Creative Destruction In The Dutch Life Insurance Industry

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Dutch life market on eve of major shake-out …

Dutch life market on eve of major shake-out
We expect that over the next five years, many insurers will disappear and there remain a maximum of 6 to 10 (of the 65) life insurers. That is the prediction of Atos Consulting in the update of the ‘scenario planning life insurance 2020’.
• It appears that one of the most gloomy scenario now seems to be come reality. Only insurers that adjust their business model and realize significant cost savings, are likely to survive.

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  • 1. 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 LIFEINSURANCE 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 ascenario that seems to be taking shape?Our 2009 scenario analysis outlined four possible The two main trends underlying the projectedfuture scenarios hinging on the future development of a scenarios are:number of trends. 1. The need to cover risks with life insurance 2. The need for personalized advice Four possible future scenarios These two fundamental underlying trends have not changed. With these two trends in mind, we will now take a Scenario 1 A lot Scenario 2 Big Brother Product innovation look at a number of significant developments on the Dutch Life Insurance Market in 2011. Life insurance Highly regulated life New public subsidization providers are coming out of tough times, and they are insurance market in an unstable in an unstable economy financial world not out of the woods yet, as major challenges still lie No personal financial advice With personal financial advice ahead. We will address these issues one by one below Need to cover risks and draw some general conclusions at the end of this Financial system Financial system article regarding what all of this means for the projected completely reformed; completely reformed; scenarios. accumulation of capital accumulation of capital is the trend is the trend Scenario 3 Scenario 4 System Changed Virtual Guardian Angel A little
  • 2. “CREATIVE DESTRUCTION” IN THE DUTCH LIFE INSURANCE MARKETBank savings products further reduce life Closed-book consolidators set their sights on theinsurance policy sales Dutch marketIn 2009 the number of insurance policies sold dropped In late 2010, it was announced that a Dutch companyby 15%. This trend appears to be continuing: in 2010 (Certens) was founded with the aim of specializingthe number of life insurance policies sold fell 19% to in buying up and settling closed portfolios from life750,000 (Dutch Center for Insurance Statistics (CVS), insurance providers. At the same time, the Central BankFebruary 2011). Revenues on the market have dropped of the Netherlands (De Nederlandsche Bank (DNB))from 5.3 billion euro down to 4.5 billion euro. Most revealed in its quarterly report that several foreignof production shifted to bank savings products and closed-book consolidators (such as Resolution fromin 2010 practically every single insurance provider the UK) were taking an interest in the Dutch market.introduced their own bank savings product onto the DNB has a favorable view of this development becausemarket (via a company bank or a partner bank). As the sale of closed portfolios and divestment of legacyin 2009, the market for investment-linked insurance systems could provide relief for insurance providers andsuffered the heaviest loss in 2010 as well, falling from improve their financial positions.168,700 policies closed in 2008 to 77,328 policies in2009 and down to just 55,000 policies in 2010. Overcapacity on the life insurance market In February 2011, DNB warned of overcapacity on theEndowment mortgages as life insurance products are life insurance market: “Under these market conditions,still popular among Dutch consumers, but banks have there is a risk of loss-making products being put ontodeveloped good bank savings alternatives for these as the market, which may pose a threat to the long-termwell. In addition, the number of mortgages sold in the viability of insurance providers”. DNB expects that lifeNetherlands has also been in decline as a result of the insurance providers will have to adapt their businesscrisis. models in order to survive in this market.Term life insurance is the only growth market for Solvency II comes with high costs for small tolife insurance providers medium-sized life insurance providersAfter a 9% decrease in 2009, the number of term life Solvency II will have a particularly harsh impact onpolicies sold rose by 21% in 2010. This was due in the financial positions of small to medium-sized lifepart to the surge in bank savings accounts, for which insurance providers:separate term life policies are sold. On this market, > Some portfolios and insurance providers will have toentry of foreign budget providers such as TAF and meet higher capital requirements.Cardiff has sparked a price war, putting a great deal of > In some cases, legacy systems will have to bepressure on margins. This is evidenced, for instance, replaced or modified at high costs.by the fact that the 21% increase in the number of > Particularly for small to medium-sized insuranceterm life policies sold has translated into an increase in providers, it may be necessary to invest inturnover of less than 8%. improvements in Asset Liability Management (ALM) and risk management.A new scandal looms involving compensationpayments in the life insurance market Life insurance providers will have to startJust when (almost) all insurance providers believed they recalculating and adjusting all life insurance policyhad reached a settlement, and the first customers were premiumsgoing to start receiving their compensation letters in This is a consequence of a verdict from the European2011 for their extortionate policies, the life insurance Court of Justice. On March 1st, 2011, the courtprovider at ASR Nederland has been convicted for prohibited insurance providers from making a distinctionproviding compensations based on net yields. If between men and women in calculating premiums.this verdict is upheld on appeal, this will have major The prohibition takes effect in December of 2012repercussions for Dutch life insurance providers. In and over the next year and a half will result in a heftythat event, the compensations that Dutch insurance administrative burden on insurance providers fromproviders must pay out would be several times greater adjustments such as modifying products, recalculatingthan the previous settlement. In combination with ‘no premiums and converting policies.cure, no pay’ lawsuits, this may even result in severalbankruptcies.
  • 3. The ban on commission is ushering in a new world posed by these developments and achieve a majorDutch Finance Minister De Jager has issued a ban reduction in costs. Some of the strategies we encounteron commission for complex products that will take here are:effect on January 1st, 2013. This will create a schism > Divest closed life portfolios to a closed-bookbetween consultancy and brokerage (sales). Brokers will consolidator and shift focus to new, transparentswitch from acting as a sales channel for life insurance products and term life insurance policies.providers to the role of trusted advisers to customers. > Divest the life insurance provider and exit the market.Brokers will have to devise new business models if > Consolidate all life insurance providers within thethey are to survive. We will witness upscaling and company group under a single label and insuranceconsolidation on the brokerage market and the advent of license (Allianz and ASR are just two examples).discount formulas. The relationship between insurance > Outsource parts of the administrative process to low-provider and broker will become more professional and wage countries (for instance, one of the major Dutchbrokers will require insurance providers to have their insurance providers is currently executing a pilotadministrative affairs in proper order. Furthermore, in the project to move part of their back office processes tofuture brokers will always deal with a broader range of India).products than just insurance policies. Bank products will > Business Process Outsourcing (outsourcing thebe included in their consultancy services. For insurance entire back office and (if applicable) customer serviceproviders, it will be necessary to develop a multi-channel processes, including systems and staff). This trenddistribution strategy, as it will no longer be possible to really took off last year in the UK in particular. Therely on the brokerage channel for turnover. UK market leader, Capita, has announced that it will be looking for growth opportunities on the EuropeanConsumer confidence in insurance providers is mainland over the coming years, and that it is taking astill low good look at the Netherlands.Consumer confidence in the insurance sector is stillnegative (Dutch Centre for Insurance Statistics (CVS), That would greatly simplify the market in theFebruary 2011). The only silver lining here is that there is Netherlands over the coming years. Over the nextan upwards trend in consumer confidence. The CVS’s 5 to 10 years, the majority of the current labels andconsumer confidence indicator rose from -36 in the providers (we still have almost 60 of them left) willsecond quarter of 2009 up to -23 by the last quarter of disappear from the market and those that remain will2010. The major Dutch intermediary insurance providers have to continuously reduce costs to stay ahead of thescored poorly in an annual study conducted by the competition.University of Groningen on Customer Performanceamong 100 major Dutch companies. They hold four of What does all of this mean for the life insurancethe bottom six positions in the Top 100: Aegon (99), market and the scenarios?Nationale Nederlanden (97), Reaal (95) and Delta Lloyd Looking at the four scenarios3, we appear to be heading(94). Only insurance provider ASR managed to improve towards scenario 3: ‘System Changed’. As a resultits position as an intermediary insurance provider over of the imminent pension agreement, people will startthe last year, climbing four spots to arrive at number 85. saving for later on a more individual basis, which will hardly benefit insurance providers. A large numberThe result of these developments is a shakeout of life insurance providers will vanish from the marketamong life insurance providers over the coming years and low-cost and possibly alsoAs a result of the developments detailed above, we white-label insurance provides will arise, who will offerhave noticed in our consulting practice that many their products to distributors at low operating costs. Indirectors are asking themselves whether they really addition to these, there will also be a number of closed-want to continue to operate in the life insurance market. book consolidators active in the market, who will buy upAnd if so, in what way? The life insurance market and settle closed life portfolios.has become unattractive for many of the establishedplayers. Life insurance providers will have to adapt theirbusiness models rapidly in order to meet the challenges
  • 4. “CREATIVE DESTRUCTION” IN THE DUTCH LIFE INSURANCE MARKETIn our opinion, consumer confidence will continue its 1. Creative Destruction is a concept of Joseph Schumpeter (1883-1950).rebound over the coming years, but it remains to be Schumpeter defines the term ‘creative destruction’ as a processseen whether this trend will also apply to life insurance of continuing innovation, in which successful application of newproviders. Especially now that it appears that the technologies destroys the older ones. Schumpeter held (technological)extortionate policy scandal still has not been resolved/ innovation to be the only real source of economic growth. Successfulconcluded. innovation creates temporary market strength, which affects the profits and market shares of companies founded on prior technologies. In aWhat we are now dealing with is a complete never-ending process of rises and falls, old companies are destroyed bytransformation of the life insurance market. Hence the new ones.title of our update: “Creative Destruction” in the Dutch 2. Scenario Planning: ‘The Life Insurance Market in 2020’, available at www.Life Insurance Market. With the advent of new products scenario-planning.nl Atos Consulting Trends Institute (only in Dutch)(bank savings products), technologies (Internet, 3. Scenario Planning: ‘The Life Insurance Market in 2020’, available at www.business process modeling), and new business models scenario-planning.nl Atos Consulting Trends Institute (only in Dutch)(business process outsourcing, relocation to low-wagecountries) in the life insurance market, we are witnessingthe end of the old order. New (foreign) entrants withno legacies and low-cost business models, as well asbanks with their substitute products, will take over alarge portion of the market. In our opinion, only thoselife insurance providers who can adapt their businessmodels and drastically reduce costs will survive thistransition. Most life insurance providers will ultimately gounder in a cycle of creative destruction and renewal.For more information, please feel free to contactStephan Linnenbank RM, partner at Atos Consulting.Atos ConsultingPapendorpseweg 933528 BJ UtrechtThe NetherlandsPhone: +31 (0)88 265 88 88info.consulting@atosorigin.comwww.atosconsulting.nlAtos, 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