103 ANNUAL REPORT 2010 D. SHADOW ACCOUNTING Shadow accounting ensures that all gains and losses on  investments affect the measurement of the insurance assets  and liabilities in the same way, regardless of whether they are  realized or unrealized and regardless of whether the unrealized  gains and losses are recognized in the income statement or  directly in equity in the revaluation reserve. In some instances,  realized gains or losses on investments have a direct effect on  the measurement of the insurance assets and liabilities. For  example, some insurance contracts include benefits that are  contractually based on the investment returns realized by the  insurer. In addition, realization of gains or losses on available- for-sale investments can lead to unlocking of VOBA or DPAC  and can also affect the outcome of the liability adequacy test  to the extent that it considers actual future investment returns.  For similar changes in unrealized gains and losses, shadow  accounting is applied. If an unrealized gain or loss triggers a  shadow accounting adjustment to VOBA, DPAC or the insurance  liabilities, the corresponding adjustment is recognized through  other comprehensive income in the revaluation reserve,  together with the unrealized gain or loss.  Some profit sharing schemes issued by the Group entitle the  policyholder to a bonus which is based on the actual total  return on specific assets held. To the extent that the bonus  relates to gains or losses on available-for-sale investments  for which the unrealized gains or losses are recognized in the  revaluation reserve in equity, shadow accounting is applied.  This means that the increase in the liability is also charged to  equity to offset the unrealized gains rather than to the income  statement. Non-life insurance contracts are insurance contracts where  the insured event is not life-contingent. For non-life products  the insurance liability generally includes reserves for unearned  premiums, unexpired risk, inadequate premium levels and  outstanding claims and benefits. No catastrophe or equalization  reserves are included in the measurement of the liability.  The reserve for unearned premiums includes premiums  received for risks that have not yet expired. Generally the  reserve is released over the term of the contract and is  recognized as premium income.  The liability for outstanding claims and benefits is established  for claims that have not been settled and any related cash  flows, such as claims handling costs. It includes claims that  have been incurred but have not been reported to the Group.  The liability is calculated at the reporting date using statistical  methods based on empirical data and current assumptions that  may include a margin for adverse deviation. Liabilities for  claims subject to periodic payment are calculated using  actuarial methods consistent with those applied to life  insurance contracts. Discounting is applied if allowed by the  local accounting principles used to measure the insurance  liabilities. Discounting of liabilities is generally applied when  there is a high level of certainty concerning the amount and  settlement term of the cash outflows. At each reporting date the adequacy of the life insurance  liabilities, net of VOBA and DPAC, is assessed using a liability  adequacy test. Additional recoverability tests for policies  written in the last year may also result in loss recognition. Life insurance contracts for account of policyholders and any  related VOBA and DPAC are considered in the liability adequacy  test performed on insurance contracts. To the extent that the  account balances are insufficient to meet future benefits and  expenses, additional liabilities are established and included in  the liability for life insurance. All tests performed within the Group are based on current  estimates of all contractual future cash flows, including related  cash flows from policyholder options and guarantees. A number  of valuation methods are applied, including discounted cash  flow methods, option pricing models and stochastic modelling.  Aggregation levels are set either on geographical jurisdiction or  at the level of portfolio of contracts that are subject to broadly  similar risks and managed together as a single portfolio.  To the extent that the tests involve discounting of future  cash flows, the interest rate applied is based on market rates  or is based on management’s expectation of the future return  on investments. These future returns on investments take into  account management’s best estimate related to the actual  investments and, where applicable, reinvestments of these  investments at maturity. Any resulting deficiency is recognized in the income statement,  initially by impairing the DPAC and VOBA and subsequently by  establishing an insurance liability for the remaining loss, unless  shadow loss recognition has taken place.  The adequacy of the non-life insurance liability is tested at each  reporting date. Changes in expected claims that have occurred,  but that have not been settled, are reflected by adjusting the  liability for claims and future benefits. The reserve for unexpired  risk is increased to the extent that the future claims and  expenses in respect of current insurance contracts exceed the  future premiums plus the current unearned premium reserve. F. LIABILITY ADEQUACY TESTING E. NON-LIFE INSURANCE CONTRACTS  SHARPENING OUR FOCUS