S E E I N G T H I N G S D I F F E R E N T LY

“CREATIVE DESTRUCTION”1 IN THE DUTCH LIFE INSURANCE MARKETUpdate on scenario analysis: “The Dutch Life Insurance Market in 2020”

In late 2009 Atos Consulting published a scenario analysis entitled “The Dutch Life Insurance Market in 2020”2. Now, a little over one year later, it is time for an update. Are the trends and developments continuing, and is there a scenario that seems to be taking shape?

Our 2009 scenario analysis outlined four possible future scenarios hinging on the future development of a number of trends.

The two main trends underlying the projected scenarios are:1. The need to cover risks with life insurance2. The need for personalized adviceThese two fundamental underlying trends have not changed.

With these two trends in mind, we will now take a look at a number of significant developments on the Dutch Life Insurance Market in 2011. Life insurance providers are coming out of tough times, and they are not out of the woods yet, as major challenges still lie ahead. We will address these issues one by one below and draw some general conclusions at the end of this article regarding what all of this means for the projected scenarios.

Four possible future scenarios

Scenario 1Big Brother

Scenario 3System Changed

Scenario 2Product innovation

Scenario 4Virtual Guardian Angel

Highly regulated life insurance market

in an unstable economy

Financial system completely reformed;

accumulation of capital is the trend

New public subsidization in an unstable financial world

Financial system completely reformed;

accumulation of capital is the trend

No personal financial advice With personal financial advice

A lot

A little

Need

to c

over

risk

s

Bank savings products further reduce life insurance policy salesIn 2009 the number of insurance policies sold dropped by 15%. This trend appears to be continuing: in 2010 the number of life insurance policies sold fell 19% to 750,000 (Dutch Center for Insurance Statistics (CVS), February 2011). Revenues on the market have dropped from 5.3 billion euro down to 4.5 billion euro. Most of production shifted to bank savings products and in 2010 practically every single insurance provider introduced their own bank savings product onto the market (via a company bank or a partner bank). As in 2009, the market for investment-linked insurance suffered the heaviest loss in 2010 as well, falling from 168,700 policies closed in 2008 to 77,328 policies in 2009 and down to just 55,000 policies in 2010.

Endowment mortgages as life insurance products are still popular among Dutch consumers, but banks have developed good bank savings alternatives for these as well. In addition, the number of mortgages sold in the Netherlands has also been in decline as a result of the crisis.

Term life insurance is the only growth market for life insurance providersAfter a 9% decrease in 2009, the number of term life policies sold rose by 21% in 2010. This was due in part to the surge in bank savings accounts, for which separate term life policies are sold. On this market, entry of foreign budget providers such as TAF and Cardiff has sparked a price war, putting a great deal of pressure on margins. This is evidenced, for instance, by the fact that the 21% increase in the number of term life policies sold has translated into an increase in turnover of less than 8%.

A new scandal looms involving compensation payments in the life insurance marketJust when (almost) all insurance providers believed they had reached a settlement, and the first customers were going to start receiving their compensation letters in 2011 for their extortionate policies, the life insurance provider at ASR Nederland has been convicted for providing compensations based on net yields. If this verdict is upheld on appeal, this will have major repercussions for Dutch life insurance providers. In that event, the compensations that Dutch insurance providers must pay out would be several times greater than the previous settlement. In combination with ‘no cure, no pay’ lawsuits, this may even result in several bankruptcies.

Closed-book consolidators set their sights on the Dutch marketIn late 2010, it was announced that a Dutch company (Certens) was founded with the aim of specializing in buying up and settling closed portfolios from life insurance providers. At the same time, the Central Bank of the Netherlands (De Nederlandsche Bank (DNB)) revealed in its quarterly report that several foreign closed-book consolidators (such as Resolution from the UK) were taking an interest in the Dutch market. DNB has a favorable view of this development because the sale of closed portfolios and divestment of legacy systems could provide relief for insurance providers and improve their financial positions.

Overcapacity on the life insurance marketIn February 2011, DNB warned of overcapacity on the life insurance market: “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”. DNB expects that life insurance providers will have to adapt their business models in order to survive in this market.

Solvency II comes with high costs for small to medium-sized life insurance providersSolvency II will have a particularly harsh impact on the financial positions of small to medium-sized life insurance providers: > Some portfolios and insurance providers will have to

meet higher capital requirements.> In some cases, legacy systems will have to be

replaced or modified at high costs.> Particularly for small to medium-sized insurance

providers, it may be necessary to invest in improvements in Asset Liability Management (ALM) and risk management.

Life insurance providers will have to start recalculating and adjusting all life insurance policy premiumsThis is a consequence of a verdict from the European Court of Justice. On March 1st, 2011, the court prohibited insurance providers from making a distinction between men and women in calculating premiums. The prohibition takes effect in December of 2012 and over the next year and a half will result in a hefty administrative burden on insurance providers from adjustments such as modifying products, recalculating premiums and converting policies.

“CREATIVE DESTRUCTION” IN THE DUTCH LIFE INSURANCE MARKET

The ban on commission is ushering in a new worldDutch Finance Minister De Jager has issued a ban on commission for complex products that will take effect on January 1st, 2013. This will create a schism between consultancy and brokerage (sales). Brokers will switch from acting as a sales channel for life insurance providers to the role of trusted advisers to customers. Brokers will have to devise new business models if they are to survive. We will witness upscaling and consolidation on the brokerage market and the advent of discount formulas. The relationship between insurance provider and broker will become more professional and brokers will require insurance providers to have their administrative affairs in proper order. Furthermore, in the future brokers will always deal with a broader range of products than just insurance policies. Bank products will be included in their consultancy services. For insurance providers, it will be necessary to develop a multi-channel distribution strategy, as it will no longer be possible to rely on the brokerage channel for turnover.

Consumer confidence in insurance providers is still lowConsumer confidence in the insurance sector is still negative (Dutch Centre for Insurance Statistics (CVS), February 2011). The only silver lining here is that there is an upwards trend in consumer confidence. The CVS’s consumer confidence indicator rose from -36 in the second quarter of 2009 up to -23 by the last quarter of 2010. The major Dutch intermediary insurance providers scored poorly in an annual study conducted by the University of Groningen on Customer Performance among 100 major Dutch companies. They hold four of the bottom six positions in the Top 100: Aegon (99), Nationale Nederlanden (97), Reaal (95) and Delta Lloyd (94). Only insurance provider ASR managed to improve its position as an intermediary insurance provider over the last year, climbing four spots to arrive at number 85.

The result of these developments is a shakeout among life insurance providersAs a result of the developments detailed above, we have noticed in our consulting practice that many directors are asking themselves whether they really want to continue to operate in the life insurance market. And if so, in what way? 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. Some of the strategies we encounter here are:> Divest closed life portfolios to a closed-book

consolidator and shift focus to new, transparent products and term life insurance policies.

> Divest the life insurance provider and exit the market.> Consolidate all life insurance providers within the

company group under a single label and insurance license (Allianz and ASR are just two examples).

> Outsource parts of the administrative process to low-wage countries (for instance, one of the major Dutch insurance providers is currently executing a pilot project to move part of their back office processes to India).

> Business Process Outsourcing (outsourcing the entire back office and (if applicable) customer service processes, including systems and staff). This trend really took off last year in the UK in particular. The UK market leader, Capita, has announced that it will be looking for growth opportunities on the European mainland over the coming years, and that it is taking a good look at the Netherlands.

That would greatly simplify the market in the Netherlands over the coming years. Over the next 5 to 10 years, the majority of the current labels and providers (we still have almost 60 of them left) will disappear from the market and those that remain will have to continuously reduce costs to stay ahead of the competition.

What does all of this mean for the life insurance market and the scenarios?Looking at the four scenarios3, we appear to be heading towards scenario 3: ‘System Changed’. As a result of the imminent pension agreement, people will start saving for later on a more individual basis, which will hardly benefit insurance providers. A large number of life insurance providers will vanish from the market over the coming years and low-cost and possibly also white-label insurance provides will arise, who will offer their products to distributors at low operating costs. In addition to these, there will also be a number of closed-book consolidators active in the market, who will buy up and settle closed life portfolios.

“CREATIVE DESTRUCTION” IN THE DUTCH LIFE INSURANCE MARKET

Atos, Atos including the fish logo, Atos Origin including the fish logo, Atos Consulting and the fish logo itself are registered trademarks of Atos Origin S.A. February 2011

In our opinion, consumer confidence will continue its rebound over the coming years, but it remains to be seen whether this trend will also apply to life insurance providers. Especially now that it appears that the extortionate policy scandal still has not been resolved/concluded.

What we are now dealing with is a complete transformation of the life insurance market. Hence the title of our update: “Creative Destruction” in the Dutch Life Insurance Market. With the advent of new products (bank savings products), technologies (Internet, business process modeling), and new business models (business process outsourcing, relocation to low-wage countries) in the life insurance market, we are witnessing the end of the old order. New (foreign) entrants with no legacies and low-cost business models, as well as banks with their substitute products, will take over a large portion of the market. 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.

For more information, please feel free to contact Stephan Linnenbank RM, partner at Atos Consulting.

Atos ConsultingPapendorpseweg 933528 BJ UtrechtThe NetherlandsPhone: +31 (0)88 265 88 88info.consulting@atosorigin.comwww.atosconsulting.nl

1. Creative Destruction is a concept of Joseph Schumpeter (1883-1950).

Schumpeter defines the term ‘creative destruction’ as a process

of continuing innovation, in which successful application of new

technologies destroys the older ones. Schumpeter held (technological)

innovation to be the only real source of economic growth. Successful

innovation creates temporary market strength, which affects the profits

and market shares of companies founded on prior technologies. In a

never-ending process of rises and falls, old companies are destroyed by

new ones.

2. Scenario Planning: ‘The Life Insurance Market in 2020’, available at www.

scenario-planning.nl Atos Consulting Trends Institute (only in Dutch)

3. Scenario Planning: ‘The Life Insurance Market in 2020’, available at www.

scenario-planning.nl Atos Consulting Trends Institute (only in Dutch)