Many Dutch life insurers made the headlines for all the
wrong reasons during the global financial crisis. The Netherlands’
life industry is now faced by a barrage of daunting challenges
ranging from a drastic loss of market share to plummeting margins
that threaten its very existence in its current form.


Bar chart showing Dutch Life Insurance Market: Gross premium income, 2000-2009In
November 2009, Aviva took the first step in the process of reducing
its exposure to the Netherlands when it completed an initial public
offer of its then wholly-owned Dutch unit, composite insurer Delta
Lloyd. The UK’s largest insurer followed this up in early-2011
when, through a private placing of Delta Lloyd ordinary shares, it
reduced its stake further, from 58.2% to 43.1%.

Aviva has left no doubt that it
wants as little as possible to do with the Dutch insurance market.
And for good reason: it is a market in decline and one facing
intense competition, both internally and externally. So serious are
the problems facing the life insurance industry that the
Netherlands’ central bank, De Nederlandsche Bank (DNB), warned in
early-2011 that survival of many market players is under

Part of the Dutch life industry’s
problems lie in its own past success and resultant maturity.
Although the Netherlands has a population of only some 16.5m, the
Netherlands’ life insurance market is, according to data from Swiss
Re, the world’s 14th largest based on gross premium income of
€24.22bn ($35.6bn) in 2009.

The Dutch life industry has
sustained a number of serious setbacks in recent years. Among them
was a severe financial beating at the hands of the global financial
crisis which in late-2008 left three of its major players – ING
Group, Aegon and SNS REAAL – scrambling for assistance from the
Dutch government.

Statement from Atos ConsultingAmong
the major players the notable exception was Delta Lloyd, the
country’s sixth-largest life insurer by gross premium income. ING,
the largest life insurer, received €10bn in state assistance, Aegon
(third-largest) €3bn and SNS REAAL (second-largest) €750m plus a
€500m capital injection from its majority owner, Stichting

Among other companies, Eureko, the
industry’s fourth-largest life insurer, was forced to raise €1bn
from its two biggest shareholders, Rabobank and Achmea Association.
In addition, following the rescue and dismantling of former
Belgo-Dutch bancassurance group Fortis, its Dutch insurance
operations became 100% state owned. The operations were
consolidated into a single company renamed ASR Nederland which
ranks fifth in the Dutch life market.

But the financial crisis was not
the only major setback that hit Dutch insurers in 2008. Far more
serious, and certainly a setback with longer-term structural
ramifications, was the government’s granting in late-2008 of
permission to banks to offer banksparen (bank savings) products
which have the same tax advantages for consumers that insurance
products have.


Bank products more

Pie chart showing market sharesof Dutch life insurance market in 2009According to rating agency Moody’s Investor Services:
“Although banking and insurance products are slightly different –
for example insurance products offer additional protection features
– this change in legislation has increased the direct competition
between banks and insurance companies, and it appears that banking
products are more attractive to customers due to their lower

More specifically, noted Moody’s,
the majority of customers who feel they do not need the protection
features will opt for banking products, while insurers will only
attract those who have an interest in protection features.

The result has been a sharp decline
in premium income and in the number of life policies being sold.
According to DNB, new life business fell from €1.25bn in 2007 to
€690m in 2010. The Dutch Centre for Insurance Statistics (DCIS)
reported that the number policies sold in 2009 fell by 23% compared
with 2008 to about 825,000 and by a further 19% in 2010 to about

Under the weight of increased
competition from banks, the sales of new savings products have been
particularly hard-hit. According to rating agency Fitch, sales of
savings products fell by more than 70% between 2007 and 2010,
including a fall of nearly 40% from 2008 to 2009.

Moody’s observed that the
significant share-gain banks have enjoyed in the wealth
accumulation products market is likely to be an ongoing feature.
This trend, noted Moody’s, is supported by the importance of banks
as a distribution channel in the Netherlands. Customers, added the
rating agency, can very easily compare the merits of each product
when they are sold on the same shelf in a bank.

Echoing Moody’s view, Fitch
believes that for life insurers the bancassurance channel will
increasingly become of less assistance in its sales efforts. This
is because banks will focus increasingly on selling their own
products through the channel.

In 2008, the bancassurance channel
accounted for 11.6% of total life industry sales. Intermediaries
accounted for 57% of sales, direct sales 26% and various other
channels 4%.



Bar chart showing new business margins in the Dutch life insurance market, 2010Life insurers have also seen a significant decline in the
sales of unit-linked products. According to the Dutch association
of insurers, the Verbond van Verzekeraars (VVV) sales of
unit-linked products peaked at about €800m in 2006 and declined in
every subsequent year to reach about €110m in 2010.

According to the DCIS, some 55,000
unit-linked policies were sold in 2010, down from about 77,300 in
2009 and about 169, 000 in 2008.

Moody’s pointed out that the
financial crisis reduced the attractiveness of unit-linked products
but that was only part of the reason for the slump in their sales.
The rating agency noted that there is another more deep-seated
cause of the fall in unit-linked product sales: distrust of
insurance companies.

Moody’s explained that when
unit-linked sales were at their strongest, unit-linked products and
universal life products were sold bearing charges of between 6% and
10% of their premiums.

The deterioration in the
performance financial markets coupled with the high costs of the
policies, resulted in very poor returns for most customers who in
turn triggered a loss of confidence and controversy over the
transparency of the life industry’s cost structure.

As a consequence, Moody’s continued
the latter, following negotiations between consumer associations
and the Financial Services Ombudsman, recommended in March 2008
that Dutch insurers compensate customers for the excessive costs,
and that insurers retroactively top off the costs of the policies
at 3.5% of premiums paid.

Although most insurers have
compensated unit-linked policyholders, or are in a process of doing
so, Moody’s believes the life industry will not be able to regain
consumer confidence rapidly and that, as a consequence, unit-linked
product sales will not recover in the short or even

In similar vein, Fitch believes it
will take some time and considerable effort before the reputational
damage suffered by the Dutch life industry is reversed.

The challenge Dutch life insurers
face in regaining the confidence of consumers was highlighted by
results of the prestigious annual customer service survey conducted
by the University of Groningen’s Customer Insights Centre.

Results of the 2010 survey released
in February this year revealed that out of 100 companies ranked
across all service industries, life insurers occupied four of the
six bottom positions.

Specifically, Aegon ranked 99th,
Nationale Nederlanden, a unit of ING, ranked 97th, SNS Reaal ranked
95th and Delta Lloyd ranked 94th. Only one insurer, ASR Nederland,
managed to improve its ranking compared with the previous survey,
rising from 89th to 85th.


Mortgage protection

Bar chart showing individual life premium income in the Dutch life insurance market, 2005-2010As if Dutch life insurers do not have enough problems with
falling savings and unit-linked product sales and a bad customer
image, they have also been hit by a slump in the demand for
mortgage protection products. In tandem with many other residential
property markets, the Netherlands’ market was hit badly by the
financial crisis and a tightening-up by banks of their mortgage
advance criteria.

Indicating the severity of the
residential property slump for Dutch life insurers, sales of
mortgage protection products fell from €300m in 2007 to barely
€100m in 2010 and the share of these products of total sales from
23% to just around 14.5%.

Despite some signs of a recovery in
the country’s residential property market in the fourth-quarter of
2010, this, according to the Dutch Association of Estate Agents,
merely reflected a surge in demand for mortgages by consumers in
advance of the introduction of even stricter lending criteria by
banks. The association warned recently that the slump in the
Netherlands’ residential property market is far from over.

Overall, the Netherlands’ economic
prospects are also far from inspiring. Professional services firm
Ernst & Young in conjunction with Oxford Economics predicts
that the Netherlands’ GDP will increase by 1.7% in 2011, the same
increase as recorded in 2010, and increase at an average rate of
1.9% over the following four years to 2015.

One positive point is that the
Netherlands’ unemployment rate is relatively low.

However, Ernst & Young notes:
“Dutch consumers are in the midst of an intensifying real wage
squeeze, with average earnings growth running at just 1% a year,
half the pace of inflation. There appears to have been a trade-off
between jobs and wages, with the Netherlands seeing unemployment
fall to 5.1% at the end of 2010 compared with the February 2010
peak of 5.8%, but at the expense of very weak wage growth.”


Life margins under

Bar chart showing policies sold in the Dutch life insurance market, 2004-2010Given the problems facing Dutch life insurers it is
hardly surprising that new life business product margins have come
under significant pressure.

Indeed, according to a Moody’s
study of average new business margins of seven major life insurers
(Allianz, Axa, Generali, Aviva, Prudential, Aegon and SNS REAAL)
new business margins in the Dutch market, 11% in 2010, were the
lowest in Western Europe. New business margins in Germany were the
highest at 25% followed by the UK at 20%.

Moody’s noted that despite the
significant decline in interest rates, the highly competitive
environment prevailing in the Dutch life market has forced insurers
to maintain high minimum guaranteed rates on life products. These
are at 3% for new business and between 3.5% and 4.5% on average for
in-force business.

The rating agency stresses: “The
Dutch market is the only major European market in which guarantees
of traditional life products did not decrease during the financial
crisis, despite their high level and the sharp decline in interest
rates, effectively making these products unprofitable.

“We expect new business margins in
the Dutch market to remain the lowest in Western Europe.”

Moody’s also emphasised that the
low level of investment income of Dutch insurers (about 4%) and the
persistence of low interest rates will continue to put life margins
under pressure.

In addition, noted Moody’s, some
insurers realised gains on sales of investments during 2010 –
mostly on their fixed income portfolio – in order to boost net

“We believe that in the longer term
it will add further pressure on insurers’ earnings, as
reinvestments were likely done at lower rates, or on riskier or
less liquid assets,” Moody’s observes.

Threatening to put more pressure on
Dutch life insurers’ profitability is the goal of many to improve
economies of scale.

“The race for economies of scale is
also a feature of many Dutch insurers aiming to mitigate declining
profitability, although this actually fosters increased competition
and feeds a vicious circle, as it ultimately contributes to
additional pressure on margins,” notes Moody’s.

Two other factors are at work in
the market that are negative for margins. One is the pressure
powerful consumer bodies are exerting on life insurers to lower
margins. The other is the advent of low-cost producers.

In the pensions market, new
low-cost entrants are putting additional pressure on pricing, which
established players with their higher cost bases are finding
difficult to contend with, noted Fitch.

“Price is the decisive factor in
employers’ purchasing decisions, making it virtually impossible for
companies to compete with even small price differentials,” the
rating industry stresses.



The old saying “if you can’t beat
them, join them” appears to have a significant degree of validity
in the Dutch life market, which observers such as Fitch and Moody’s
anticipate will see increased merger activity.

This prediction was underscored in
April 2011 in a statement by SNS Reaal’s CEO Ronald Latenstein
quoted by news agency Reuters: “It doesn’t require a lot of wisdom
to predict there will be consolidation. We are exploring the
opportunities and everybody is talking to each other.”

However, he added that because all
insurers are restructuring, it will take a few years before any
action will be seen.

The complexity of the Dutch life
insurance industry’s problems was highlighted in a study by the
Dutch unit of French consultancy Atos Consulting, Creative

Destruction in the Dutch Life Insurance Industry
. The
consultancy’s conclusions make for depressing reading.

“We have noted in our consulting
practice that many directors are asking themselves whether they
really want to operate in the life insurance market. And if so, in
what way?”

Atos consulting continues: “The
life insurance market has become unattractive for many of the
established players. Life insurance providers will have to adapt
their business models rapidly in order to meet the challenges posed
by these developments and achieve a major reduction in costs.”

The consultancy noted that some of
the strategies it is encountering among Dutch life insurers

  • divest closed life books to
    a closed-book consolidator and shift focus to new transparent
    products and term life policies;
  • divest the life insurance
    provider and exit the market;
  • consolidate all life
    insurance providers within the company group under a single brand
    and insurance license. Allianz and ASR Nederland are two
  • outsource part of the
    administrative process to low-wage countries; and
  • outsource all back-office
    and service processes.

Atos Consulting noted that a major
Dutch insurer is executing a pilot project in India to move part of
its back-office processes to India.

DNB has also expressed considerable
concern about the overcapacity and intense competition in the life

In February 2011, the central bank
warned: “Under these market conditions there is a risk of
loss-making products being put onto the market which may pose a
threat to the long-term viability of insurance providers which will
have to adapt their business models in order to survive in this

Atos Consulting notes: “We are now
dealing with the complete transformation of the life insurance

The consultancy stresses that with
the advent of new savings products being offered by banks, new
business models (such as outsourcing), “we are witnessing the end
of the old-order”.

Atos Consulting predicted that new,
foreign insurers, which have low-cost business models and carry no
legacy burdens, and banks with their substitute products will “take
over a large portion of the market”.

Ominously, Atos Consulting
concludes: “In our opinion, only those life insurance providers who
can adapt their business models and drastically reduce costs will
survive this transition. Most life insurance providers will
ultimately go under in a cycle of creative destruction and

So, it would seem, if Atos Consulting’s prediction proves to be
only partially accurate, Aviva can be criticised for its exit from
the Dutch life market on only one count: for being too slow.