We operate in a fast-moving, highly regulated environment. This environment is affected by a number of factors: economic, financial, regulatory, social and environmental.
The world economy has continued to improve over the past year. Growth has picked up in the US and Europe; it's also accelerating in China and Japan. Economic growth, generally, is good news for our business. But growth in some parts of the world is still uncertain. And wages haven't kept pace with this growth everywhere, which means many consumers aren't yet feeling the benefits of the economic recovery.
Financial markets have performed well. During the past year, stock markets have been trading at all-time highs. Again, that's good news for investors like us and many of our customers. Interest rates are still a concern despite recent increases in the US and UK. In Europe, the European Central Bank's (ECB) benchmark refinancing rate has been at 0% now for almost two years. Low interest rates are a challenge for insurers. In the past, the industry earned much of its money from interest rate spreads.
Regulation is becoming increasingly complex. New capital requirements, known as Solvency II, have been in force since the start of 2016, bringing significant change to the industry. In Europe, we're also seeing a step-up in data privacy controls, with the EU's new General Data Protection Regulation (GDPR), as well as new rules on insurance distribution, financial reporting and MiFID II1, which is aimed at increasing transparency and offering investors greater security. New regulations can add to operating costs, but they also help protect consumers and strengthen confidence in financial markets.
Political uncertainty makes investment harder, and may pose a threat to longer-term economic growth. In the past year, we've seen an increase in political uncertainty in several key Aegon markets, including the UK, Spain, Turkey and the US. More generally, we've seen an increase in protectionism in some parts of the world, but also, promisingly, the emergence of a new international development agenda, with the Paris Climate Agreement and the adoption of new UN Sustainable Development Goals.
Our society is also changing rapidly, beyond politics and the economy. Most of us are living longer, healthier lives; this is increasingly true of developing countries, as well as Europe, the US and Japan. At the same time, new technologies are having a profound effect on the way we work, the way we interact with others and, ultimately, the way we organize our economies.
Who are our stakeholders?
We define our stakeholders as 'any individual or organization affected, or likely to be affected, by our business, or that may, in turn, affect the environment in which we operate'. Our stakeholders include customers, employees, investors, business partners and distributors, and the wider community – governments, regulators, NGOs and community groups. We regularly engage with stakeholders through polls and surveys, conferences, workshops and face-to-face meetings. We use what our stakeholders tell us to improve our products and services, and to make sure our business remains accountable and delivers value. This chart shows our five main stakeholder groups, and the basis of the relationship we have with each group:
Individual customers, groups and corporate clients provide us with fees, premiums and deposits. In return, we provide them with Protection and long-term financial security.
- Business partners
Distributors, joint venture partners, reinsurers, and suppliers of goods and services provide us with distribution, goods and services, reinsurance. In return, we provide them with financial support, expertise and a reliable, professional relationship.
Shareholders, bondholders, financial analysts and portfolio managers provide us with cash through investment in bonds and shares. In return, we provide them with attractive long-term returns.
Employees, tied agents, trade unions and other representative groups provide us with time, resources, skills and knowledge. In return, we provide them with salaries and benefits, training, career development.
- Wider community
Governments, regulators, charities, community groups, NGOs, academics, experts, and other public institutions provide is with public services, infrastructure, access to labor and markets, license to operate2 In return, we provide them with payment of taxes, community investment, expertise on aging and retirement issues and responsible approach to investment.
Every year, we carry out a materiality assessment. This helps us identify the issues that have the most impact on our business, profitability and reputation.
To conduct our materiality assessment, we look first at the main economic, financial, regulatory, climate-related and social factors affecting our environment. We survey both our own senior management and a cross-section of our stakeholders to determine which of these factors are the most important, or most material. The results are plotted on a materiality matrix (below) and fed into our reporting and strategy processes. Last year's survey took place in January /February 2017. This assessment helps with strategy implementation, and ensures we continue to respond quickly to social and economic change. The exercise gave us five material issues: low interest rates, the advance of new technologies, aging populations, economic and financial uncertainty and tighter regulations (including changing capital requirements; we decided to combine these two issues). In this section, we'll look at how these five issues will affect our business, the risks and opportunities they'll bring and the actions we're taking.
1 Markets in Financial Instruments Directive II, introduced in January 2018. MiFID II is a set of financial rules aimed at making Europe's market for financial services safer, more efficient and more transparent. GDPR is due to come into force in May 2018.
2 License to operate refers to the general acceptance or approval by stakeholders for a company to continue its business operations in their community or communities.