Notes to the consolidated financial statements of Aegon N.V.  Note 4 174 Recognition of provisions 4 Financial and insurance risks General Each sensitivity analysis reflects the extent to which the shock tested would affect management’s critical accounting estimates and  judgment in applying Aegon’s accounting policies. Market-consistent assumptions underlying the measurement of non-listed assets  and liabilities are adjusted to reflect the shock tested. The shock may also affect the measurement of assets and liabilities based on  assumptions that are not observable in the market. For example, a shock in interest rates may lead to changes in the amortization  schedule of DPAC or to increased impairment losses on equity investments. Although management’s short-term assumptions may  change if there is a reasonably possible change in a risk factor, long-term assumptions will generally not be revised unless there is  evidence that the movement is permanent. This fact is reflected in the sensitivity analyses. Results of Aegon’s sensitivity analyses are presented throughout this section to show the estimated sensitivity of net income and  shareholders’ equity to various scenarios. For each type of market risk, the analysis shows how net income and shareholders’ equity  would have been affected by changes in the relevant risk variable that were reasonably possible at the reporting date. For each  sensitivity test the impact of a reasonably possible change in a single factor is shown. Management action is taken into account  to the extent that it is part of Aegon’s regular policies and procedures, such as established hedging programs. However, incidental  management actions that would require a change in policies and procedures are not considered.  As part of its risk management programs, Aegon takes inventory of its current risk position across risk categories. Aegon also measures  the sensitivity of net income and shareholders' equity under both deterministic and stochastic scenarios. Management uses the insight  gained through these “what if?” scenarios to manage the Group’s risk exposure and capital position. The models, scenarios and  assumptions used are reviewed regularly and updated as necessary. Aegon operates a Derivative Use Policy and a Reinsurance Use Policy to govern its usage of derivatives and reinsurance. These policies  establish the control, authorization, execution and monitoring requirements of the usage of such instruments. In addition, these policies  stipulate necessary mitigation of credit risk created through these derivatives and reinsurance risk management tools. For derivatives,  credit risk is normally mitigated by requirements to post collateral via credit support annex agreements. For reinsurance, credit risk  is normally mitigated by downgrade triggers allowing Aegon’s recapture of business, funds withheld by treaties (when Aegon owns  the assets) and assets held in trust for the benefit of Aegon (in the event of reinsurer insolvency). To manage its risk exposure, Aegon has risk policies in place. Many of these policies are group-wide while others are specific to  the unique situation of local businesses. The Group level policies limit the Group’s exposure to major risks such as equity, interest  rates, credit, underwriting and currency. The limits in these policies in aggregate remain within the Group’s overall tolerance for risk  and the Group’s financial resources. Operating within this policy framework, Aegon employs risk management programs including  asset liability management (ALM) processes and models, hedging programs (which are largely conducted via the use of derivatives) and  insurance programs (which are largely conducted through the use of reinsurance). These risk management programs are in place in each  country unit and are not only used to manage risk in each unit, but are also part of the Group’s overall risk strategy.  Aegon manages risk at local level where business is transacted, based on principles and policies established at the Group level. Aegon’s  integrated approach to risk management involves common measurement of risk and scope of risk coverage to allow for aggregation of  the Group’s risk position.  As an insurance group, Aegon is in the “business of risk” and as a result is exposed to a variety of risks. A description of Aegon’s risk  management and control systems is given below on the basis of significant identified risks for the company. Some risks, such as  currency translation risk, are related to the international nature of Aegon’s business. Other risks include insurance related risks, such  as changes in mortality and morbidity. However, Aegon’s largest exposures are to changes in financial markets (e.g. interest rate, credit  and equity market risks) that affect the value of the investments, liabilities from products that Aegon sells, deferred expenses and  value of business acquired. Provisions are established when it is probable that a past event has given rise to a present obligation or loss, the settlement of  the obligation will probably lead to an outflow of resources embodying economic benefits and the amount can be reasonably  estimated. Management exercises judgment in evaluating the probability that a loss will be incurred. The estimate of the amount  of a loss requires management judgment in the selection of a proper calculation model and the specific assumptions related to  the particular exposure. Annual Report 2013