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.
In 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 threat.
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.
Among 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 Beheer.
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 attractive
According 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 costs.”
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 750,000.
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%.
Life 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 medium-term.
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 woes
As 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 pressure
Given 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 profits.
“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 include:
- 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 examples;
- 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 market.
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 market.”
Atos Consulting notes: “We are now dealing with the complete transformation of the life insurance market,”
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 renewal.”
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.