Insurance in the Netherlands

percent to 5 percent. Besides the turnaround in the book results on the investments made, a substantial drop in the loss ratio of over 3 percent was the cause of this extraordinary improvement. The loss ratio dropped as a result of the lucky combination of good weather conditions during the year and an exceptional decrease in the number of car thefts.

As the second most important branch in terms of premium written, automobile puts a relatively heavy mark upon the development of total non-life technical results. This becomes even clearer by looking at the development of non-life technical results exclusive of technical results for the branch accident, health, and disability. As can be seen clearly from Figure 9.10, the development of technical results for only property and automobile insurance “perfectly” follows the development of technical results for automobile only (compare Figure 9.10 with the automobile section of Figure 9.9).

6.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

5.0

4.0

3.0

1. 1.0 0.0 -1.0 -2.0 -3.0 -4.0

Source: PVK and Central Bureau of Statistics.

Note: The relative technical result of a branch is the profit or loss on the technical account of the aggregated income statement for the branch divided by the aggregated gross premium income written for that branch.

Figure 9.10. Relative Technical Results for Non-Life Excluding Health and Disability Insurance, 1990-2003

Due to restrictive underwriting policies, technical results from transport insurance are positive again. Nevertheless, profit margins remain low due to continuing strong competition from the London market.

Until recently, fire was a relatively profitable and stable branch. In 2000 the results suffered from the great fireworks disaster at Enschede. In the summer of 2000 the storage room of SE Fireworks, in a residential quarter of that town, exploded. Twenty-three people were killed and almost a thousand were injured. The material losses are estimated at half a billion euros. Nevertheless, technical results were still not really bad (see Figure 9.9). In 2002, for the first time in years, technical results were written in red, mainly due to some big losses on industrial fire insurance policies and to higher reinsurance costs resulting from 9/11. However, in 2003 results rallied strongly again to previous levels (see Figure 9.9).

Technical results from the other branches are under pressure. As in other countries, also in the Netherlands experience shows it is difficult to gain effective control over liability claims. Nevertheless, the average profitability of all the other branches together is historically only slightly below average while the volatility of 
technical results is clearly the lowest of all the non-life branches. The category other branches is also the only category that did not show technical results in red for decades.

Finally, it should be noted that in 2003 a terrorism pool became effective. With support of international re-insurers and the national government, the pool covers losses due to attacks by terrorists. There is a limit for a single policyholder or a single location of €75 million; total coverage is limited to €1 billion a year. As a consequence Dutch non-life insurers jointly limited the coverage provided by their own policies to the coverage provided by the newly created terrorism pool. Of the total coverage provided, the first €600 million is for the account of insurers and reinsurers, while the €400 million coverage above that first layer is provided by the Dutch government.

4. Distribution Systems

Distribution Channels and Their Relative Importance

In the Netherlands the distribution system for insurance contracts is very diversified. Independent agents, tied agents, banking outlets, direct writers, underwriting agents, and insurance brokers are all common in the Dutch market. Agents and brokers have an estimated market share of approximately 60 percent, direct writers 20 percent, and banks 15 percent.

Remarkably, a bank—the co-operative Rabobank—is by far the insurance brokerage market leader in terms of gross commission fees earned. Most independent agents are relatively small local intermediaries. As a consequence, seven of the top 10 intermediaries in terms of gross commission fees earned are banks (five) or captives owned by insurance groups (two). Two of the remaining three are the Dutch subsidiaries of the worldwide insurance brokers Aon and Marsh.

In the last few years, different kinds of “exotic” intermediaries such as oil companies, supermarkets, football clubs, car dealers, drugstores, and so on have also entered the market. Until now the success of those new initiatives was only limited. For example, although no fewer than 30 automobile brands today have their own brand automobile insurance policy, the total penetration rate of own-brand automobile insurance policies is by rough estimation at most only 5 percent to 7 percent. Moreover, part of this market share was realized by the distribution of some of the auto brand policies by independent agents.

Dynamics in the Business Environment for the Intermediaries

A few years ago the generous special tax facilities for life insurance policies were changed drastically. As a consequence, many intermediaries had to make the turnaround from simple tax-driven “hit-and-run” selling to “advice-based” selling. At the same time stock markets crashed and the economy cooled down. Huge volumes of recently agreed life insurance policies were surrendered, rendered paid up, or cancelled without any value remaining for the policyholder. Due to relatively very high acquisition commissions paid out at the inception of the contract, huge amounts of commissions paid out before were taken back by the insurers in question. The combined effect of a drastically changed business environment (tax changes, crashes on the stock exchanges, a cooling down of the economy, and low interest rates) and huge cash outflows as a result of arisen commission takebacks (high surrender frequencies) resulted in a real shake-out in the “hit-and-run” intermediaries.

In addition, the distribution channel of independent agents is still in search of a new equilibrium since the business environment has changed so drastically. At the same time, independent agents in particular were confronted with important changes in the regulatory environment for the distribution system and have to prepare for the coming supervisory regulation for financial intermediaries.

Dynamics in the Regulatory Environment for the Distribution System

A few years ago, the rules prescribing fixed commission rates for the distribution channel of independent agents were abolished. Nevertheless, the Dutch antitrust authority, the Nederlandse Mededingingsautoriteit (NMa), has reported again that for non-life business the formerly market-wide agreed commission levels are in general still effective. In 2000 the NMa disqualified this situation as being in violation of the antitrust law.

The rules prohibiting offering a gift to potential clients if and only if they buy an insurance policy were abolished. Today, direct writers in particular use this tactic to tempt potential clients. The gifts range from a lottery ticket for a legal expenses insurance policy to a digital camera for a deferred annuity contract.

At the moment there is much talk about (the lack of) transparency with respect to participation of insurance companies in intermediaries or even total ownership of intermediaries by insurance companies. Due to a lack of transparency, clients cannot know if the intermediary is completely free to give the best advice or not. In the near future, the new Act on the Selling of Financial Services will prescribe full disclosure of all financial and/or contractual ties between insurer and intermediary. However, for the time being, the exact contents and wording of the coming act are still under discussion.

Another still longer pending issue is the lack of transparency with respect to the remuneration of financial intermediaries. Especially in life business with its focus on (very) high acquisition commission fees, this lack of transparency is genuinely an issue.

Until now most intermediaries have been against the disclosure of the amount of the commission fee earned for a specific transaction. They compare their lack of transparency about remuneration with that of washing machine and car dealers. The more appropriate comparison with the totally transparent fee-based remuneration system of professional advisors such as accountants, lawyers, and tax advisors is systematically disregarded. Nevertheless, little by little, well-educated people believe a lack of transparency is no longer justified. However, also under the new Act on the Selling of Financial Services, there will be no rules prescribing the disclosure of the commission earned by the intermediary.

In the near future, the Act on the Selling of Financial Services will become law. Under this act intermediaries will have to apply for a license to operate in the market for financial services, with licenses granted by the Authority for the Financial Markets (AFM). This same AFM will be in charge of the supervision of financial intermediaries. To take out and hold a license to operate, an intermediary must satisfy specific rules with respect to:

• the expertise of the agent with respect to the products and the services he offers;
• the integrity of the agent, including his adherence to rules and standards of market conduct;
• the financial position of the intermediary, including holding an adequate commercial liability insurance policy; and
• the management skills of the agent, including a proper administrative system of checks and balances.

As noted, though, the exact contents and wording of the coming act are still under discussion.

E-commerce in the Dutch Insurance Market

Currently, the websites of Dutch insurers are still focused on marketing and counseling; offering insurance policy sign-up electronically is an exception; some “revolutionary” initiatives to start real virtual insurance companies already have failed. Nevertheless, it is possible to take out some standard policies electronically for simple insurance risks, for example, travel insurance. The medium-sized mutual non-life insurer Unive claims that 10 percent of its new business is taken out electronically. In addition, the company expected the share of e-business in total new business acquired would double in 2004 to 20 percent. However, most insurance companies' websites focus on providing information and providing a means to apply for an offer. Insurers working with independent agents also use their websites specifically to generate leads for their intermediaries.

So, real e-business is still not usual business in the Dutch insurance market. Nevertheless, some intermediaries’ websites that focus on comparing insurance products seem relatively successful. These websites can be made profitable by selling the leads generated to the intermediaries in question or to outside intermediaries or (direct writing) insurance companies. At the same time, these websites make a welcome contribution to creating more transparency in the insurance market. As products and services will become more transparent, the potential for e-commerce in the insurance market will surely increase enormously. In the Dutch banking sector, e-commerce is already commonplace. It is only a question of time until the same will be the case in the Dutch insurance sector.

5. CONCENTRATION, GLOBALIZATION, INTEGRATION,

AND THE DUTCH INSURANCE MARKET

1. Overview of the Total Number of Market Participants

Traditionally, the Dutch insurance market has been one of the most open markets in the world. As a consequence, one of the main characteristics of the market is the large number of licensed companies. Since the European single market was formed in 1993, the number of insurers (excluding the funeral funds under supervision) exploded to 1,072 at the end of 1999 (see Figure 9.11). Due to the single license principle, more than 60 percent of them were not supervised by the Dutch 
supervisory authority but by the supervisory authority in their home country. Since 1999, the number of market participants has been more or less stable, around 1,050.

In 1996, also the funeral funds with at least 3,000 adult members were brought under supervisory control. Ninety-three funeral funds met the criterion of having at least 3,000 members of age. Due to the planned reconstruction of the sector, this number halved within six years to 46 at the end of 2002 and then stabilized at that level.

At the end of 2003 there were 1,079 licensed market participants, with 247 life insurers, 46 funeral funds, and 786 non-life insurers.

2. Competition in the Market for Life Insurance Policies

Source: PVK and Central Bureau of Statistics.

Figure 9.11. Number of Licensed Life Insurers in the Dutch Market, 1985-2003

At the end of 2003, 247 life insurance companies were licensed to operate in the Dutch market; in 1985 there had been only 69. Since the European single market was formed in 1993, the number of life insurers exploded from 97 at the end of 1992 to 263 at the end of 2002 (see Figure 9.11). At first, the number of life insurers with a license granted by the Dutch supervisory authority increased steadily to a maximum of 109 at the end of 1999. However, since the start of the new millennium, this number decreased from year to year with 87 remaining at the end of 2003. At the same time, the increase of the number of insurers with a license granted under the “single license principle” continued until the end of 2002. In 2003 this number decreased for the first time, from 171 to 160, for a total of 247 licensed market participants at the end of 2003.

300

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

■ Dutch Insurers 1? Foreign Insurers

 

 

Due to the single-license principle, not less than 65 percent of the licensed market participants are not supervised by the Dutch supervisory authority but by the supervisory authority in their home country. Most of them even do not have their office within the country but do their business through underwriting agents or other kinds of representatives. Unfortunately, it is not known which part of the licensed foreign companies are effectively not operational in the Dutch market. Although it seems likely that by far the largest part of the turnover in a national market for insurance policies will automatically flow to insurers established in the country in question and not to insurers established abroad, it is, however, also likely that a large number of licensed foreign companies will at least lead to some potential competitive pressure in the market.

In addition to the life insurers operating in the Dutch market for individual and group life insurance contracts, no fewer than 867 pension funds were operational in the Netherlands at the end of 2003, the largest part being company pension funds (753), a still substantial part being pension funds for branches of industry (103), and a minor portion being occupational pension funds (11).

Life insurance business both complements and competes with pensions business. At the same time, some pension funds compete directly with insurers by offering their participants supplementary life and/or disability insurance products. However, a few years ago new legislation introduced strict rules for offering insurance products by pension funds or by insurance subsidiaries of pension funds. As a result, some pension funds announced their withdrawal from the insurance market. For example, the second largest pension fund in the Netherlands, the Stichting Pensioenfonds voor de Gezondheid, Geestelijke en Maatschappelijke Belangen PGGM, announced its intention to sell its insurance subsidiaries.

3. Competition in the Market for Non-Life Insurance Policies

At the end of 2003, 786 non-life insurance companies had licenses to operate in the Dutch market. In 1985 there were still “only” 361 licensed non-life insurance companies. Since the European single market was formed in 1993, the number of non-life insurers exploded from 391 at the end of 1992 to 819 at the end of 1999 (see Figure 9.12).¹⁵

With the introduction of the single license principle, the number of non-life insurers with a license granted by the Dutch supervisory authority dropped by almost 30 percent, from 391 at the end of 1992 to 280 at the end of 1995. At the same time, no fewer than 402 new licenses were granted to foreign insurers already having licenses to operate in another European Union country.

Since 1998 the number of insurers with licenses granted by the Dutch supervisory authority decreased steadily from 294 at the end of 1998 to 246 at the end of 2003. So in the last five years, more than 15 percent of the domestic non-life insurers disappeared as a consequence of takeovers, mergers, or run-offs. However, the increase in the number of insurers with licenses granted under the single license principle continued until the end of 2002. In 2003, this number decreased for the first 

900

time, from 555 to 540, for a total of 786 licensed market participants at the end of 2003.

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Year

• Dutch Insurers Foreign Insurers

Source: PVK and Central Bureau of Statistics.

Figure 9.12. Number of Licensed Non-Life Insurers in the Dutch Market, 1985— 2003

4. Concentration in the Dutch Insurance Market

Despite the large number of licensed companies in the Dutch market, in 2003 the top 10 insurance groups in the relevant market segments have written almost 90 percent of life business and a respectable 67 percent of non-life business.¹⁶ Table 9.7 specifies the market share of the top 10 insurance groups in the Dutch life and nonlife markets.¹⁷

All top five insurance groups and most top 10 insurance groups are the result of high profile mergers and/or takeovers. In 2002 the Aviva subsidiary Delta Lloyd took over the insurance subsidiaries of ABN Amro. ABN Amro Life Insurance was number nine in the top 10 of life insurers. Due to the take-over by Delta Lloyd, Allianz entered the top 10 of life insurers in 2002. Delta Lloyd itself rose from sixth to fourth in life business. ABN Amro Property & Casualty Insurance was much smaller and had no position in the top 10 of non-life insurers. 

Table 9.7. Market Share of Ten Largest Insurance Groups in the Dutch Life and Non-Life Insurance Market, 2002-03

Ranks	Life Insurance	Type	2002 (%)	2003 (%)	Non-Life Insurance	Type	2002 (%)	2003 (%)
1	ING	stock	20.6	22.9	Achmea	mutual	13.7	14.6
2	Aegon	stock	15.0	13.2	Fortis	stock	11.5	11.4
3	Fortis	stock	13.1	12.2	ING	stock	9.4	8.7
4	Delta Lloyd’s	stock	10.6	8.8	Delta Lloyd’s	stock	8.2	8.0
5	Rabobank	mutual	7.4	8.3	Rabobank	mutual	6.0	6.0
6	Achmea	mutual	7.4	7.7	Allianz	stock	5.6	5.5
7	Swiss Life	stock	4.2	6.6	Unive	mutual	3.8	3.9
8	SNS Reaal	mutual	5.9	6.2	Menzis (Amicon)	mutual	2.4	3.4
9	AXA	stock	2.5	2.1	Aegon	stock	3.0	2.9
10	Allianz	stock	1.7	1.6	AXA	stock	2.9	2.5
Total Market Share of Top Ten			88.4	89.6	Total Market Share of Top Ten		66.5	66.9

Source: AM Jaarboek (2003/2004) and (2004).

Note: Market share is defined in terms of premium income written. Delta Lloyd's total market share in the market for non-life insurance as published in AM Jaarboek (2003/2004) is incorrect. In this chapter, the correct figure has been used.

 

Most recently, Achmea took over Levob in 2003, a smaller all-finance group, while Menzis acquired the smaller health insurance companies NVS and Rijnmond. As a result, Achmea in particular could consolidate its leading position in the nonlife market and Menzis could win two positions in the ranking for non-life insurers. Aegon, one of the large international Dutch insurers, sank to ninth. ING and AXA lost market share in the non-life market, viz., 0.7 percent and 0.4 percent.

In the life market AXA lost market share too, but ING could extend its market leadership substantially. The other large international groups lost substantial parts of their market shares, viz., Aegon and Delta Lloyd 1.8 percent and Fortis 0.9 percent. Swiss Life and SNS Reaal changed positions in 2003; however, note that Swiss Life received a very large one-time single premium out of the transfer of the assets and liabilities of a pension fund, so the change does not seem structural.