108 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON N.V.  NOTE 3 NOTE 3  CRITICAL ACCOUNTING ESTIMATES AND  JUDGMENT IN APPLYING ACCOUNTING  POLICIES Actuarial assumptions Valuation of assets and liabilities arising from life  insurance contracts Application of the accounting policies in the preparation of the  financial statements requires management to apply judgment  involving assumptions and estimates concerning future results or  other developments, including the likelihood, timing or amount  of future transactions or events. There can be no assurance  that actual results will not differ materially from those  estimates. Accounting policies that are critical to the financial  statement presentation and that require complex estimates or  significant judgment are described in the following sections. The main assumptions used in measuring DPAC, VOBA and the  liabilities for life insurance contracts with fixed or guaranteed  terms relate to mortality, morbidity, investment return and  future expenses. Depending on local accounting principles,  surrender rates may be considered.  Mortality tables applied are generally developed based on a  blend of company experience and industry wide studies, taking  into consideration product characteristics, own risk selection  criteria, target market and past experience. Mortality  experience is monitored through regular studies, the results  of which are fed into the pricing cycle for new products and  reflected in the liability calculation when appropriate. For  contracts insuring survivorship, allowance may be made for  further longevity improvements. Morbidity assumptions are  based on own claims severity and frequency experience,  adjusted where appropriate for industry information.  The liability for life insurance contracts with guaranteed or fixed  account terms is either based on current assumptions or on the  assumptions established at inception of the contract, reflecting  the best estimates at the time increased with a margin for  adverse deviation. All contracts are subject to liability adequacy  testing which reflects management’s current estimates of  future cash flows. To the extent that the liability is based on  current assumptions, a change in assumptions will have an  immediate impact on the income statement. Also, if a change  in assumption results in the failure of the liability adequacy test,  the entire deficiency is recognized in the income statement. To  the extent that the failure relates to unrealized gains and losses  on available-for-sale investments, the additional liability is  recognized in the revaluation reserve in equity. Some insurance contracts without a guaranteed or fixed contract  term contain guaranteed minimum benefits. Depending on  the nature of the guarantee, it may either be bifurcated and  presented as a derivative or be reflected in the value of the  insurance liability in accordance with local accounting principles.  Given the dynamic and complex nature of these guarantees,  stochastic techniques under a variety of market return scenarios  are often used for measurement purposes. Such models require  management to make numerous estimates based on historical  experience and market expectations. Changes in these estimates  will immediately affect the income statement. In addition, certain acquisition costs related to the sale of  new policies and the purchase of policies already in force  are recorded as DPAC and VOBA assets respectively and are  amortized to the income statement over time. If the assumptions  relating to the future profitability of these policies are not  realized, the amortization of these costs could be accelerated  and may even require write offs due to unrecoverability.  Estimated gross profits on variable life and variable annuity  products in the Americas include a short- and long term equity  market return assumption. As of the second quarter of 2010,  AEGON held its short-term equity market return assumption  equal to its long-term assumption at 9%, reflecting continued  volatility experienced in equity markets and the use of macro  equity hedges. Investment assumptions are either prescribed by the local  regulator or based on management’s future expectations.  In the latter case, the anticipated future investment returns  are set by management on a countrywide basis, considering  available market information and economic indicators.  A significant assumption related to estimated gross profits  on variable annuities and variable life insurance products in  the United States and some of the smaller country units, is  the annual long-term growth rate of the underlying assets.  As equity markets do not move in a systematic manner,  assumptions as to the long-term growth rate are made after  considering the effects of short-term variances from the long- term assumptions (a reversion to the mean assumption) and  the effects of hedging. The reconsideration of this assumption  may affect the original DPAC or VOBA amortization schedule,  referred to as DPAC or VOBA unlocking. The difference between  the original DPAC or VOBA amortization schedule and the  revised schedule, which is based on estimates of actual and  future gross profits, is recognized in the income statement as  an expense or a benefit in the period of determination. 