Fitch Ratings says the rating outlook for the Dutch insurance sector is stable, indicating that a vast majority of Dutch insurer ratings are likely to be affirmed over the next 12-24 months.Fitch's outlook assumes a continued, but weak, economic recovery in the Netherlands, with modest GDP growth. The outlook does not take into account potential exogenous shocks to the Dutch economy but will be updated to reflect such events if they occur.
"The Netherlands insurance market is well established, sophisticated and highly competitive," says David Prowse, Senior Director in Fitch's Insurance team in London. "Ratings already take into account the severe pricing pressure threatening the profitability and even the viability of certain product lines. However, ratings also reflect the ambitious cost-cutting that insurers are carrying out to bolster their profitability. Successful implementation of these measures will be essential for insurers' prospects and is likely to be the main driver of ratings."
The life insurance market in the Netherlands has declined sharply since 2007 as a consequence of tax changes allowing banks to compete on equal terms with insurers in the savings market. The effect has been exacerbated by a slump in insurers' products sold through banks, as banks are increasingly promoting their own saving products. Low interest rates have also depressed profitability, particularly for life products with investment guarantees.
In the non-life sector, crucial success factors are disciplined underwriting, lower expense bases and cost-effective sales platforms. Fitch expects established insurers to develop web-based platforms in response to competition from increasingly popular internet providers.
The Netherlands has the largest private health care insurance market in Europe, with annual premiums of around EUR40bn. However, most of this insurance is, in effect, underwritten by the Dutch government, with insurers undertaking a lot of the administration associated with healthcare but taking on little risk. Profitability is driven by market presence (important for negotiating contracts with employers), scale (important for bargaining power to minimise procurement costs for health services), economies of scale, and customer service. Fitch believes the market will become increasingly competitive with the growing use of price comparison websites.
Overall, Dutch insurers look set to be well capitalised under Solvency II. Aggregate capital surplus for the Dutch market under the fifth Quantitative Impact Study (QIS5), which captures more risks than the currently regulatory capital requirements, was EUR17.5bn. This figure is around EUR7.5bn lower than under the current regime, broadly mirroring the Europe-wide trend of reporting a reduced level of surplus capital under Solvency II.
Although Dutch insurers' earnings benefited from higher equity-market valuations and the tightening of credit spreads in 2010, in the medium term, Fitch expects profitability to be lower than pre-crisis levels as a consequence of lower interest rates and insurers' more cautious investment portfolios.
Fitch considers that the main risks to Dutch insurers' ratings over the next 12-24 months are failure to report sufficient operating profits, most likely caused by an inability to cut costs, and potentially unsustainable price competition. These risks are exacerbated by muted GDP growth and, for life insurers, the threat of prolonged low interest rates. However, the established insurers continue to have strong market positions and will be well placed if they succeed with their efficiency programmes.
The Dutch insurance sector is the fourth-largest in the euro zone after France, Germany and Italy with total assets in excess of EUR400bn at end-March 2011. Total premiums in 2010 amounted to EUR76.9bn, comprising EUR21.5bn for life insurance, EUR13.1bn for non-life insurance and EUR42.4bn for accident and health insurance.
As part of its forthcoming series of insurance roadshows, Fitch will visit Amsterdam on 6 October 2011. Chris Waterman, Managing Director of Fitch's insurance team, will speak on European insurance, David Prowse will speak on the Dutch insurance market, and there will be presentations on reinsurance, US insurance and Solvency II. Attendance is free but pre-registration is required via the following link: http://fitchratings.nyws.com/insuranceroadshow-amsterdam1
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