Bruno Davila examines how the Dutch market is focusing on the adoption of new technologies to overcome its challenges
Enough has been said about how insurance market conditions, especially in developed markets, have been affected by low interest rates, pricing pressures and operational constraints. However, not many governments and financial supervisory authorities have delivered a clear assessment of the forces that are shaping resilience in their local markets. The Netherlands, a country that boasts having a plan for every square meter of its land, is one of few countries that have delivered a sober and pragmatic approach for the future of its insurance market, as a fundamental tool for stability.
In December 2016, the Dutch Central Bank (DNB), released a systemic analysis of the impact that a series of key developments will have on the insurance market in the mid-term. The report, titled Vision for the Future of the Dutch Insurance Sector, sharply dissects the impacts that the adoption of innovative technologies, changes in societal dynamics, economic trends, evolution of regulatory framework and shifting consumer behaviour will have on insurance.
The DNB argues that insurers need to decide about some foundational changes required to guarantee financial solidity and stability for the sector -- cost-cutting initiatives, cross-border expansion, investment plans for innovation or integration plans are a few crucial options discussed -- and that insurers unable to adapt should explore consolidating, partnering or completely running-off operations that will not help maintain or grow profitability.
The fundamental choice for Dutch carriers is how to digitalise their core operations in an environment increasingly led by experience-driven consumers demanding transparency and freedom of choice, in a shifting economic environment where the 'sharing economy', increased trend of self-employment and individualisation are shaping risk profiles for good. The fundamental choice is how to grow in transformation and with limited room for error. Unsurprisingly, evolution is picking winners and losers.
Slightly more than 18 months have passed from the delivery of this sobering assessment by the DNB, and the market has reacted diligently to ensure resilience in the face of the challenges. The DNB has both enforced its vision and supported capital providers' continuity and, despite ongoing contraction of both non-life and life sectors, most credit risk rating agencies provide stable outlooks for the market -- citing efforts made by local insurers to improve capitalisation and focus on profitability.
The non-life market has contracted from €56.8bn in 2011 to €54bn in 2016, with pure P&C -- excluding PA&H -- seeing -4.9% reductions per year in this period. The life market, meanwhile, has contracted from €21.9bn in 2011 to €16.6bn in 2016.
Generally, profitability has seen some worsening, but it is expected that some hardening of rates will help stabilise the underperforming trends in some lines. The market as a whole is expected to do better, underpinned by the country's economic growth and burgeoning customer base -- for example, investment in residential, commercial buildings and infrastructure is expected to grow at 4.3% per year up until 2020, compounded by the largest house price increase in 15 years with house prices 16.4% higher than the dip in June 2013.
£54bn -- Non life market worth £54bn in 2016
Dominant Dutch insurance groups have executed significant projects to identify, control and address their roadblocks to sustainable profit margins. Some have sought capital injection or run-off operations into specialised partners and some other have chosen the route of consolidation.
The Dutch market has seen strong consolidation during the past 10 years, leaving the top five life insurers with a combined market share of about 75% and the top five non-life insurers with about 60% of the market in terms of gross written premiums.
These consolidation efforts have been encouraged by a challenging environment pushing carriers to scale back operations and foster synergies with significant focus on cost reduction, redefinition of business models and adoption of new technology.
The Netherlands is one of few countries that have delivered a sober and pragmatic approach for the future of its insurance market
DIGITALISATION OF THE INDUSTRY
The increased availability of innovative technologies applied ti insurance, like tracking or monitoring devices in Marine, to provide one example, is transforming the possibilities of active risk management in the insurance sector. A fully digitised insurance entity can link premiums to policyholders' activity, improving the ability to generate underwriting profits from increased margins.
During the past couple of years, the Dutch market has seen an accelerated pace of innovative technology presented to the insurance market, made available for incumbents' operations to explore ways to access new markets, work more efficiently and, ultimately, improve profitability.
Various key carriers in the market are actively seeking to interact with solution providers and finding ways to work together in the adoption of new technologies, investment on promising platforms and jointly developing a broader range of products to improve risk selection, customer engagement and pricing models.
Insurers are harnessing increasingly applicable and affordable technology to enhance consumer offerings, which offers substantial growth opportunities for the sector.
Innovation by incumbents, as happens in other developed and mature markets, is limited by the individual challenges of legacy systems, organisational structures and capacity to invest in developing infrastructure that will enable an ever more data-intensive industry.
The Dutch insurance sector faces a daunting list of challenges as it seeks growth through transformation. These challenges primarily stem from market dynamics and the operational and regulatory landscape (including pressure from supervisory authorities). But businesses pioneering technologies and demonstrating their potential in risk management and loss prevention, are expected to successfully seize the opportunities.
Main investments in the Internet of Things are concentrated in areas such as equipment management, fleet management and smart buildings. Commercial insurance providers cannot afford to adopt a wait-and-see approach; they are looking to be proactive and ensure that their products and services for the commercial setting keep pace with connected industries and the economy. This is vital if the sector is to remain relevant in the future.
With an active insurtech environment, we see insurers being receptive to cooperation and open to strategic partnerships with technology companies and data providers, to build comprehensive value propositions