145 ANNUAL REPORT 2010 SHARPENING OUR FOCUS Sensitivity analysis of net income and shareholders’  equity to changes in various underwriting risks Estimated approximate effect 2010 2009 On share- holders’  equity On net  income On share- holders’  equity On net  income 20% increase in lapse rates (47) (46) (30) (29) 20% decrease in lapse rates 46 44 26 25 10% increase in mortality rates (90) (90) (102) (102) 10% decrease in mortality rates 92 91 104 103 10% increase in morbidity rates (75) (75) (67) (67) 10% decrease in morbidity rates 74 74 66 66 On March 1, 2011 the European Court of Justice (ECJ) delivered  a judgment in the Test Achats case which relates to the ability  of an insurance company to use gender as a rating factor when  pricing risk. The ECJ has ruled that using gender as a rating  factor when pricing risk is invalid. However, the ECJ has granted  a transitional period for relief for implementation. The effect of  this is that, as from December 21, 2012, it will be unlawful to use  gender-related factors for determining premiums and benefits  A change in actual experience with mortality or morbidity rates  may not lead to a change in the assumptions underlying the  measurement of the insurance liabilities as management may  recognize that the change is temporary. Life insurers are also  exposed to longevity risk. Increased life expectation above our  assumed life expectation at the time of underwriting negatively  impacts our results. Refer to note 2.19 for a discussion on how  longevity assumptions are accounted for. Sensitivity analysis of net income and shareholders’ equity  to various underwriting risks is shown in the table that follows.  The sensitivities represent an increase or decrease of mortality  and morbidity rates over best estimate. Increases in mortality  rates lead to an increase in the level of benefits and claims.  The impact on net income and shareholders’ equity of sales  transactions of investments required to meet the higher cash  outflow is reflected in the sensitivities. Sources of underwriting risk include policy lapses and policy  claims (such as mortality and morbidity). In general, AEGON is  at risk if policy lapses increase as sometimes AEGON is unable  to fully recover up front expenses in selling a product despite  the presence of commission recoveries or surrender charges  and fees. 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,  and sells certain types of policies that are at risk if mortality  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. decreases (longevity risk) such as annuity products. AEGON is  also at risk if expenses are higher than assumed by  management. 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 increase liabilities,  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 balance  sheet and are being amortized into income 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 due to  unrecoverability. This could have a materially adverse effect on  AEGON’s business, results of operations and financial condition. UNDERWRITING RISK