Risk and capital management

AEGON’s risk management and control systems are designed to ensure that these risks are managed as effectively and efficiently as possible. For AEGON, risk management involves:

• Understanding which risks the company is able to underwrite.
• Assessing the risk-return trade-off associated with these risks.
• Establishing limits for the level of exposure to a particular risk or combination of risks.
• Measuring and monitoring risk exposures and actively managing the company’s overall risk and solvency positions.

By operating within certain pre-defined tolerances and adhering to policies that limit the overall risk the company is exposed to, AEGON is able to accept risk with the full knowledge of potential returns and losses both for the company and for its shareholders.

AEGON must, at all times, maintain a solvency position such that no plausible scenario would cause the company to default on its obligations to policyholders. To accomplish this, AEGON has established two basic objectives for its risk management strategy:

• Maintain AA capital adequacy requirements: AEGON maintains its companies’ capital adequacy levels at whichever is the higher of local regulatory requirements, the relevant local Standard & Poor’s requirements for very strong capitalization and any additional self-imposed economic requirements.
• Maintain solvency even under extreme event scenarios: AEGON must remain solvent in the case of plausible extreme events.

Types of risk

As an international provider of life insurance, pensions and other long-term investment and savings products, AEGON faces a number of risks, both operational and financial. Some of these risks may arise from internal factors, such as inadequate compliance systems. Others, such as movements in interest rates or unexpected changes in longevity trends, are external in nature.

AEGON’s most significant risk is to changes in financial markets, related particularly to movements in interest rates or equity and credit markets. Clearly, these risks, whether internal or external, may affect the company’s operations, its earnings, its share price, the value of its investments or the sale of certain products and services.

Risk management in 2008¹

Like other insurance and financial services companies, AEGON experienced the impact of unprecedented deterioration in capital markets in 2008. The global financial crisis brought about sharp declines in equity markets, a worsening in general economic conditions, lower interest rates, extreme market volatility, an unprecedented widening in credit spreads and a sharp increase in bond defaults.

These factors had serious implications not only for AEGON’s sales and earnings, but also for the company’s capital and liquidity position. AEGON regularly carries out sensitivity analyses to determine the impact of different scenarios (including extreme event scenarios), particularly on the company’s earnings and capital position1.

During the year, AEGON took a series of measures designed to counter the effects of the market crisis and, where required, limit the company’s exposure to major financial risks. See related documents 'financial crisis' for more details.

AEGON’s risk governance framework

AEGON has a strong culture of risk management, based on a clear, well-defined governance framework. The goals of this framework are as follows:

• To minimize ambiguity by clearly defining responsibilities and escalation procedures for decision makers.
• To institute a proper system of checks and balances by ensuring that senior management are aware at all times of material risk exposure.
• To manage concentration by avoiding the threat of insolvency from an over-concentration of risk in particular areas.
• To facilitate diversification by enabling management to identify diversification benefits from apparent risk return trade-offs.
• To reassure external constituencies that AEGON has appropriate risk management structures and controls in place.
  

Governance structure

AEGON’s risk management framework is represented across all levels of the organization. This ensures a coherent and integrated approach to risk management throughout the company. Similarly, AEGON has put in place a number of company-wide risk policies, which detail specific operating guidelines and limits. These policies are designed to keep overall risk-specific exposures to a manageable level.

Any breach of policy limits or warning levels trigger immediate remedial action or heightened monitoring. Further risk policies may be developed at a local level to cover situations specific to particular country or business units.

AEGON’s risk management governance structure has four basic layers:

• The Supervisory Board (and the Supervisory Board Risk Committee)
• The Executive Board
• AEGON’s Group Risk and Capital Committee (GRCC)
• Individual Risk and Capital Committees (RCCs) present in AEGON’s operating units.
  

Roles and responsibilities

AEGON’s Executive Board has overall responsibility for risk management. The Board adopts the risk governance framework and determines the company’s overall risk tolerance and risk appetite. The Executive Board reports to the Risk Committee of AEGON’s Supervisory Board, which is responsible for overseeing AEGON’s enterprise risk management framework, including governance and measures taken to ensure risk management is integrated properly into the company’s broader strategy.

In addition, the Risk Committee also reviews overall risk exposure in light of management’s risk appetite, the company’s own risk exposure limits and AEGON’s overall solvency position. The Committee reports to the full Supervisory Board on a quarterly basis or more frequently, if required. It is the responsibility of the Executive Board to update the Supervisory Board, should any risks directly threaten the solvency or operations of the company.

The Executive Board also supervises the work of AEGON’s Group Risk and Capital Committee (GRCC). The GRCC is responsible for overseeing AEGON’s solvency position, ensuring that risk-taking is within overall tolerance levels and that the company’s capital position is adequate to support AA capital adequacy requirements. As such, the GRCC also works closely with the company’s Group Treasury and Group Risk departments.

It is the responsibility of the GRCC to update the Executive Board should any risk threaten the company’s economic solvency, statutory solvency or its operations. In line with AEGON’s integrated approach to risk management, the company’s Chief Financial Officer sits as both a member of the Executive Board and as Chairman of the GRCC. AEGON’s Chief Risk Officer (CRO), its Group Treasurer and CFOs from the company’s three main country units – the United States, the Netherlands and the United Kingdom – are also members of the GRCC.

The GRCC is also responsible for ensuring best risk management practices are adhered to, as well as for promoting strong risk management as an important part of AEGON’s overall corporate culture.

The GRCC also provides oversight for individual country unit Risk and Capital Committees (RCCs). As such, the GRCC receives regular reports from RCCs, reviews major decisions and oversees compliance with Group-level risk policies.

RCCs have been established at each of AEGON’s country units and, within the United States, at each business unit. The responsibilities and prerogatives of the RCCs are set out in their respective charters and are similar in content to those of the GRCC, but applicable to local circumstances. AEGON’s regional Chief Risk Officers (or designated staff) are members of every operating unit RCC for which they have oversight responsibility.

Group Risk

The role of Group Risk is to act, effectively, as the working arm of the GRCC. As such, Group Risk is responsible for developing and executing risk policies and frameworks. This involves identifying risk, particularly operating and emerging risk, as well as reviewing risk assessments carried out by operating units. Group Risk also identifies best risk management practices and helps ensure there is consistency in methodology and application of these practices across the Company. In addition, Group Risk performs risk analyses, either at its own initiative or at the request of management, including the analysis of extreme events and related management capabilities.

AEGON’s risk management staff structure is also integrated. Regional CROs for the Americas, Europe and Asia report directly to the company’s Chief Risk Officer. CROs of individual operating units report to their respective regional CROs.

¹Please note that the information here is intended as an overview only. A more detailed explanation of credit risk, equity and other investment risk, interest rate risk, currency exchange rate risk, liquidity risk, underwriting risk and operational risk, as well as other group-wide risk management policies may be found on pages 116 to 140 of the Financial statements Annual Report 2008.