Rationale
S&P Global Ratings assesses the industry and country risk of the Netherlands' life insurance sector as intermediate. This level of risk is similar to that for life insurers in Germany and the Nordic countries.
Country Risk: Very Low
Our very low assessment of the Netherlands' country risk reflects our view that the Dutch economy provides a largely stable operating environment for the life insurance sector. We view the Dutch economy as well diversified, open, and wealthy, and as benefiting from a flexible and highly skilled labor force.
However, due to the effects of COVID-19, we expect a sharp deterioration in macroeconomic prospects. Despite the government has put in place a package of emergency measures to prevent widespread job losses and business closures, we have significantly lowered our GDP forecasts for the year, with GDP in the eurozone expected to contract by 7.3% and by 6.7% in the Netherlands. Currently, we assume the Netherlands' GDP will increase by 6.2% in 2021 and 4.0% in 2022. However, the pandemic could evolve differently from what we currently assume. If the virus resurges, this could involve possibly longer lockdowns or interruptions in loosening the social-distancing measures. This may put greater pressure on demand for insurance products. On the positive side, we anticipate that the unemployment rate in the Netherlands will remain rather low, below 4% in 2020 and the following two years. Furthermore, we expect inflation to decline to 0.5% in 2020 from 2.7% last year, and to increase above 1% for 2021 and 2022.
Industry Risk: Moderately High
The life insurance market in the Netherlands has been reasonably profitable in the last five years. We estimate that the average return on equity (ROE) for 2015-2019 was 9.9%, and the return on assets (ROA) over the same period was 0.9%. For 2019, we estimate that ROE was above 10% and ROA was higher than 1% thanks to the strong equity market performance last year.
However, we anticipate that profitability in the Dutch life insurance is under pressure due to current market turbulences from the impact of COVID-19, including falling equity markets, widening spreads, and a continuation of the ultra-low-yield environment. For the Netherlands, we expect the 10-year government bond yield to remain slightly negative until 2023 when we expect it turn positive. This will weigh on investment results and the insurers' fee income from the asset management business.
At this point, we believe it is hard to predict market developments for the full year. That said, we believe ROE will be negative for 2020. For 2021 and 2022, we expect the market to recover and to be profitable overall, with ROE of about 5%-8%.
Factors supporting profitability
- In our view, insurers experience moderate operational, regulatory, and legal barriers to entry. Regulators impose a rigorous, but not prohibitive, process for approving new licenses for insurers. Sales through intermediaries are significant for the Dutch life insurance business. New insurers would therefore need to establish relationships with a smaller number of intermediaries to start their operations. They also require technology, claims systems, and experienced managerial staff, which could be challenging initially.
- The Netherlands' regulatory framework for insurers has two institutions handling different areas: De Nederlandsche Bank (DNB) provides prudential supervision, and the Autoriteit Financiële Markten (AFM) provides conduct of business supervision. DNB and the Dutch state have shown their ability and willingness to support the sector during difficult times. The regulators' response to the financial crisis has resulted in our favorable view of the Netherlands' regulatory regime and the degree of security that Dutch policyholders enjoy. We consider that governance and transparency support our assessment. Our view of adequate transparency is bolstered by the findings of Transparency International, which ranks the Netherlands eighth in its Corruption Perceptions Index 2017. As of Sept. 30, 2019, its Solvency II ratio was on average 188%. That said, most Dutch life companies have started 2020 with significant capital buffers; however, less-capitalized companies will struggle more to maintain a solvent position as the effects of COVID-19 unfold.
Factors limiting profitability
- In our view, product risk is high due to the significant guarantee rates in the life insurers' in-force business and the longevity risk. This weighs on overall earnings and constrains the sector's profitability. We estimate that guarantees are about 3.0% to 3.5% compared to the current low-yield environment. Furthermore, about 75% of insurers' overall liabilities stem from traditional business, which is high compared to other European countries (see chart 1). In the U.K., for instance, the amount of traditional business is about one-third of total liabilities. We anticipate that guarantees will decline over time since most insurers no longer offer them; however, given the long-term nature of the products, average guarantee levels will only abate slowly. Longevity risk also remains significant in the Netherlands. Some insurers, such as Aegon, entered into longevity swaps or diversified their business books to reduce this risk.
- Continuing on the downward trend since 2014, we expect the life insurance business to contract further in the coming years due to increased competition from bank savings products. In the Netherlands, contrary to other European markets, unit-linked products are rather unpopular due to historical issues, and banking products are replacing them. Gross written premiums declined by 7.7% in 2018, and they continued to drop in 2019 but at lower rate of 1% as of year-to-date September. For 2020, we expect gross premiums to decline by about 3% due to the adverse macroeconomic environment and market turbulence. In 2021, we expect the life insurance market to stabilize, with the rate falling by 2%.
Chart 1
Related Criteria
- Insurers Rating Methodology, July 1, 2019
Related Research
- The Netherlands 'AAA/A-1+' Ratings Affirmed; Outlook Stable, May 15, 2020
- Europe Braces For A Deeper Recession In 2020, April 20, 2020
This report does not constitute a rating action.
| Primary Credit Analyst: | Sebastian Dany, Frankfurt (49) 69-33-999-238; sebastian.dany@spglobal.com |
| Secondary Contact: | Mark D Nicholson, London (44) 20-7176-7991; mark.nicholson@spglobal.com |
| Additional Contact: | Insurance Ratings Europe; insurance_interactive_europe@spglobal.com |
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