Insurance in the Netherlands

Year

Unit-Linked Market Share in New Business Acquired Moving Average Share in New Business Acquired

 

Source: PVK and Central Bureau of Statistics.

Figure 9.5. Unit-Linked Business Market Share of Total New Business Acquired for Individual Life Policies with Premium Payment, 9/1997-1/2004

The trend-break in the first years of the twenty-first century is clear from Figure 9.5. The shift from traditional to unit-linked has reversed in favor of traditional life insurance policies. Nevertheless, the amount of premiums written from unit-linked policies increases still further at a relatively steady rate because the premium income generated by the already existing unit-linked portfolio is still relatively low. Logically, shifts in the composition of new business sold can be seen more directly and clearly in figures concerning premiums written from single premium contracts.

In the segment for single premium contracts the turnaround in December 2000 resulted in a real “landslide.”  Although the peak reached was less than 60 percent, substantially lower than the peak of nearly 80 percent for contracts with premium payment, the setback was by far more serious (see Figure 9.6). Within three years the 12 months moving average dropped tremendously from more than 43 percent in January 2001 to less than 19 percent in January 2004. So the 12 months moving average was more than halved.

Year

Unit-Linked Market Share in New Business Acquired  Moving Average Share in New Business Acquired

 

Source: PVK and Central Bureau of Statistics.

Figure 9.6. Unit-Linked Business Market Share of Total New Business Acquired for Individual Single Premium Life Policies, 9/1997-1/2004

Indeed, single premium unit-linked policies never attained the same enormous popularity as periodic premium unit-linked policies because immediate annuities account for a very large part of the segment for single premium policies. Due to the specific character of an immediate annuity, with the client generally in need of a far- reaching income guarantee, this kind of product is less suited for selling as a unit- linked product. Because it is likely that in the years to come the market share of immediate annuities will only increase further, it does not seem likely that in the near future unit-linked business will, in this segment, regain the market share lost.

Growing Importance of Mortgage-Related Life Insurance Policies

During the last few years the dependency of new life business acquired in the market for mortgage loans rose substantially. Figure 9.7 shows the recent development of the monthly share of mortgage-related life business in total new business acquired in the segment of individual life insurance with premium payment.

At the peak of popularity of unit-linked business, almost 85 (!) percent of the new mortgage-related life insurance policies sold were unit-linked policies (in terms of premiums written). The market share of unit-linked business in this segment is still 70 percent. Nevertheless, the growth in this market segment in the most recent years came only from the selling of traditional life insurance policies.

With a 12-months moving average market share of mortgage-related business that has risen from less than 30 percent in 2001 to almost 45 percent at the beginning of 2004, the vulnerability of the sector for the development of the mortgage loans market has risen proportionately. Due to “overheated” housing prices, bottoming interest rates, the economic downturn and the resulting rise in unemployment, and last but surely not least an adverse change in the tax system in effect as of January 1, 2004, the market for mortgage-related life insurance policies stands at a breaking point. In the trade journals some pessimists declared that an adverse effect for new 

Year

Market Share ofMortgage Related Life Insurance  Moving Average Share in New Business Acquired

business acquired could be expected of more than €300 million in terms of premium income written.

Source: PVK and Central Bureau of Statistics.

Figure 9.7. Market Share ofMortgage Related Business in Total New Business Acquired for Individual Life Policies with Premium Payment, 9/1997-1/2004 in the Netherlands from September 1997 to January 2004

3. Overview of the Market for Non-Life Business¹² The Relative Relevance of the Different Branches

Premium income from non-life business has grown steadily for decades. A substantial part of this steady growth was due to continually rising health care costs and a drastic privatization of the social security system for sickness and disability insurance. As a result, premium income from accident, private health, and disability insurance policies already accounts for nearly half of the total premium income from non-life business. Figure 9.8 compares non-life premiums by line of business for 1981 and 2003, while Table 9.4 gives premiums by line for the period 1990-2003.

In 1981 premium income from accident, private health, and disability insurance still accounted for “only” one-third of total non-life premium income written. Since 1981 the “market share” of accident, health, and disability insurance increased enormously while this rise in the importance of accident, health and disability insurance for the non-life business segment continues. In 2003 approximately 60 percent of the premium income written came from private health insurance policies and approximately 40 percent from sickness and disability insurance policies (AM Jaarboek 2004). 

2003

1981

Figure 9.8. Composition of Gross Non-Life Premiums

• Accident & health
• Fire
• Motor
• Transport
• Other branches

Source: PVK and Central Bureau of Statistics.

 

 

 

 

 

 

 

Note that only private health insurance is accounted for in the figures given above. Premium income from compulsory health insurance—almost two times the amount of premium income from private health insurance—is not included. Health insurance is compulsory for each employee with a yearly income of less than approximately €33,000. Of Dutch citizens, roughly two-thirds are insured by one of the compulsory funds.

Also, social premiums imposed by the Exceptional Medical Expenses Act (AWBZ), amounting to almost €13 billion, are not included. Every Dutch citizen is by law insured against exceptional medical expenses, such as the (very high) costs of long-term nursing home care. Approximately 60 percent of the AWBZ-expenses is spent on nursing and care for disabled and aged people. The other 40 percent is more or less evenly spent on mental health care and facilities for disabled people. The licensed health insurers act as administrative offices to execute the AWBZ.

So the relative share of health and disability insurance increased substantially during the past decades. However, due to population growth, growing prosperity, and a continuing progression in the penetration of high-tech and relatively expensive equipment and appliances, premium income from property and automobile insurance policies also showed a steady, although less impressive growth rate. On the other hand, premium income from transport insurance shrank to almost marginal proportions, in spite of the fact that the Dutch ports are among the largest transit ports of the world. Strong competition from the London market was one of the causes.

Approximately 55 percent of total premium income written from automobile insurance policies was generated by automobile liability msurance policies. The other 45 percent was generated by accidental damage insurance policies. In 2003 the growth rate for automobile insurance was below average, with growth mainly resulting from premium rate increases, especially for automobile liability insurance.

In addition to personal and commercial liability insurance, the category “other branches”  mainly includes credit insurance, legal expenses insurance, and travel insurance. Especially due to an increasing penetration of. liability insurance combined with rising premium rates for it, the growth rate for premium income written from policies within this category has accelerated. In 2001 premium income grew by 9 percent while in 2002 the growth rate accelerated to more than 13 percent. In 2003 the growth rate consolidated on the high level of 13 percent. 

Although the U.S. culture of civil litigation has not yet reached the Netherlands, claim awareness and the amounts of claims are nevertheless rising. Against the background of rising claim awareness, it is not surprising that the market penetration of legal expenses insurance grew relatively fast. Nevertheless, legal expenses insurance is still a small branch in terms of premium income written (much less than €400 million).

In the Dutch insurance market employers’ liability is also a relatively uncertain risk. With, for example, the DES and asbestosis cases in mind, insurers are reluctant to offer employers’ and product liability insurance.¹³ As a logical consequence, premium rates are rising. For the near future it seems likely that penetration rates and premium rates for employers’ liability insurance will continue to rise.

Table 9.4. Non-Life Insurance Premium Revenues by Line of Business, 1990-2003 (€ Millions)

Year	Accident and Health	Fire	Motor	Transport	Other Branches
1990	3,376	1,833	2,208	406	1,094
1991	3,406	1,881	2,295	433	1,163
1992	3,918	1,999	2,354	502	1,251
1993	4,412	2,159	2,479	529	1,295
1994	4,981	2,236	2,748	498	1,371
1995	5,225	2,362	2,944	506	1,388
1996	5,577	2,417	3,129	520	1,396
1997	6,010	2,459	3,175	523	1,482
1998	6,421	2,527	3,279	520	1,741
1999	7,106	2,512	3,463	490	1,809
2000	7,595	2,674	3,759	515	2,022
2001	8,437	2,814	3,988	543	2,202
2002	9,661	3,129	4,222	579	2,495
2003	10,279	3,314	4,381	598	2,632

Source: PVK and Central Bureau of Statistics.

 

The Aggregated Balance Sheet of the Non-Life Insurance Industry

The most important items on the balance sheet of a non-life insurer are the investments, technical provisions, and guarantee funds (net worth or equity capital). Premiums paid by the policyholders create liabilities for the insurer. Because nonlife insurers have a more or less stable permanent “stock” of liabilities they have a more or less stable amount available to invest in shares, in loans and fixed-income securities, and in other assets. The guarantee funds are needed to secure the solvency of the insurer. Table 9.5 shows the aggregated balance sheet of the Dutch non-life insurance industry as of December 31, 2003.

Table 9.5. Aggregated Balance Sheet of the Dutch Non-Life Insurance Industry, 12/31/2003 (€ Millions)

Assets		Liabilities
Investments for the Benefit of the		Guarantee Funds	10,155
Insurer
Shares	4,216
Loans and Fixed Income Securities	21,330	Technical Provisions	22,176
Other Investments	3,772	Non-Technical Provisions	375
Other Assets	7,624	Other Liabilities	4,236
Total Assets	36,942	Total Liabilities	36,942

Source: PVK and Central Bureau of Statistics.

 

To evaluate the level of the guarantee funds, the actual level has to be related to the required level, giving the solvency ratio. The solvency ratio for Dutch non-life insurers is discussed earlier in this chapter with reference to Figure 9.1.

On average more than 70 percent of the investments of Dutch non-life insurers are fixed-income investments and approximately 14 percent are in shares (see Table 9.5). The other investments consist of investments in land and buildings and in affiliated companies. At the start of the new millennium nearly 28 percent of total investments was invested in shares, almost double the current 14 percent.

The Aggregated Income Statement of the Non-Life Insurance Industry

Since the EU directive on the accounts and the consolidated accounts of insurance companies was implemented in Dutch civil law, the income statement of insurers consists of a technical account and a non-technical account.¹⁴ Given the technical character of the business, the technical account is by far the most important part of the income statement of an insurer. The non-technical account mainly consists of the investment income allocated to or kept back in the non-technical account, other nontechnical revenues, and charges and tax charges. Table 9.6 shows the aggregated income statement of the Dutch non-life insurance industry for financial year 2003.

The first part of the technical account shows total revenues accrued from mainly premium income and investment income. As Table 9.6 shows, reinsurance premiums ceded are on average nearly 11 percent of gross premiums earned. In 2002 it was over 12 percent due to the rate increases on the reinsurance market following 9/11. In 2003 reinsurance charges fell back again because the insurance companies on average increased the amounts of their own retentions.

Table 9.6. Aggregated Income Statement of the Dutch Non-Life Insurance Industry, 2003 (€ Millions)

Income Statement Item
Gross Premiums Written	21,203
Change in the Gross Provision for Unearned Premiums	(.299)
Gross Premiums Earned	20,904
Reinsurance Premiums Ceded	(2,260)
Earned Premiums, Net of Reinsurance		18,644
Investment Income Technical Account		1,212
Other Technical Income		.258 20,114
Claims Incurred, Net of Reinsurance	14,064
Changes in Technical Provisions, Net of Reinsurance	(.009)
Bonuses and Rebates	.103	14,158 5,956
Operating Expenses and Interest Charges	4,481
Other Charges Technical Account	.290	4,771
Balance on Technical Account		1,185
Investment Income Non-Technical Account	.551
Other Income and Charges and Minority Interests	(.067)	.484
Profit or Loss for the Financial Year, Before Tax		1,669
Tax Charges		(.399)
Profit or Loss for the Financial Year, After Tax		1,270

Source: PVK and Central Bureau of Statistics.

 

In financial year 2003, investment income accounted only for 6 percent of total technical income. As a consequence, strong fluctuations in the amount of the investment income earned do not impact technical results and net results the same way as in the life insurance industry. Nevertheless, in 2003 net results “exploded” from €197 million in 2002 to €1,270 million in 2003, mainly because total investment income doubled in 2003.

However, a large part of the difference in investment income is the result of the reversal in 2003 of the write-off in 2002 of large amounts of negative investment revaluation reserves. So although net results for 2003 and the development of net results in 2003 look good at first sight, in reality net results for 2003 were much worse both in absolute terms and relative to the non-distorted 2002-figure. As a consequence, the 2003 level of net results and the strong recovery of reported results in 2003 cannot be seen as real and of a structural character.

The second part of the technical account shows the claims incurred during the financial year. Claims incurred plus bonuses and rebates allowed amount to 76 percent of net premium income earned.

In the third and last part of the income statement the operating expenses and other technical charges are specified. In 2003 total operating expenses amounted to 24 percent of net premium income earned. Commissions paid to intermediaries account for a substantial part of the operating expenses.

Together with the loss ratio referred to above, the expense ratio of 24 percent makes a combined ratio of (almost) exactly 100 percent. In 2002 the combined ratio was 103 percent and in 2001 more than 104 percent. The realized improvements were mainly caused by premium rate increases.

Technical Results

The profit or loss at the bottom of the technical account of the income statement as discussed above is the technical result of the insurer. Figure 9.9 shows the development of technical results in total and by branch as a percentage of gross premium income written. As the figure shows, technical results fluctuate from year to year, with negative results for automobile, transport, property, and health insurance in 2002. Health insurance technical results have been near or below zero for several years, but are mostly more than compensated for by positive technical results on sickness and disability insurance policies. Especially in 2001 and 2002, technical results on sickness and disability insurance were again very attractive, resulting in nice overall results for the total branch (see Figure 9.9). In 2003 technical results in all branches were positive.

Due to negative total returns on the stock markets and relatively low capital market interest rates, the dip in relative total net results in 2002 was by far more serious than the dip in relative technical results. Total technical results nearly halved from over 2 percent to a little bit more than 1 percent, while total net results tumbled almost 70 percent, from nearly 4 percent to less than 1 percent.

In 2003 results recovered substantially except for the branch “other branches.” Relative total technical results rallied by 400 percent to over 5.5 percent and relative total net results by 200 percent to 6 percent. As discussed above, one has to remember that book results were depressed in 2002 and boosted in 2003 due to the developments on the stock exchanges.

Successive technical results from automobile insurance typically fluctuate around zero. The market for automobile insurance policies is traditionally the most competitive segment of the market for non-life insurers. After some recovery in

2001. automobile insurance technical results slid again in 2002. Nevertheless, in 2003 results recovered strongly. Relative technical results rallied from minus 1.5 
      

International Insurance Markets 479

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 9.9. Relative Technical Results by Branch, 1995-2003