Market risk is the risk of potential losses due to adverse movements in financial market variables. Exposure to market risk is measured by the impact of movements in financial variables such as equity prices, interest rates and property prices. The various types of market risk which are discussed in this chapter, are:

• interest rate risk

• equity risk

• property risk

• currency risk

• spread risk

• concentration risk

Market risk reports are submitted to the FRC at least once a month. Key reports on market risk include the Solvency II and economic capital report, the interest rate risk report and the report on risk budgets related to the strategic asset mix.

A summary of sensitivities to market risks for the regulatory solvency, total equity and profit for the year is presented in the tables below. The first table summarises the required capital for market risks based on the standard model:

The main market risks of a.s.r. are equity, property and spread risk. This is in line with the risk budgets based on the strategic asset allocation study. Market risk increased mainly driven by increased equity risk, partly offset by higher interest rates and reduced currency risk.

The value of investment funds at year-end 2021 was € 5,307 million (2020: € 4,687 million). a.s.r. applies the look through approach for investment funds to assess the market risk.

The interest rate risk is the maximum loss of (i) an upward shock or (ii) a downward shock of the yield curve. For a.s.r. the downward shock is dominant.

The diversification effect shows the effect of having a well-diversified investment portfolio.

Solvency II sensitivities

The Solvency II SCR is a Value at Risk-measure. Therefore, Solvency II ratio sensitivities are disclosed as the alternative analysis, instead of IFRS sensitivities, as permitted by IFRS. The sensitivities of the solvency ratio as at 31 December 2021, expressed as the impact on the group solvency ratio (in percentage points) are as presented in the table below. The total impact is split between the impact on the solvency ratio related to movement in the available capital and the required capital. The sensitivities are based on the situation per 31 December 2021.

The impact of the interest rate sensitivities (+1%) deceased, due to higher interest rates.

Corporate spread widening (+75bps) includes impact of spread widening on IAS19 pension provision. The positive impact of the sensitivity of equity risk increased due to an increase of the equity put options portfolio in 2020.

6.8.3.1 Interest rate risk

Interest rate risk is the risk that the value of assets, liabilities or financial instruments will change due to fluctuations in interest rates. Many insurance products are exposed to interest rate risk; the value of the products is closely related to the applicable interest rate curve. The interest rate risk of insurance products depends on the term to maturity, interest rate guarantees and profit-sharing features. Life insurance contracts are particularly sensitive to interest rate risk. The required capital for interest rate risk is determined by calculating the impact on the available capital due to changes in the yield curve. Both assets and liabilities are taken into account. The interest rate risk is the maximum loss of (i) an upward shock or (ii) a downward shock of the yield curve according to the prescribed methodology. a.s.r. applies a look through approach for investment funds to assess the interest rate risk.

The interest rate risk is calculated by a relative shock up- and downward shock of the risk-free (basis) yield curve.

All adjustments (credit spread, volatility adjustment) on this yield curve are considered constant. The yield curve is extrapolated to the UFR. The yield curve after shock is not extrapolated again to the UFR.

The used shocks vary by maturity and the absolute shocks are higher for shorter maturities (descending: 75% to 20% and ascending: -70% to -20%):

• the yield curve up shock contains a minimum shock of 100bps;

• the yield curve after the downward shock is limited to zero (no negative interest rates);

• the yield curves of all currencies are shocked simultaneously.

In 2021 the interest rate risk decreased due to the increase in interest rates.

a.s.r. has assessed various scenarios to determine the sensitivity to interest rate risk. The impact on the solvency ratio is calculated by determining the difference in the change in available and required capital.

Interest rate risk is managed by aligning fixed-income investments to the profile of the liabilities. Among other instruments, swaptions and interest rate swaps are used for hedging the specific interest rate risk arising from interest rate guarantees and profitsharing features in life insurance products.

An interest rate risk policy is in place for a.s.r. Group as well as for the registered insurance companies. All interest rate- sensitive balance sheet items are in scope, including the employee benefit obligations of the Group. In principle, the sensitivity of the solvency ratio to interest rates is minimised. In addition, the exposure to interest rate risk or various term buckets is subject to maximum amounts.

6.8.3.2 Equity risk

Equity risk arises from the sensitivity of the value of assets and liabilities to changes in the level or in the volatility of market prices of equities. In order to maintain a good understanding of the actual equity risk, a.s.r. applies the look-through approach for investment funds to assess the equity risk. Besides the equity portfolio, a.s.r. holds put-options to mitigate part of the equity risk.

The required capital for equity risk is determined by calculating the impact on the available capital due to an immediate drop in share prices. Both assets and liabilities are taken into account. Stocks listed in regulated markets in countries in the EEA or OECD are shocked by 39% together with the symmetric adjustment of the equity capital charge (type I). Stocks in countries that are not members of the EEA or OECD, unlisted equities, alternative investments, or investment funds in which the look-through principle is not possible, are shocked by 49% together with the symmetric adjustment of the equity capital charge (type II). Investments of a strategic nature are shocked by 22%. Equity qualifying as an infrastructure investment (e.g. wind farm Wieringermeer) are shocked by 30% together with 77% of the symmetric adjustment of the equity capital charge.

a.s.r. applies the transitional measure for equity risk for shares in portfolio at 31 December 2015. The SCR equity shock was 22% at 31 December 2015 and linear increasing in 7 years to (i) 39% + symmetric adjustment for type I shares and (ii) 49% + symmetric adjustment for type II shares. This resulted in a reduction of the average risk charge of equity risk of about 1.0% per 31 December 2021.

In 2021 the equity risk increased € 228 million, mainly due to higher share prices which leads to a higher SCR equity risk, both driven by an increased exposure to equities and a higher risk charge as a result of the symmetric adjustment. Furthermore, the SCR equity risk increased due to the run-off of the transitional measure of equity risk, which is partly mitigated by the expansion of the option hedge.

In case the transitional measure would not be used, SCR equity risk would increase to € 1,226 million.

Composition of equity portfolio

The fair value of equities and similar investments at year-end 2021 was € 3,259 million (2020: € 2,633 million). The increase in 2021 was mainly due to the positive returns on the equity markets.

The equities are diversified across the Netherlands (including participating interests), other European countries and the United States. A limited part of the portfolio consists of investments in emerging markets and alternatives. A portfolio of put options with an value of € 28 million is in place to mitigate the equity risk.

The table below shows the exposure of the equity portfolio to different categories. The total value is including the equities in externally managed funds. In 2021 a.s.r. has sold a significant part of the emerging market portfolio. The increase in the category Other is mainly the result of the investment in the wind farm Wieringermeer (€ 333 million).

6.8.3.3 Property risk

The property risk depends on the total exposure to real estate. In order to maintain a good understanding of the actual property risk, a.s.r. applies the look through approach for investment funds to assess the property risk.

The required capital for property risk is determined by calculating the impact on the available capital due to an immediate drop in property prices by 25%. Both assets and liabilities are taken into account. The product Agrarische Impact Erfpacht (AIE) has effectively a lower charge (average of 10.8%) due to the underlying risk mitigating characteristics of this product.

a.s.r. applies look through approach for participations which activities are primarily real estate investments.

The real estate exposure increased due to both transactions and increases in property prices. Also, the AIE real estate has on average a lower charge (10.8%), which results in a decrease in property risk. As a result of these effects, the required capital for property risk is slightly higher.

The sensitivity of the solvency ratio to changes in property value is monitored on a monthly basis. Sensitivity of regulatory solvency (Solvency II) to changes in property prices is shown in the following table.

The property risk depends on the total exposure to property, which includes both property investments and property held for own use. The fair value of property was € 5,031 million at year-end 2021 (2020: € 4,688 million). The increase in 2021 (approximately € 343 million) was a result of both transactions (approximately € 150 million) and increases in property prices (approximately € 193 million).

6.8.3.4 Currency risk

Currency risk measures the impact of losses related to changes in currency exchange rates. The table below provides an overview of all currencies with exposure on liabilities and the currencies with the largest exposures. In 2021 a.s.r. has currency risk to insurance products in mainly American dollars (USD), Danish crown (DKK) and Hong Kong dollars (HKD).

In 2021 a.s.r. implemented a new hedge policy for currency risk. For different investment categories a.s.r. has defined a target hedge ratio. The required capital for currency risk is determined by calculating the impact on the available capital due to a change in exchange rates. Both assets and liabilities are taken into account and a look-through approach is applied for investment funds. For each currency the maximum loss due to an upward and a downward shock of 25% is determined except for a small number of currencies where lower shocks are applied (a.o. Danish crown).

In 2021 the SCR currency risk has decreased with € 74 million. The main reason for this reduction is the increased currency hedge for the non-Euro equity portfolio.

Specification currencies with largest exposure

The exposure to non-Euro equity has substantially decreased due to the increased currency hedge for the non-Euro equity portfolio. The non-Euro liabilities have further decreased as a result of a run-off of the portfolios.

The total foreign exchange exposure at year-end 2021 was € 506 million (2020: € 819 million).

6.8.3.5 Spread risk

Spread risk arises from the sensitivity of the value of assets and liabilities to changes in the level of credit spreads on the relevant risk-free interest rates. a.s.r. has a policy of maintaining a well-diversified high-quality investment grade portfolio while avoiding large risk concentrations. Going forward, the volatility in spreads will continue to have possible short-term effects on the market value of the fixed income portfolio. In the long run, the credit spreads are expected to be realised and to contribute to the growth of the own funds. The required capital for spread risk is determined by calculating the impact on the available capital due to the volatility of credit spreads over the term structure of the risk-free rate.

The required capital for spread risk is equal to the sum of the capital requirements for bonds, structured products and credit derivatives. The capital requirement depends on (i) the market value, (ii) the modified duration and (iii) the credit quality category.

The SCR spread risk slightly increased in 2021.

The sensitivity to spread risk is measured as the impact of an increase of spread on loans and corporate bonds of 75 bps. The VA is based on a reference portfolio. An increase of 75 bps of the spreads on loans and corporate bonds within the reference portfolio leads to an increase of the VA with 19 bps in 2021 (2020: 15 bps). The credit spread sensitivity increased from +17 to +20.

Composition of fixed income portfolio

Spread risk is managed on a portfolio basis within limits and risk budgets established by the relevant risk committees. Where relevant, credit ratings provided by the external rating agencies are used to determine risk budgets and monitor limits. A limited number of fixed-income investments do not have an external rating. These investments are generally assigned an internal rating. Internal ratings are based on methodologies and rating classifications similar to those used by external agencies.

The following tables provide a detailed breakdown of the fixed-income exposure by (i) rating class and (ii) sector. Assets in scope of spread risk are, by definition, not in scope of counterparty default risk. The total exposure of assets in scope of spread risk is € 28,562 million (2020: € 31,695 million). The composition of the portfolio is similar to 2020.

6.8.3.6 Market risk concentrations

Concentrations of market risk constitute an additional risk to an insurer. Concentration risk is the concentration of exposures to the same counterparty. Other possible concentrations (region, country, etc.) are not in scope. The capital requirement for concentration risk is determined in three steps:

1. determine the exposure above threshold. The threshold depends on the credit quality of the counterparty;

2. calculation of the capital requirement for each counterparty, based on a specified factor depending on the credit quality;

3. aggregation of individual capital requirements for the various counterparties.

According the spread risk module, bonds and loans guaranteed by a certain government or international organisation are not in scope of concentration risk. Bank deposits can be excluded from concentration risk if they fulfil certain conditions.

a.s.r. continuously monitors exposures in order to avoid concentrations in a single obligor outside of the risk appetite and has an overall limit on the total level of the required capital for market risk concentrations. The calculation of the market risk concentrations applies to the total investment portfolio, where, in line with Solvency II, government bonds are not included.

The required capital for market risk concentrations is nil as per year-end 2021.