The Dutch life sector faces various challenges. The sector is experiencing the consequences of reputation damage caused by the affair surrounding unit-linked insurance policies. In addition, the emergence of bank saving has intensified competition in the wealth enhancement segment. The introduction of the new regulatory framework (Solvency II) has provided for a more risk-based supervisory system, based on market-consistent valuation of assets and liabilities and requiring insurers to hold capital for all quantifiable risks.
Since 2010 the total premium volume of the sector has contracted. As retaining sales in such market conditions can become an important target, strong competition may temporarily lead to (excessively) sharp rates.
In the insurance sector, institutions report on their profitability in various and sometimes not particularly clear ways. This complicates the analysis of new life insurance production. A more consistent and clearly organised approach to the valuation of insurance business will benefit all stakeholders; the supervisor, the analyst and the insurance sector alike. Prompted by its study and with this aim in mind, DNB has drawn up good practices to increase comparability of the valuation of new production.
With the advent of Solvency II, DNB encourages a market-consistent basis for reporting. A market-consistent approach is in line with the Solvency II principles, which the sector will have to adopt in the coming years. The market-consistent valuation uses current assumptions, which can be either observed in the financial markets or are based on as many realistic principles as possible, e.g. for costs or mortality rates. A number of insurers have recently indicated they will start publishing market-consistent figures for new production, a move welcomed by DNB.
Consequences of Solvency II
In the run-up to Solvency II, insurers that have already switched to market-consistent methods seem to be benefiting from them. The introduction of Solvency II will have a major impact on insurers' business operations. More than at present, they will have to value their balance sheet and consequently their insurance portfolio at market value. Market risks will become visible and insurers need to hold capital for these risks. Although Solvency II has not yet been fully crystallised, the framework is now largely known. It is essential that insurers position themselves for adopting the Solvency II principles. Price setting of new production should be a well-considered process and DNB recommends factoring in the Solvency II principles.
Sales retention and profitability
The DNB study shows that sales are an important component in price-setting policies for new production, whereas indicators such as costs and economic profitability do not always play a sufficiently prominent role in decision-making. Although sales may be a temporary target in certain circumstances, DNB finds it important that profitability is given adequate weight in decisions on the price setting of new production.
At the current price setting and in the present economic climate of low interest rates, non-guaranteed products are more profitable than guaranteed products. A related issue is that policies with life-long payments carry far more risks for the insurer because they give long guarantees to customers.
The insurance sector must now compete directly in different segments with the banking sector (bank savings) and Premium Pension Institutions (PPIs). However, insurance products generally contain a risk component that assumes risks such as longevity risks from the consumer. This comes at a price. DNB deems it important that the financial sector clarifies the differences within the range of wealth enhancement and wealth reduction products to consumers, enabling consumers to make well-informed choices.