Negative outlook for Dutch insurance industry

The fundamental credit outlook for the Dutch insurance industry is negative, reflecting the absence of growth opportunities in the non-life segment, uncertainties surrounding the health segment and the negative prospects for the life insurance market, Moody's Investors Service said in a new Industry Outlook. The outlook also reflects the pressures on profitability in all the segments of the industry.
Moody's negative outlook for the Dutch insurance industry expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.
"The Dutch life insurance market has been hit by a controversy relating to unit-linked contracts, including an investigation by the financial services ombudsman revealing some evidence of a lack of transparency in the cost structure of these contracts. It is now clear that insurers will be obliged to indemnify policyholders, but the costs for the industry remain uncertain. However, more important than the financial impact, Moody's believes this situation will depress sales of retail insurance savings products for the medium-term, especially in the unit-linked segment, as well as the future profitability of life players. Relative demand for guaranteed products will also increase," said Benjamin Serra, a Moody's Analyst and author of the report.
In Moody's opinion, these negative impacts will be exacerbated by the increased competition in the savings segment introduced by new legislation allowing banks to sell savings products with the same favourable taxation as insurance products.
However, some opportunities will arise for life insurance companies in the pension segment, although insurers also have to compete with pension funds in this area.
Nonetheless, annuities already represent a significant part of Dutch insurers' liabilities and successful growth in the pensions segment would lead to life players being increasingly exposed to longevity risk.
"As far as non-life insurance is concerned, the Dutch market is mature, with limited growth opportunities. High competition also translates into a decreasing trend in average premiums. This phenomenon has been reinforced recently by the rapid growth in competition from low-cost internet players. Moody's therefore expects the profitability of the industry to steadily decline going forward," added Serra.
Meanwhile, health insurance, the largest segment in terms of premiums since the healthcare system was privatised in 2006, is characterised by ongoing uncertainties, as the legislation governing this segment is still evolving. This political risk may weigh on the profitability of this sector.
In addition, expenses have increased in all segments, driven by IT investments aimed at improving services to customers and intermediaries, which will likely weigh on profitability in the near term. In this context, most insurers are focusing on improving efficiency and creating economies of scale, which has led to significant market consolidation recently, which Moody's expects to continue in the short to medium term. However, this will be accompanied by significant execution risks.
Nonetheless, Moody's recognises that the Dutch insurance industry remains adequately capitalised and its asset quality is relatively good. However, solvency ratios have declined in recent months given the recent decrease in equity markets, interest rate increases and spread widening. Financial flexibility has also deteriorated recently, due to the combination of decreases in capitalisation and higher funding costs.