		(115	)
5% increase in mortality rates		(140	)		(147	)		340			295
5% decrease in mortality rates		(50	)		(46	)		(434	)		(378	)
10% increase in morbidity rates		(389	)		(394	)		(292	)		(284	)
10% decrease in morbidity rates		108			109			178			175

1	Includes the approximate effects of the disposal group

34.2 Insurance contracts for general account


	2022		2021
Life insurance		75,084		110,691
Non-life insurance
- Unearned premiums and unexpired risks		6,181		6,548
- Outstanding claims		1,683		2,247
- Incurred but not reported claims		460		816
Incoming reinsurance		3,901		4,120
At December 31		87,309		124,422

The decrease in Insurance contracts for general account in 2022 is mainly the result of the classification of Aegon the Netherlands as held for sale and discontinued operations, refer to note 51 Discontinued operations.


	2022		2021
Non-life insurance:
- Accident and health insurance		8,324		9,374
- General insurance		-		237
Total non-life insurance		8,324		9,611


Movements during the year in life insurance:	2022			2021
At January 1		110,691			109,062
Disposals		(576	)		-
Portfolio transfers and acquisitions		(18	)		(26	)
Gross premium and deposits – existing and new business		6,070			6,033
Unwind of discount / interest credited		3,593			4,037
Insurance liabilities released		(10,364	)		(9,490	)
Changes in valuation of expected future benefits		(2,840	)		(1,635	)
Loss recognized as a result of liability adequacy testing		(2,239	)		(236	)
Shadow accounting adjustments		(3,352	)		(1,821	)
Net exchange differences		4,338			4,713
Transfer (to) / from reinsurance assets		273			36
Transfers to disposal groups		(30,491	)		-
Other		-			17
At December 31		75,084			110,691


Sensitivity analysis of net result and shareholders’ equity	Estimated approximate effects on net result			Estimated approximate effects on shareholders’ equity
2022 1)
Shift up 50 basis points - Bond credit spreads		(237	)		(1,463	)
Shift down 50 basis points - Bond credit spreads		233			1,567
Shift up 50 basis points - Mortgage spreads		(314	)		(280	)
Shift down 50 basis points - Mortgage spreads		156			190
Shift up 5 basis points - Liquidity premium		97			129
Shift down 5 basis points - Liquidity premium		(77	)		(42	)

2021 1)
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	)

1	Includes the approximate effects of the disposal group


Movements during the year in non-life insurance:	2022			2021
At January 1		9,611			9,118
Disposals		(115	)		(25	)
Portfolio transfers and acquisitions		-			1
Gross premiums – existing and new business		1,310			1,508
Unwind of discount / interest credited		536			479
Insurance liabilities released		(1,198	)		(992	)
Changes in valuation of expected future claims		41			(36	)
Change in unearned premiums		(488	)		(731	)
Change in unexpired risks		-			-
Incurred related to current year		642			670
Incurred related to prior years		262			267
Release for claims settled current year		(211	)		(269	)
Release for claims settled prior years		(822	)		(757	)
Shadow accounting adjustments		(734	)		(153	)
Change in IBNR		(98	)		(59	)
Net exchange differences		550			592
Transfers to disposal groups		(961	)		-
Other		-			(1	)
At December 31		8,324			9,611


Movements during the year in incoming reinsurance:	2022			2021
At January 1		4,120			3,965
Gross premium and deposits – existing and new business		1,142			1,276
Unwind of discount / interest credited		199			192
Insurance liabilities released		(1,885	)		(1,562	)
Changes in valuation of expected future benefits		91			(36	)
Shadow accounting adjustments		(30	)		(7	)
Loss recognized as a result of liability adequacy		(11	)		(3	)
Net exchange differences		276			296
Other		(2	)		(1	)
At December 31		3,901			4,120

34.3 Insurance contracts for account of policyholders


Insurance contracts for account of policyholders	2022			2021
At January 1		149,323			135,441
Disposal of a business		(192	)		-
Portfolio transfers and acquisitions		(73	)		(547	)
Gross premium and deposits – existing and new business		4,831			5,532
Unwind of discount / interest credited		(24,402	)		14,994
Insurance liabilities released		(10,190	)		(13,199	)
Fund charges released		(1,681	)		(1,680	)
Changes in valuation of expected future benefits		(1,121	)		(145	)
Transfer (to) / from insurance contracts		(284	)		783
Net exchange differences		3,773			8,144
Transfers to disposal groups		(19,577	)		-
Other		-			1
At December 31		100,409			149,323