low interest rate environment
COVID-19 / repeated pandemics
impact of supervision, laws and regulations and juridification of society
climate change and energy transition
pressure on business model
IT / cyber risk
In 2021 interest rates remained at historically low levels, partly due to the quantitative easing of central banks that was expanded during COVID-19. This potentially puts pressure on capital generation. Since returns on regular bonds are unattractive, demand for other assets went up and pushed their valuations to higher levels. The risk of a negative price correction may have increased.
The solvency and interest rate position are continuously monitored and findings are reported to the FRC. The consequences of potentially low investment returns and fluctuations in interest rates and inflation are examined in more detail in the annual SAA study, the annual Own Risk and Solvency Assessment (ORSA) and the quarterly balance sheet prognosis.
In December 2019, a pneumonia outbreak was reported in China which in 2020 rapidly developed into what is now commonly referred to as COVID-19. COVID-19 has resulted in a significant number of confirmed cases of infection and untimely deaths in large portions of the world, including the Netherlands. Globally, governments are taking various measures to contain the outbreak. In the Netherlands, the Dutch government issued a series of far-reaching measures to stop the spread of COVID-19. Both COVID-19 and the countermeasures have had a significant impact on Dutch society and the economy. The economic impact was mitigated in the short-term by significant economic relief programmes presented by the government to support both companies and individuals financially impacted by COVID-19. The longer term economic impact of the countermeasures taken to mitigate COVID-19 is uncertain. For more details on the impact on a.s.r., see the explanation of the non-financial risks regarding the operational impact on a.s.r. and the explanation of financial risks regarding the financial implications on a.s.r.
a.s.r.’s reputation will suffer if new requirements are not complied with in time.
Available resources will largely be utilised to align the organisation with new legislation, leaving fewer resources to spend on core customer processes.
Processes will become less efficient and pressure on the workforce will increase.
a.s.r. will have administrative fines or sanctions imposed on it for failure to comply with requirements (on time).
Regulatory solvency position and / or performance change due to changes in regulations and supervision, such as IFRS 9, IFRS 17, and Solvency II.
a.s.r. constantly monitors changing laws and regulations and assesses their impact and the corresponding actions required. The availability of capacity is also continuously monitored to ensure that there are sufficient resources to process all regulations in a timely manner. a.s.r. has a multidisciplinary legislation and regulation committee to help the various businesses signal and adopt legislative amendments in good time. The committee reports to the NFRC.
CDD risk (including anti-money laundering) remains relevant for a.s.r. in order to guarantee sound and controlled business operations. To mitigate the risks of non-compliance relating to CDD, a.s.r. centralised a major part of its CDD screening and tooling. The central CDD desk consisting of Compliance, Investigations, Legal and representatives of the business lines plays a key role in ensuring a consistent screening approach within a.s.r. The CDD desk also functions as an expertise centre.
The Group has become subject to increasing sustainability regulations, such as Regulation (EU) 2019/2088 of 10 March 2021 relating to disclosures (SFDR), and may also become subject to Regulation (EU) 2020/852 (partially) from 1 January 2022 relating to a framework to facilitate sustainable investment (the EU Taxonomy Regulation). These regulations will require the Group to include information at entity and product level as to whether certain financial products take account of an adverse impact on sustainability, promote environmental or social characteristics and meet one or more of the environmental targets set out in the EU Taxonomy Regulation. The EU Taxonomy Regulation will also require the Group to include in its non-financial statement how and to what extent the Group’s activities are associated with economic activities that qualify as environmentally sustainable. The sustainability regulations also include the amendment of existing directives and regulations such as Solvency II, Insurance Distribution Directive (IDD), Markets in Financial Instruments Directive (MiFID II), Alternative Investment Fund Managers Directive (AIFMD), and Benchmarks Regulation (BMR). The sustainability regulations will therefore also have an impact on product development and advice, Know Your Customer (KYC), risk management, solvency requirements and the disclosure of financial products. Since some of the sustainability regulations are still being developed, their full impact on the Group is as yet unclear. The Group will have to implement these regulations and is likely to have to implement more sustainability-related regulations in the future.
In June 2020, the International Accounting Standards Board (IASB) published the revised International Financial Reporting Standard 17 (IFRS 17) which was endorsed by the EU. The new standard for insurance contracts will replace the existing IFRS 4 standard and will be effective from 1 January 2023. IFRS 17 is designed to facilitate comparability between insurers and to increase transparency in relation to risks, contingencies, losses and embedded options in insurance contracts. IFRS 9 Financial Instruments was published in July 2014 and will have a major impact on the accounting of financial instruments (investments). In order to maintain cohesion between the two standards, a.s.r. applies the option in IFRS 4 which allows for the deferral of the implementation of IFRS 9 until the implementation of IFRS 17 in 2023. Since 2017, a.s.r. has had an internal programme in place to prepare for the implementation of IFRS 17 and IFRS 9 throughout the Group. IFRS 17 and IFRS 9 will have a major impact on the Group’s primary financial processing and reporting and could have a significant effect on financial statements and related KPIs. Finance, Risk, Audit and the business lines have all been given attention in the programmes due to the need to develop an integrated vision. For more information see chapter 6.3.3.
On 22 September 2021, the European Commission adopted a review package of Solvency II legislation. It consists of various changes to the Solvency II framework, affecting most notably the liability discount curve, the risk margin and the volatility adjustment (VA). The next step is for the European Parliament and the member states in the Council to negotiate the final legislative texts based on the Commission's proposals. The changes are expected to take effect in 2024 at the earliest and some measures will include a phase-in period of up to eight years, to 2032.
Political, regulatory and public attention has focused on unit-linked life insurance policies for some time now. Elements of a.s.r.’s unit-linked life insurance policies are challenged on multiple legal grounds in current legal proceedings and may continue to be challenged in the future. There is a risk that one or more of the current and / or future claims and / or allegations will be upheld. To date, a number of rulings relating to unit-linked life insurance products have been issued by the Financial Services Complaints Board (FSCB) and (appeal) courts in the Netherlands against a.s.r. and other insurers in specific cases. In these proceedings, different (legal) approaches have been taken to arrive at a ruling. The outcomes of these rulings are varied. Since the record of (a.s.r.’s) policies dates back many years, it contains a wide variety of products with different features and conditions and, since rulings are so diverse, no reliable estimate can be made of the timings and outcomes of these current and future legal proceedings. Although the financial consequences of these developments could be substantial, a.s.r.’s exposure cannot be reliably estimated or quantified at this point.
If one or more of these legal proceedings succeed, there is a risk that a ruling, though only legally binding for the parties involved in the proceedings, could be applied to, or be relevant for, other unit-linked life insurance policies sold by a.s.r. Consequently, the consequences of any current and / or future legal proceedings brought upon a.s.r. could be substantial for a.s.r.’s life insurance business and have a potential materially adverse effect on a.s.r.’s financial position, business, reputation, revenues, operating results, solvency, financial condition and / or prospects.
a.s.r. is currently subject to three collective actions. The claims are all based on similar grounds and have been rejected by a.s.r. a.s.r. is defending itself in these legal proceedings. The timing and outcome of these collective actions is currently uncertain and deferred. The main reason for this deferral lies with developments regarding preliminary questions from the High Court of The Hague towards the Supreme Court in the proceedings (Collective Action) between Woekerpolis.nl and another Dutch insurer.
On 12 February 2022, the Supreme Court has answered the preliminary questions from Court of Appeal The Hague on information obligations for unit-linked policies. The Supreme Court primarily considers that Dutch civil law is applicable to the legal relationship between insurer and insured. It is up to lower courts to decide whether Dutch civil law entails obligations to provide information in addition to the obligations arising from specific regulations and, if so, which obligations. The Supreme Court holds that potential additional information obligations must satisfy the criteria formulated by the Court of Justice of the EU in 2015. The collective actions against a.s.r. that have been deferred in view of the preliminary questions before the Supreme Court, will be resumed.
In 2008, a.s.r. concluded an outline agreement with two leading consumer protection organisations to offer compensation to unit-linked policyholders if the cost and / or risk premium exceeded a specified maximum. A full agreement on the implementation of the compensation scheme was reached in 2012. The total recognised cumulative financial costs relating to the compensation scheme for Individual life in a.s.r.’s income statement up to 2021 was € 1,025.5 million. This includes, amongst other things, compensation paid, amortisation of surrender penalties and costs relating to improved product offerings. The remaining provision in the balance sheet as at 31 December 2021 amounted to € 42.7 million and is available only to cover potential additional compensation (for distressing cases and costs relating to the compensation scheme). Individual cases have a limited impact on the risk profile.
Climate change brings opportunities and risks for a.s.r., its customers and society at large. On the one hand, climate-related risks have an impact on the investment portfolio and the cost of claims. On the other hand, a.s.r. can make a positive contribution to climate mitigation and adaptation through its investments, products and / or services.
The physical risks associated with climate-induced extreme weather events.
Loss of biodiversity.
Transition risks associated with the energy transition.
Reputational risks associated with consumer sentiment towards financial institutions.
Regulation and litigation risks as announced under the EU Strategic Finance Action Plan (EU SFAP).
Physical risks, such as extreme weather events, drought and floods, could increase claims on a.s.r.’s insurance policies and potentially push up the costs of a.s.r.’s real estate portfolio. In the event of extreme weather events, the claim patterns of P&C insurance policies will become more unpredictable since it will become more difficult to gauge the likelihood of extreme weather.
Loss of biodiversity can accelerate climate change. Loss of biodiversity not only entails risks for nature and society, but also financial risks, e.g. for a.s.r.’s agricultural portfolio.
The extent of transition risks and their impact depend in part on the speed of the energy transition, government policies, technological developments and changing consumer behaviour. An abrupt climate transition will potentially have major consequences for the economy, business models and financial stability.
Climate change is a source of reputational risk as consumer sentiment towards organisations regarding the organisation’s contribution to the energy transition is changing. a.s.r. assists the transition to a low carbon economy through its impact investing and by developing products and services that take the energy transition into account. a.s.r. also invests in its own office building and parking facilities to make it more sustainable: e.g. in 2021 many solar panels and a bi-directional charging system for electric cars were added.
The EU SFAP entails a large amount of new regulation which must be interpreted and implemented in a short period of time. At the same time, not all regulation is as yet definitive. This entails the risk that a.s.r. will make incorrect interpretations which could lead to negative publicity and / or fines and lawsuits.
See chapter 4.5 for more detailed information on climate-related risks and opportunities, and a.s.r.’s approach to addressing climate change and scenario analysis.
This risk priority concerns the contraction of the individual life insurance market combined with a more competitive insurance market, leading to margin and volume decreases. The shrinkage in the life portfolio is proceeding more slowly than initially anticipated and will continue to make a significant contribution to both the organic capital creation (OCC) and the operating result in the coming years. a.s.r. continually monitors and assesses its product portfolio and distribution channels for relevant alterations in order to meet changing customer needs and to achieve planned cost reductions as premiums fall. For example, it actively monitors the market to examine potential acquisitions or mergers.
IT risk, including cyber, is constantly increasing and evolving. Malicious actors are (covertly) probing and intruding, pushing the development of more sophisticated attacks. The battle against cybercrime is ongoing and continued to dominate risk reports in 2021, especially with regard to ransomware attacks. In order to be cyber resilient, a.s.r. has a centralised programme to improve its cyber capabilities such as identification, protection, detection, respond and recover.
Digitalisation is an important strategic target for a.s.r., one which requires the trust of customers in a.s.r.’s digital services. To build this trust, a.s.r. continues to monitor the threat landscape and invests accordingly in prevention, detection and response skills and technology to strengthen its cyber resilience. At the same time, digitisation is leading to growing dependencies in the value chain ecosystem. The focus on, and increased awareness for, cyber risks is therefore a continuous challenge for both a.s.r. and its value chain ecosystem. Cloud and cloud security are important aspects of digitalisation. In 2021 a.s.r. further strengthened its ability to protect itself against malicious actors for the on premises and cloud solutions.
a.s.r. is also actively involved in partnerships with financial institutions and public agents, such as the Nationaal Cyber Security Centrum (National Cyber Security Centre (NCSC)), i-CERT and DNB Threat Intelligence-Based Ethical Red team programme (TIBER-NL), to share information and improve the resilience of the financial industry against cyber risks. Cyber resilience is important for a.s.r., and in 2021 it therefore took part in a TIBER exercise for the second time.
changes in society and deglobalisation
If the life expectancy of a.s.r.’s policyholders improves significantly compared to current (expected) mortality due to relatively sudden (medical and / or technological) developments in health care there is a chance that a.s.r.'s policyholders will live significantly longer compared to the current mortality assumptions, this will have an impact on a.s.r. Some improvements and unexpected breakthroughs could even ultimately result in a lower solvency for a.s.r. a.s.r. monitors the longevity developments of its own portfolio, and mitigating measures such as longevity reinsurance are continuously analysed from a risk management perspective. Based on the analysis, it was concluded that the longevity risk could if necessary be reinsured and therefore it could be considered as a lower emerging risk.
Society seems to continue to fragment and further polarise, also solidarity is declining. If these trends continue, this may impact customer behaviour, customer expectations and demand for insurance products. There is a trend of growing populism in many countries, leading to deglobalisation. Populist leaders tend to favour protectionist measures such as trade tariffs. This could result in less cross-border trade and lower economic growth, with a potential impact on the returns on a.s.r.’s investment portfolio. a.s.r.’s investment department regularly assesses the economic outlook and its impact on the asset classes’ risks and return. Relevant developments such as deglobalisation are taken into account.
The effect of COVID-19 and the measures taken by the Dutch government are impacting a.s.r.’s technical result in the life and non-life business. The effect on the individual life business is limited due to excess mortality in old age (70+) in the Netherlands. Excess mortality has impacted (limited) the funeral and pension business. The effects of COVID-19 , and in particular the (movement-limiting) measures taken by the Dutch government, have had a significant effect on the claims portfolio. While it was expected at an earlier stage that the measures would lead to a higher business discontinuity, which could lead to a possible shrinkage in the commercial non-life portfolio, a.s.r. does not currently see these effects in its portfolio due to, among other things, the additional support measures from the government. The direct effect of the lockdown is obviously visible in the restriction of the freedom of movement, with vehicle insurance claims lower than in a normal year. The counterpart at a lower level are the short and long-term effects within Disability. Here a.s.r. sees an increase in sickness reports, but there are significant differences per sector, and a decrease in rehabilitation because many partial recovery / reintegration processes are currently faltering (the aid sector is also largely down / cannot do physical business). Due to the size and diversity of the claims portfolio, the underlying results compensate for the total level.
At this point in time, there remains uncertainty over the long-term effects and the impact of COVID-19 on the global economy and financial markets. As stated earlier in this report, a.s.r. is financially healthy and its capital position is solid. a.s.r. continues to closely monitor the impact of COVID-19 on the operating performance of its various business lines. a.s.r. furthermore continues to monitor the potential IFRS impact relating to the valuation of financial instruments and valuation of technical provisions which are sensitive to developments in the (long-term) interest rates.
In 2021, the Actuarial Society analysed the potential impact of COVID-19 on life expectancy in the Netherlands and concluded that it had no material impact and also that the 2020 mortality table was still valid.
Inflation went up in the last two years, contrary to the development in interest rates, and had a negative impact on the solvency ratio. Divergence of interest rates and inflation is expected to disappear in time and not to grow. Although, a longer period of divergence is not unimaginable. The sensitivity of the Solvency II ratio is +10%-points in case of an interest of +1.0% and -2% in case of an inflation of +0.3%. Based on historical data, correlation exists between increased interest and higher inflation, the combined sensitivity in case of an interest of +1.0% and an inflation of +0.3% is +8%-points.
In the first half of 2021, the Central Crisis Team (CCT) continued to manage the impact of COVID-19. a.s.r.’s offices gradually reopened on 25 May to allow meetings and face-to-face gatherings to take place once more. The CCT was scaled down as of 18 June; the COVID-19 working group remained active to prepare decision-making on COVID-19 related issues. After the government dropped the 1.5 meter measure, the offices opened their doors to more employees from 25 September, whilst retaining a number of measures to regulate use and prevent too many people from visiting the offices. In response to the fourth wave of infections and in line with government advice, all employees worked from home from 15 November till 31 December; the a.s.r. offices were only open for necessary work.
a.s.r. has identified strategic and operational risks relating to COVID-19. For Disability (reduction of COVID-19 support measures) and Europeesche Verzekeringen (modified strategy), the possible consequential loss due to the increased (economic) uncertainty relating to COVID-19 is classified as a strategic high risk and thus potentially affects long-term value creation. The impact on a.s.r.’s operational processes in 2021 was also limited. The course of COVID-19 and its long-term consequences for a.s.r., the economy and society are inherently uncertain and might be considerable. There is also a risk that society will see a repetition of new global viral diseases in the future, with similar (global) reflexes to COVID-19.
From an operational perspective, prolonged working from home affects the vitality of employees and the social cohesion of business lines and of a.s.r. as a whole. The measures taken in this regard in 2020, such as virtual employee meetings, training opportunities and online workouts, were continued into 2021. In order to monitor how a.s.r. employees were doing while working entirely from home, a.s.r. continued to deploy the Employee Mood Monitor. The results gave an insight into the pillars of dedication, job satisfaction and vitality and a reason to discuss these issues within teams or use targeted interventions by management.
COVID-19 has clearly shown that employees have been presented with a substantial change as a result of combining working from home with working in the office. In the second quarter of 2021, the policy on office-based working was developed in the wake of the pandemic. It creates a framework for the hybrid situation in which employees work both in the office and at home, and formulates basic principles for implementing this. For example, a.s.r.'s customers and their needs are central; employees work independently of time and place; and employees are given the confidence and space to manage their tasks as they see fit. Another principle is that employees work at least two days a week in the office on average. The office has been upgraded in 2021 to provide new (hybrid) meeting and contact facilities. The implementation of this policy (re-boarding) is a learning and organic process in which adjustments are made when necessary.
In 2021 a.s.r. further strengthened the governance of outsourcing by centralising responsibility for it. Outsourcing risk (internal and external) is managed and reported as part of the overall operational risk. Outsourcing risk remains relevant for a.s.r., especially in view of cyber resilience and growing dependence on suppliers. a.s.r. is fully aware of these potential risks and regulatory developments. An outsourcing framework is in place to define responsibilities, processes, risk assessment and mandatory controls. a.s.r. plans to expand the available information using an external database, which allows it to increase the insight of key suppliers.
Processes can be digitised.
Operations can be made efficient.
The front-end of business can be transformed.
Customer and advisory relationships / connections can be enhanced.
As such, a.s.r. recognises the importance of sound data quality (both financial and non-financial). To uphold the reliability and confidentiality of its data, a.s.r. has an explicit data quality policy in place defining the data quality (including control) framework and data governance. Adherence to this policy is ensured by the three lines of defence risk governance model. With a new Central Data Office and a Data Quality Improvement Programme, additional measures are taken to increase maturity in data management practices.
As mentioned earlier, digitalisation is an important strategic target for a.s.r. Therefore, agility and risk both drive the rate of change as they coincide in digitising the customer experience. Agility breaks down complexity and delivers focus while risk reduces uncertainty and insures value. a.s.r. shifts from traditional to digital communication channels which changes risk exposure and this leads to policy realignment. On an operational level, digitalisation is an enabler to reduce effort in monitoring business processes and to automate risk management controls. At a strategic level, digitalisation enables data-driven insight by combining process and customer experience data. The continuous change that digitalisation brings about requires development risks to be integrated in automated pipelines in order to minimise risks without hindering the continuous delivery of business value.
a.s.r. encourages farmers to work together to accelerate the sustainability transition of the agricultural sector. This is better for the environment and for the farmer’s wallet. Because a.s.r. rewards farmers who are committed to sustainable business operations with a 5 to 10% discount on the ground rent or lease of the agricultural land they have in use from a.s.r.
Dairy farmer Tom ten Kate is one of these farmers. His milk has been going to dairy factory A-ware since 2012, for Albert Heijn’s nature label. Since Tom no longer ploughs his grassland, the soil is healthier and more resistant to climatic extremes. His cows are outside more often and he has chosen for a sustainable land use where carbon is fixed in the soil through organic matter. This makes the soil healthier and more resilient to climate extremes.
Tom completed his business plan when a.s.r. leased 16.5 hectares of additional land to him. Now his cows no longer need any extra feed concentrates and Tom no longer needs to bother himself with the disposal of manure. As a result, his farm emits less carbon and A-ware pays him 5 cents per litre more than the basic price for milk.