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.

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 LIFE
INSURANCE MARKET
Update 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 The two main trends underlying the projected
future 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 MARKET
Bank savings products further reduce life Closed-book consolidators set their sights on the
insurance policy sales Dutch market
In 2009 the number of insurance policies sold dropped In late 2010, it was announced that a Dutch company
by 15%. This trend appears to be continuing: in 2010 (Certens) was founded with the aim of specializing
the number of life insurance policies sold fell 19% to in buying up and settling closed portfolios from life
750,000 (Dutch Center for Insurance Statistics (CVS), insurance providers. At the same time, the Central Bank
February 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 foreign
of production shifted to bank savings products and closed-book consolidators (such as Resolution from
in 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 because
market (via a company bank or a partner bank). As the sale of closed portfolios and divestment of legacy
in 2009, the market for investment-linked insurance systems could provide relief for insurance providers and
suffered the heaviest loss in 2010 as well, falling from improve their financial positions.
168,700 policies closed in 2008 to 77,328 policies in
2009 and down to just 55,000 policies in 2010. Overcapacity on the life insurance market
In February 2011, DNB warned of overcapacity on the
Endowment 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 onto
developed good bank savings alternatives for these as the market, which may pose a threat to the long-term
well. In addition, the number of mortgages sold in the viability of insurance providers”. DNB expects that life
Netherlands has also been in decline as a result of the insurance providers will have to adapt their business
crisis. 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 to
life insurance providers medium-sized life insurance providers
After a 9% decrease in 2009, the number of term life Solvency II will have a particularly harsh impact on
policies sold rose by 21% in 2010. This was due in the financial positions of small to medium-sized life
part 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 to
entry 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 be
pressure 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 insurance
term life policies sold has translated into an increase in providers, it may be necessary to invest in
turnover of less than 8%. improvements in Asset Liability Management (ALM)
and risk management.
A new scandal looms involving compensation
payments in the life insurance market Life insurance providers will have to start
Just when (almost) all insurance providers believed they recalculating and adjusting all life insurance policy
had reached a settlement, and the first customers were premiums
going to start receiving their compensation letters in This is a consequence of a verdict from the European
2011 for their extortionate policies, the life insurance Court of Justice. On March 1st, 2011, the court
provider at ASR Nederland has been convicted for prohibited insurance providers from making a distinction
providing 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 2012
repercussions for Dutch life insurance providers. In and over the next year and a half will result in a hefty
that event, the compensations that Dutch insurance administrative burden on insurance providers from
providers must pay out would be several times greater adjustments such as modifying products, recalculating
than the previous settlement. In combination with ‘no premiums and converting policies.
cure, no pay’ lawsuits, this may even result in several
bankruptcies.

3. The ban on commission is ushering in a new world posed by these developments and achieve a major
Dutch Finance Minister De Jager has issued a ban reduction in costs. Some of the strategies we encounter
on 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-book
between consultancy and brokerage (sales). Brokers will consolidator and shift focus to new, transparent
switch 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 the
they are to survive. We will witness upscaling and company group under a single label and insurance
consolidation 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 Dutch
brokers will require insurance providers to have their insurance providers is currently executing a pilot
administrative affairs in proper order. Furthermore, in the project to move part of their back office processes to
future brokers will always deal with a broader range of India).
products than just insurance policies. Bank products will > Business Process Outsourcing (outsourcing the
be included in their consultancy services. For insurance entire back office and (if applicable) customer service
providers, it will be necessary to develop a multi-channel processes, including systems and staff). This trend
distribution strategy, as it will no longer be possible to really took off last year in the UK in particular. The
rely on the brokerage channel for turnover. UK market leader, Capita, has announced that it will
be looking for growth opportunities on the European
Consumer confidence in insurance providers is mainland over the coming years, and that it is taking a
still low good look at the Netherlands.
Consumer confidence in the insurance sector is still
negative (Dutch Centre for Insurance Statistics (CVS), That would greatly simplify the market in the
February 2011). The only silver lining here is that there is Netherlands over the coming years. Over the next
an upwards trend in consumer confidence. The CVS’s 5 to 10 years, the majority of the current labels and
consumer confidence indicator rose from -36 in the providers (we still have almost 60 of them left) will
second quarter of 2009 up to -23 by the last quarter of disappear from the market and those that remain will
2010. The major Dutch intermediary insurance providers have to continuously reduce costs to stay ahead of the
scored poorly in an annual study conducted by the competition.
University of Groningen on Customer Performance
among 100 major Dutch companies. They hold four of What does all of this mean for the life insurance
the 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 result
its position as an intermediary insurance provider over of the imminent pension agreement, people will start
the 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 number
The result of these developments is a shakeout of life insurance providers will vanish from the market
among life insurance providers over the coming years and low-cost and possibly also
As a result of the developments detailed above, we white-label insurance provides will arise, who will offer
have noticed in our consulting practice that many their products to distributors at low operating costs. In
directors 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 up
And if so, in what way? The life insurance market and settle closed life portfolios.
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

4. “CREATIVE DESTRUCTION” IN THE DUTCH LIFE INSURANCE MARKET
In 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 process
seen whether this trend will also apply to life insurance of continuing innovation, in which successful application of new
providers. 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. Successful
concluded. innovation creates temporary market strength, which affects the profits
and market shares of companies founded on prior technologies. In a
What we are now dealing with is a complete never-ending process of rises and falls, old companies are destroyed by
transformation 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-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 Consulting
Papendorpseweg 93
3528 BJ Utrecht
The Netherlands
Phone: +31 (0)88 265 88 88
info.consulting@atosorigin.com
www.atosconsulting.nl
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