Dutch insurers have weathered the COVID-19 pandemic relatively well. The primary impact has been a hit to their investment income, which dropped significantly in comparison with 2019.

While economic recovery should support margins and investment results in 2021-2022, the Dutch insurance market remains highly competitive and concentrated. To overcome low interest rates, players are shifting to higher-margin products, consolidating to gain pricing power and synergies, and seeking out higher-yielding investment assets. While illiquid assets are becoming an increasingly popular investment, the majority of Dutch insurers' portfolios remain invested in bonds.

The past years have also highlighted new risks related to climate change and cyber security. We consider that these challenges will significantly impact the Dutch insurance business in 2021, both from a regulatory and an operational standpoint.

Despite tough market conditions, the credit profiles the four Dutch insurance groups we rate--Achmea, ASR Nederland, Aegon, and NN Group--remain robust.

Capitalization Remains Strong, Despite The Pandemic

Since Dutch insurers invest chiefly in bonds, the economic fallout from COVID-19 had a limited impact on their capital stability. While equities incur high charges under Solvency II, the drop in value in early 2020 was offset by a fall in required capital. As of third-quarter 2020, the average Solvency II ratio for Dutch insurers was a strong 194%, according to the European Insurance and Occupational Pensions Authority (EIOPA).

Table 1

Macroeconomic Recovery Will Support Margins And Investment Results

Our current expectations for Dutch GDP are rather positive, with a rebound of 3.1% in 2021 followed by 3.3% growth in 2022. We also expect that the unemployment rate in the Netherlands will remain fairly low, at below 4% through 2023. Furthermore, we expect inflation will increase to 1.7% in 2021 and then decline to 1.4% in 2022. We thus anticipate an improvement in margins and investment results for Dutch insurers. Moreover, as mortgages also represent a significant part of insurers' investment portfolios, the latter should benefit from the COVID-19-induced house price growth. Additionally, since the pandemic's impact on insurers seems to have been limited, we expect insurance groups will resume dividends payments later in 2021.

Life Insurers' Operating Income To Recover

The Dutch life insurance sector's operating income was not particularly impacted by the pandemic in 2020. Of the four insurers we rate, two ended the year with higher operating income than in 2019; and Achmea's and Aegon's weaker performance was linked to strategic exits or portfolio closures.

Despite better premiums in 2020 for some insurers, we expect premiums will shrink 2% in 2021 and 2022, due to ongoing margin pressure from high competition. Low interest rates will continue to pose a challenge, since the average guarantee on the back book of traditional life policies (75% of total life reserves) remains high at 3.25%.

To improve profitability, insurers are investing in cost-savings operations and refocusing their activities on higher-margin productions, notably by moving from defined-benefit plans to defined-contribution plans. Others are still betting on acquisitions to strengthen their position in a highly competitive market: in 2020, ASR announced the acquisition of the remaining shares in Brand New Day Premiepensioeninstelling N.V. (Brand New Day IORP), which would lead the insurer to full ownership by 2023. The market is already fairly consolidated though, with NN Group, SRLEV, Aegon, ASR, and Achmea together making up almost 90% in 2020.

Investment income, however, was severely hit by the COVID-19-induced dip in financial markets, especially during the first half of 2020. The low-interest-rate environment is pushing Dutch insurers to seek higher-yielding assets; NN Group used this approach to successfully offset the impact of the pandemic last year.

The return on equity (RoE) for Dutch life insurers dropped to 7% in 2020 after having stagnated at about 9% in the previous years. Despite the low-margin environment and competition, insurers' performance should slightly improve in 2021, and thus we expect a RoE of about 7%-8%, with the return on assets (RoA) dipping below 1%. Nonetheless, we anticipate the ultra-low-yield environment will weigh on investment results and the insurers' fee income from the asset management business. For the Netherlands, we expect the 10-year government bond yield to remain slightly negative until 2023.

Continuation Of The P&C Sector's Positive Trends Depends On Economic Recovery

P&C insurers benefited from reduced claims in 2020. A significant drop in claims from the motor, fire, and home segments more than compensated for the uptick in events, travel, and leisure. Government COVID-19 support measures for companies further decreased claims. That said, disability insurers' performance took a hit due to work interruptions triggered by the pandemic. As with life insurers, the P&C sector's profitability suffered from lower investment income last year.

Since 2018, the market's technical profitability has risen through rate increases though, mainly in the motor, accident, and property segments. The P&C sector's five-year average combined ratio (claims and expenses divided by premiums) improved to about 99% for 2016-2020, in line with that of peers. The rate increases have also reversed the previous trend of declining premiums, which had been powered by price competition.

We expect that in 2021 P&C insurers will maintain their underwriting discipline in an environment where investment income is under pressure from low interest rates. The market will benefit from lower claims in motor and fire, at least in the first half of 2021, with an uptick in claims thereafter based on a normalized business environment. At present, we assume that investment income will deteriorate in 2021 and thereafter, given ongoing low interest rates.

All in all, gross written premiums continued to rise in 2020. Nevertheless, insurers' results in 2021 will highly depend on Dutch economic recovery. We estimate premium growth of about 3% per year in 2021-2022, in line with our expectation of GDP growth. We anticipate RoE of about 8% for 2021-2022, slightly down from 2018-2019.

We estimate the P&C sector's combined ratio at 94% for 2020, mostly because of the lower claims in motor and property claims, and expect it will rise to about 96%-99% in 2021-2022 as economic activity recovers. The ongoing consolidation trend also reduced competitive pressure in the market. In 2020, NN Group acquired VIVAT and merged with Movir, which enabled the firm to increase its market share by another 6 percentage points. As of 2019, Achmea, ASR, and NN Group already represented more than half of the market in terms of revenue.

Health Insurers Are Benefitting From Government Support

Insurers' support to the Dutch health care system in 2020 resulted in higher costs. Nevertheless, the Dutch Health Insurance Fund compensated health insurers for COVID-19-related expenses incurred in 2020 and 2021. The contribution is to be distributed over the two years in proportion to claims submitted. With regulatory approval, health insurers have decided to share the expenses resulting from the pandemic and the compensation from the catastrophe scheme based on their market share. This sharing mechanism enabled positive results in basic and supplementary health insurance, while non-COVID-19-related medical expenses decreased due to the postponement of medical treatments and visits. Due to the combination of government support and a decrease in other medical expenses, the combined ratio for the sector remained below 100% in 2020. We expect that the ratio will return to its equilibrium of about 100% in 2021-2022.

Premiums have been rising for several years in the Dutch health insurance sector. While premiums and rates are controlled by the government, we expect this trend will continue after 2020, with an estimated increase of about 2% per year.

Insurers Are Shifting Investments To Combat Low Interest Rates

Low yields on government bonds in Europe are challenging insurers' capacity to offer strong guarantees on their policyholders' savings or pension plans. The latest figures published by the European Central Bank highlight negative 10-year yield rates on bonds for Luxembourg, Germany, the Netherlands, and Finland, and a median yield rate of 0.15 for European countries (see chart 1). Low or negative rates should persist for some years, due to a combination of debt burdens, globalization, ageing demographics, and technology. The pandemic has exacerbated this trend, with 10-year yield rates having dropped a further four basis points between December 2019 and December 2020 in the Netherlands.

Chart 1

Lower rates are weighing on insurers' profitability.  Life insurers are even more sensitive to interest rates and must find solutions to protect profitability in the long term. Even contracts with a zero guarantee are unprofitable when new savings are invested into negative-yielding bonds in Europe. Given that the average Dutch guarantee on the traditional portfolio is about 3.25%, this will continue to pose a challenge for the sector, albeit one that insurers have successfully met over the past decade.

As a result, more and more Dutch insurers are seeking higher-yielding assets in their portfolios.  Insurers that feel they have adequate liquidity are looking toward less-liquid assets to add value to their investments. In comparison with other European countries, Dutch insurers are already ahead of the trend, with a significant share of their portfolios invested in mortgages. Nevertheless, we expect the shift toward more illiquid assets or alternative investments will intensify.

NN Group was the only Dutch insurer we rate to achieve higher investment income in 2020 than 2019, and this achievement went hand in hand with a decrease in the proportion of government bonds and loans in its investments' market value by 4 percentage points (pp), mostly due to an increase in financial bonds and loans and money market instruments. Moreover, its real estate exposure in 2020 increased by more than 15%. As for Achmea, the proportion of government bonds, as well as government-listed and government-backed bonds in its fixed-income portfolio decreased by 3pp in 2020, mostly due to a reallocation to loans and mortgages (+2pp) and corporates bonds (+1pp). To increase returns, Achmea increased its residential mortgages portfolio by 11% in 2020. More generally, we see insurers' increasing interest in mortgages enabling higher portfolio returns.

Nevertheless, we expect Dutch insurers will maintain low liquidity risk, since the majority of their portfolio continues to be composed of bonds.   Moreover, Solvency II regulations may limit this investment shift, since higher risk-taking will result in higher capital requirements. Investments in illiquid assets with high environmental, social, and governance (ESG) performance may enable Dutch insurers to tackle climate change and low interest rates at the same time, since this would deliver higher-yields while mitigating climate change-related transitional risk.

Personal injury insurers may be forced to bolster reserves, due to interest rate adjustments

Low interest rates are also causing other shifts. In 2019, several courts ruled that the default notional interest rate used to assess the cash flows linked to personal injury claims was too high given current market conditions. While this was appealed, the Court of Appeal of The Hague issued a final ruling in 2020 in favor of an even lower interest rate. While guidance from the Dutch Association of Insurers is still outstanding, we expect Dutch insurers will revise their interest rates in their calculation, which will adjust downward their financial figures and may force them to bolster their reserves.

Climate Change Is A Major Risk Bringing New Regulations

Due to the escalating damages associated with climate change, environmental and biodiversity protection are subject to an increasing number of studies and regulations in the insurance sector. We expect that transformations related to climate change will weigh on insurers' Solvency II ratios and average returns on capital in the coming 20 years, with the impact increasing with the speed of global warming.

In June 2019, the Dutch government signed a climate agreement with national organizations and companies with the goal of reducing the country's greenhouse gas emissions by 49% by 2030. The four insurers we rate are signatory of this agreement. Moreover, a joint study published in June 2020 by the Dutch Central Bank (DNB) and the Netherlands Environmental Assessment Agency highlighted the exposure of Dutch financial institutions to risks linked to biodiversity loss. According to the study, 36% of the portfolios of Dutch financial institutions worldwide are linked to companies with a high or very high dependency on one or more ecosystems.

Nevertheless, the numerous frameworks available for environmental reporting are adding complexity to nonfinancial disclosure and decreasing transparency. We believe that standardized and credit-risk-relevant disclosures are needed to enable a clear assessment of climate-related risks and opportunities in our assessment of insurers' creditworthiness.

The current evolution in disclosure and risk-management regulations are moving in the right direction, however, and Dutch insurers will have to adapt to those new requirements. In October 2020, the EIOPA published a consultation on the use of climate change-related risk scenarios in Own Risk and Solvency Assessments (ORSAs). The guidelines stressed the need for forward-looking management of climate change-related risks. Although the consultation should be implemented in 2024 at the earliest, the topic represents a challenge for insurers as only one out of every 10 insurers in Europe currently follow such practices. The DNB's list of good practices on climate risks for insurers clearly indicates that forward-looking, climate-risk management is now expected of Dutch insurers. This new focus will be strengthened with other policies, such as the Sustainable Finance Disclosure Regulation (SFDR) of the EU Action Plan on Sustainable Finance, which became partly effective in March 2021.

Climate change will result in an increasing number of natural catastrophes, which present an array of challenges. In the Netherlands, Dutch insurers are preparing for rising costs in the P&C sector due to more frequent windstorms and hails. The violent floods that hit the South of the Netherlands in June 2021 are the most recent demonstration of this phenomenon. Some insurers have already adapted their business model to include natural incidents, such as ASR Nederland, which was the first Dutch insurer to offer flood coverage. More generally, insurers are integrating more accurate data in their prevision models to better attenuate the impact of climate change on their operations.

Chart 2

Transition risks, meaning risk related to the transition to lower carbon economies, may also impact insurers' investment portfolios and coverage offers. On one hand, public policies, and new practices and preferences may weigh on asset valuations. On the other hand, the shift toward more sustainable vehicles and homes will require insurance groups to adapt their offering and pricing, notably because those alternatives have a different loss ratio than more traditional ones. We believe ESG factors could affect our assessment of insurers' competitive position, industry and country risk, capital and earnings (notably linked to natural catastrophes), risk exposures, and governance.

Rising Cyber Risk Requires Strong Protection And New Offerings

Insurers are an attractive target for cyber attacks, since they have access to sensitive personal information. Dutch insurers have developed specific cyber policies, and some have also taken out cyber insurance.

The Netherlands tackled the topic relatively early compared with other countries, with DNB being the first central bank to supervise tests under the TIBER-EU Framework (threat intelligence-based ethical red teaming) in 2016. While the program aimed at improving firms' resilience to sophisticated cyber attacks was originally dedicated to core financial institutions, such as large banks and payment institutions, it has now been expanded to pension providers and insurers. At the European level, EIOPA published guidelines in October 2020 to harmonize the assessment of cyber risk across the insurance industry. The latter came into effect July 1, 2021, and is a first step toward a better regulatory framework on cyber security matters.

On the commercial side, we expect claims for cyber coverage will significantly increase. The latest Cyber Security Assessment for the Netherlands (CSAN) published in 2021 highlighted Dutch firms' lack of resilience to face this rising threat: in 2020, 23,976 data breaches were reported to the Dutch Data Protection Authority, and were accompanied by larger, and more complex attacks. This led to an increase in costs for the victims: according to the Hiscox Cyber Readiness Report 2020, the median cost of a cyber attack rose almost six fold in the Netherlands between 2019 and 2020.

More generally, the Netherlands stands out as a country where an above-average amount of cyber-criminal infrastructure is hosted and where attacks can reach very large scales, as demonstrated by the theft and online sale of possibly millions of Dutch car owners' private data in March 2021. Following the lack of protection highlighted in the 2021 CSAN report, a Guide to Cyber Security Measures was published by the Dutch National Cyber Security Centre on Aug. 5, 2021, to help Dutch firms improve their cyber protection. The rising awareness on the topic will go hand in hand with a rising need for cyber coverage: between 2017 and 2018, the European cyber insurance market saw gross written premiums rise 72%, according to EIOPA. If well prepared, an expansion of Dutch insurers to the cyber market could offer significant opportunities. Nevertheless, such an expansion must be accompanied by strong cyber-risk assessments and controls, notably to avoid the risk of "silent cyber" (see "Cyber Risk In A New Era: Let's Not Be Quiet About Insurers' Exposure To Silent Cyber," published on March 2, 2021). A lack of precautions in this process could lead us to downgrade insurers we rate.

Research Contributor: Oriane Peyredieu du Charlat

Related Research

• Cyber Risk In A New Era: Let's Not Be Quiet About Insurers' Exposure To Silent Cyber, March 2, 2021
• The Greening Of Financial Services: Challenges For Bank And Insurance Green And Sustainability Hybrids, Aug. 12, 2020