A. Institutional Framework and Arrangements

4. The financial sector is regulated by the Wft. In force since January 2007, the Wft contains the core of regulations for the financial sector. As a framework act, it contains its own rules and forms an umbrella for secondary legislation and regulations. Four layers of legislation and regulations can be distinguished: (1) the Wft itself; (2) the Orders in Council (the Royal Decrees); (3) the statutory rules of the MoF, DNB, and the AFM; and (4) the policy rules of the MoF, DNB, and AFM. The latter are not generally binding provisions. For the pension sector, the PW is of central relevance. As a practice, laws and regulations are regularly updated in order to incorporate developments in the financial markets and industry. This includes new regulation by the Dutch government, implementation of EU legislation, and global developments in standard setting and policy recommendations.

5. The Wft is influenced by EU regulations, especially strongly for insurance. The Wft incorporates several financial sector EU regulations. The current prudential insurance regulation, Solvency II, has been established at the EU level under maximum harmonization. Thus, a significant part of the insurance regulation follows the EU directives, which are incorporated into national legislation. Further Delegated Acts and Technical Standards, issued by the EC, apply. The PW is determined at the national level with due regard to less extensive EU applicable directives.

6. The supervisors’ role in regulation is limited to issuing rules for clarity and the application of the regulation. The MoF issues financial sector regulation. For the pension sector, the MoSA is primarily responsible. Where applicable, the Wft, directly or indirectly on the basis of Royal Decrees issued by the MoF, gives the DNB and AFM the power to release supervisory rules about subjects specified in the Wft or the relevant Royal Decrees. Moreover, based on Chapter 4.3 of the General Act on Administrative Rules (Awb; Algemene wet bestuursrecht), the DNB and AFM have the power to issue policy rules on the application of rules and requirements following the Wft and Royal Decrees thereupon. Further, Delegated Acts and Technical Standards, issued by the EC, apply.

7. The DNB and AFM may propose several adjustments to the financial sector laws and regulations, which should contribute to fulfilling their objectives. On a yearly basis, the DNB and the AFM send a so-called “Regulatory Letter” to the MoF. The MoF determines whether the proposed adjustments are achievable, from a legislative and political point of view. Next, the Parliament receives the supervisors’ Regulatory Letter, including the MoF response, and thus is informed of the legislative proposals.

8. Since 2002, the Netherlands’s supervision has followed a twin-peaks model with clear supervisory objectives. The DNB and AFM have been identified as the supervisors according to the Wft and the PW. Article 1:24, subparagraph 2, of the Wft stipulates that the DNB is responsible for prudential supervision of financial undertakings. Article 4, subparagraph 1, under “a,” Bank Act 1998 also stipulates that the DNB is responsible for the supervision of financial undertakings. Moreover, the DNB is responsible for the stability of the financial sector (Wft, Article 1:24, subparagraph 1, and Bank Act 1998, Article 4, subparagraph 1, under “c”). Article 1:25, subparagraphs 1 and 2 of the Wft stipulate that the AFM is responsible for the conduct of business of financial undertakings. The Wft further states that the “conduct of business supervision shall focus on, also in view of the stability of the financial sector, orderly and transparent financial market processes, integrity in relations between market participants and due care in the provision of services to clients.” Chapter 2 of the Wft under several articles assigns the authority to the DNB to grant and withdraw licenses to insurers. Chapter 6 of the PW directs that a newly established pension fund must register at the DNB within six weeks from its establishment. The AFM licenses investment managers of investment institutions, financial service providers, asset managers, and other investment undertakings. For pension funds, Article 151 of the PW stipulates that the AFM is charged with conduct-of-business supervision, and the DNB is charged with prudential supervision and all other supervision.

9. The DNB and AFM have appropriate safeguards for the exchange of Wft information among themselves and with other relevant supervisors. The Wft applies the internationally accepted standards in relation to confidentiality of supervisory information and sharing of confidential supervisory information. The existence of an agreement or understanding on information exchange is not a prerequisite for information exchange; however, there are strict requirements on confidentiality before information can be exchanged. The safeguards as laid down in Article 1:90, subparagraph 1, Wft, and Article 205 of the PW have to be met. The Wft allows information exchange with other supervisors and mentions explicitly the European Central Bank (ECB) (Article 1:93, subparagraph 1, under “a,” Wft) and law enforcement agencies (Article 1:93, subparagraph 1, under “f,” Wft); Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)-information can be shared with relevant supervisors under the Dutch AML/CFT Act. A similar system, with safeguards stipulated as in Article 1:90, Wft, was established for AML/CFT information (Article 22, Dutch AML/CFT Act).

10. Cooperation and coordination between the DNB and AFM is robust, with clear leadership and veto roles. A covenant between the DNB and AFM facilitates the legal framework for supervisory cooperation. The covenant also facilitates the designation of a lead supervisor under the Wft, that is, the DNB generally leads the supervision of banks, insurers, and pension funds, while the AFM leads for securities firms. The lead supervisor would defer to the judgment of the other supervisor in its areas of responsibility, not without considering and in case of differences explaining the other opinion. In the fit-and-proper assessment of key persons, each supervisor has veto power. The covenant also establishes mechanisms for consultation and the sharing of supervisory information.

11. However, working together more extensively in some areas could boost efficiency of the supervision. The twin-peaks model requires intensive coordination and cooperation of the two supervisors, and new ways to enhance such cooperation should be an ongoing process. It is in this spirit that the following recommendations are made:

• The intensity of supervision has significantly increased, and larger insurance groups are subject, on an ongoing basis, to more than 60 thematic work assessments and inspections in total from both supervisors. Each authority has the responsibility for its ongoing supervisory activities, but not for those carried out by the other supervisor. While the focus of the DNB and of the AFM is different, there are areas where a single approach could be taken. In particular, a joint approach to the supervision of culture, governance, and integrity issues is recommended;

• Data exploitation and data analytics is another area where a single approach would increase resources’ efficiency; and

• Earlier, formal information sharing on problem files should be evaluated. Both supervisors share cases under the highest level of supervisory attention, but their coordination could be increased by the DNB’s sharing company information at an earlier stage of concern.

12. The regulatory regime in the insurance and the pension sectors has significantly changed since the last FSAP, in 2011. In the insurance sector, the 2016 Solvency II framework—a market valuation and risk-based prudential regime, including a comprehensive group-wide supervision regime in line with the IAIS principles—has replaced the outdated regulatory framework Solvency I (1973). In the pension sector, since 2015 the nFTK with the supporting changes to the Pension Law has been in place. The nFTK allows for longer recovery periods and enables the extreme measure of benefit cuts to become a measure of last resort. The information requirements have increased, and the focus on the equal consideration of the interests of all participants has strengthened. In addition, the governance of the pension funds has been underpinned through the introduction of the Act of Strengthening of Pension Fund Governance (Wet Versterking Bestuur Pensioenfondsen; Wvbp) in 2014.

13. The supervisory approaches of the DNB and AFM have increased in forward-looking and risk-based aspects. An innovative supervisory approach known as FOCUS! was implemented by the DNB in 2012. FOCUS! builds on the past risk methodology used by the DNB known as the Financial Institutions Risk Analysis Method (FIRM). The use of FOCUS! has resulted in important improvements and significant progress toward a more comprehensive risk-based approach. The supervised institutions are now classified into four risk categories based on the potential level of impact of problems at a given institution, according to the DNB’s supervisory objectives. The risk assessment takes into consideration (1) the macroeconomic environment; (2) business models; (3) culture; and (4) IT as risk drivers before assessing the prudential risk at the microprudential level. The AFM supervisory approach is also new, with an enhanced risk-based focus and early risk identification supported by teams dedicated to monitoring market information. The macroeconomic and system-wide risks are translated into sector-specific risks and used as drivers for the AFM supervisory actions.

14. Financial service disputes can be mediated, and a fast track dispute resolution is available for individual consumers. The Financial Services Disputes Institute (Klachteninstituut Financiële Dienstverlening; KifiD) is currently the only disputes agency recognized by the MoF. KiFiD consists of the Financial Services Ombudsman and the Financial Services Disputes Committee. The Financial Services Ombudsman first tries to mediate between the affiliated financial undertaking and the consumer. Mediation is free of charge. The next step is to apply to the Financial Services Disputes Committee. For a nominal fee, the Disputes Committee will render a decision on the dispute.

15. Solvency II is reshaping the role of auditors. Accounting standards are in line with the International Financial Reporting Standards of the International Accounting Standards Board. Some standards are further recorded in domestic legislation, mostly applied by locally active undertakings. Internationally active undertakings, which are listed on the stock exchange, may apply the international standards directly. Under Solvency II, additional responsibility is placed on auditors to include the actuarial report as part of their external audit report. This removes the reliance of the audited report on an actuarial report prepared outside of the audit firm. Audit firms are in the process of adapting to the requirements of Solvency II, which has also introduced internal models and the need for external audits on several aspects of the new framework. Auditors are supervised by the AFM.

16. There might be an expectation gap between auditors, insurers, and pension funds boards and the DNB on the scope of the audit performed. The expectation of the supervisor and of smaller pension fund boards is that auditors provide opinions on the effectiveness of all processes. However, under current requirements, only the International Standards on Auditing 3402 (International Standard on Assurance Engagements (ISAE)) is performed; it focuses exclusively on those processes that could have an impact on the annual accounts. With the forthcoming introduction of ISAE 3000, that gap should be removed. Also, under the market consistent valuation of assets framework of Solvency II, the fair valuation of illiquid assets presents a challenge for auditors and supervisors to come to a mutual understanding. The tripartite meeting among the auditors, the board of the supervised entities, and the DNB is an important platform for reaching mutual understanding of the aspects of Solvency II.

17. The insurance and pension sectors are supported by well-established trade associations. The largest four global audit companies that are members of the Royal Dutch Professional Organization of Auditors audit 90 percent of the insurance and pension market. The Actuarial Association carries a register of its members that need to abide by actuarial standards and a code of ethics set by the association. The Dutch Association of Insurance and the Federation of Pension Funds provide market statistics and lobby for the respective industries. These trade organizations comment on forthcoming regulations and support the supervision through self-regulation.

18. A wide range of public information is available. Information on the financial strength and performance of the insurance sector is available on the DNB’s website, and Solvency II disclosure requirements will make the information richer. The DNB and AFM webpages contain information about the financial market, financial institutions, financial stability, and a few market conduct indicators. In addition, extensive socioeconomic data are available from the Central Bureau of Statistics (CBS; Centraal Bureau voor de Statistiek), the Centraal Planbureau (CPB; Netherlands Bureau for Economic Policy Analysis), the Sociaal-Cultureel Planbureau (SCP; Social and Cultural Planning Bureau), and from a number of other organizations, including several entities in the financial industry. The Verbond van Verzekeraars (VvV; Association of Insurers) has its own Centrum voor Verzekeringsstatistiek (CVS; Insurance Statistics Centre).

B. The Supervisor

C. Supervision Approach

D. Enforcement

65. A wide range of enforcement actions that facilitate timely and effective actions to remedy Wft breaches or developments that endanger solvency are available to the supervisor. According to Article 1:75, Wft, the supervisor has the power to issue a direction when it is of the opinion that the insurer fails to comply with the provisions of the Wft or related secondary legislation, or when the DNB discovers indications of a development that may endanger the own funds, solvency, liquidity, or technical provisions of that insurer. A formal direction can, if necessary, be issued via a short internal procedure. The DNB always has to substantiate whether a proposed enforcement measure is appropriate to mitigate the identified risks and is proportional to the seriousness of these risks. The enforcement tools include: (an order for) interim penalty payments; an administrative fine, requiring a recovery plan to be produced (Article 3:135, Wft) in case of a breach of the Solvency Capital Requirement (SCR), or a short-term finance scheme (Article 3:136, Wft), in case of a breach of the Minimum Capital Requirement (MCR); apply a temporary capital add-on; restrict the activities of the insurer; or appoint a trustee, or a receiver. The DNB can also ultimately withdraw the insurers’ license and request the court to apply the Emergency Regulations (Noodregeling) to the insurer.

66. Consistency is ensured in the preparation of the enforcement and follows from the internal procedures. For this purpose, the DNB and AFM jointly issued on July 10, 2008 “The policy rule on enforcement policy AFM and DNB.” Moreover, internally, the DNB applies a Working Instruction Enforcement. A firm can be penalized by each of the two authorities for the same action if the action breached the rules of both authorities. Fines have been applied to both firms and individuals. Fines do not address redress,⁶ but can be substantial, and board members have been removed in the insurance sector.⁷

67. Legislation provides an effective timely deterrent by requiring the publication of administrative fines. The DNB is obliged to make administrative fines public, as well as (an order for) interim penalty payments if and when penalty payments have been incurred. An administrative fine is to be made public anonymously if the DNB can determine that full publication would: (1) have a disproportionate effect on the parties involved; (2) hamper ongoing criminal investigations; or (3) endanger the stability of the financial system. Interested parties can request a provisional measure at the District Court of Rotterdam to prevent the publication of an administrative fine or (an order for) interim penalty payments within five days from the date of the decision announcing the publication. As an exception to the general rule, the court hearing takes place behind closed doors in such cases.

68. An objection against the imposition of an administrative fine can be filed with the supervisor and in a second instance with the courts. An insurer and other legal or natural persons with interests that are directly affected by administrative decisions of the DNB have the right to object to such decisions within six weeks from the date of the decision. After this, the objections procedure is completed. Directly affected persons have the right to appeal the decision made on the basis of the prior objection with the court within six weeks. The Court of Rotterdam is exclusively competent for cases concerning administrative decisions of the DNB based on financial regulatory laws. Ultimately, the ruling in the first instance can be appealed at the Trade and Industries Appeal Tribunal. The possible provisional measures include an order to suspend the effect of measures taken by the DNB or to suspend the publication of such measures. Acts by Dutch government bodies that do not qualify as administrative decisions cannot be objected to or appealed on the basis of the Dutch general administrative act. Such acts can be appealed again in civil proceedings on the basis of tort. An accelerated procedure is available under certain conditions if the offender does not dispute the facts and cooperates voluntarily in the accelerated settlement of the fine. The offender will receive a 30 percent discount on the amount of the fine to be imposed, and the supervisor will state—together with the publication of the fine—that the offender cooperated.

E. Group Supervision

69. Given the high concentration of market share in the six largest insurance groups, the DNB’s involvement in group supervision is important. The largest six Dutch insurance groups (and their undertakings) combined cover 86 percent of the national life market and 73 percent of the overall national insurance market. The DNB supervises 23 insurance groups, 21 mixed insurance groups, and 6 financial conglomerates; and it participates in the supervision of 15 European economic area (EEA) insurance groups. The authority is the lead supervisor for four insurance groups, one of which has been designated as a global systemically important insurer (G-SII). While the number of mixed insurance groups is large, the majority of them are captives that, given their business activity, require limited supervisory attention.⁸ During 2015, of two financial conglomerates separated from the bank ownership, one has become an insurance group and the other only a solo entity. A number of pension funds are part of financial groups.

70. The supervisors have signed several MoUs to support communication and coordination. The DNB and AFM have the authority to enter into agreements or understandings with other supervisors. In addition, that the DNB has signed the IAIS Multilateral Memorandum of Understanding (IAIS MMoU). This IAIS MMoU was designed specifically to cater to practical arrangements concerning cross-border cooperation and information exchange, while acknowledging and emphasizing observance of the IAIS Insurance Core Principles.

71. The Solvency II Directive has fortified group supervision, defining the scope and requiring supervision of the whole group. Under Solvency II, a comprehensive Group Supervision Framework is in place, so there is a clear focus on group supervision and the powers of a group supervisor. Article 1:1, Wft, defines a participating enterprise, a holding subsidiary, a financial holding company, a mixed activity insurance holding company, a mixed financial holding company, an affiliated enterprise, an insurance holding company, and an insurance group. Article 3:285, Wft, and Article 3:296, Wft, states that these entities are subject to group supervision. Article 247, Solvency II Directive, stipulates which single supervisor will be responsible for coordination and exercise of group supervision (see Article 1:1, under “’group supervisor,” Wft).

72. The SRPs for groups under Solvency II are comprehensive, and the DNB complies with the vast majority of them. The DNB complies with the following group supervision-related SRPs:

• The Group SRP that addresses, among others, the preconditions for group supervision;

• The College of Supervisors SRP that addresses the college structure and what this involves;

• The Supervision of Intra-Group Transactions SRP that addresses the importance of understanding intragroup transactions, the supervisory steps to review intragroup transactions, and potential misuses relating to intragroup;

• The Supervision of Risk Concentration SRP that addresses the requirements of Article 244 of the Solvency II Directive and includes the review of risk concentrations in the group;

• Group Own Risk and Solvency Assessment (Group ORSA);

• The System of Governance SRP that addresses the group governance; and

• The Recovery & Resolution SRP will be addressed during 2016.

73. Solvency II has also provided additional power to the supervisor of groups. The DNB has the following additional powers: (1) when the DNB is the group supervisor, it has the authority to issue a directive to a mixed financial holding company or an insurance holding company with its registered office in the Netherlands (Article 1:58e, in conjunction with Article 1:75, Wft) to adhere to a particular line of conduct when the holding company or one of the insurers in the group violates provisions laid down in Chapter 3.6 of the Wft; and (2) when the DNB is not the group supervisor, it has the power—upon request of the group supervisor—to issue/impose (Article 1:58e, Wft) a directive (Article 1:75, Wft), (an order for) interim penalty payments (Article 1:79, Wft), an administrative fine (Article 1:80, Wft), and a temporary capital add-on (Article 1:51e).

74. Some important powers for the supervision of international groups and of pension funds are unavailable to the supervisor. With the transposition of the Solvency II Directive, additional powers for the supervision of corporate governance, including fit-and-proper requirements at the group level, have been secured. However, these powers, which encompass unregulated holding companies, can only effectively be enforced when a group supervised by the DNB or AFM is headed by an insurance holding company or a mixed financial holding company based in the Netherlands or within the EEA—in the latter case, on the basis of cooperation arrangements according to the Solvency II Directive. When a group is headed by an entity based in the EEA, such powers can be applied by the relevant EEA group supervisor, where relevant, in cooperation with the DNB or AFM. When a group is headed by an entity based outside the EEA, such powers cannot be effectively applied to the relevant insurance holding company or mixed financial holding company, although Articles 3:269a and 4:6a of the Wft give some powers with respect to governance of the group to the supervisory authorities. The PW does not require supervision of service providers to which activities of pension funds have been outsourced. Moreover, most service providers with one or more subsidiaries that provide services to pension funds are not subject to direct supervision of their governance and staff qualifications at the group level. The two largest pension funds have divested their insurance operations and are active only in asset management, and thus are now no longer subject to group governance supervision. Group supervision of pension funds is not required in the PW.

75. Group reporting, including intragroup transaction reporting, has been improved. Under Solvency II, consistent and comprehensive regulatory reporting by insurance undertakings at the group level is required. This reporting consists of quantitative reporting templates (QRTs), the Group ORSA supervisory report, the regular supervisory report (RSR), and the solvency and financial condition report (SFCR):

• Insurance groups must submit 10 quarterly and 42 comprehensive annual QRTs to their group supervisor. These include annual intragroup transactions. The technical standards upon which these QRTs are based are specific to groups;

• Parent undertakings must submit a Group ORSA supervisory report to the DNB. This may be a single group-wide report covering the entire group and its subsidiaries, or a Group ORSA in which the risks pertaining to subsidiaries are taken into account by an ORSA at the subsidiary level rather than in the Group supervisory report;

• The Group RSR must provide detailed information on the group financials: how the group’s consolidated information has been prepared; the terms and conditions of significant intragroup transactions.⁹ any significant risk concentration at group level; and Group Technical provisions; and

• The Group SFCR must provide information about material differences between the scope of the group used for different reporting bases and on the Group own funds. The SFCR must include a clear and concise summary that highlights any material changes to the insurance or reinsurance undertaking’s business and performance, system of governance, risk profile, valuation for solvency purposes, and capital management over the reporting period.

76. The preparation for group supervision by the DNB under Solvency II has been ongoing for several years. The first assessment in preparation for Solvency II was carried out in 2011. In 2015, another assessment of groups was done. The DNB has created colleges of supervisors for the groups in which it is the lead supervisor. These colleges have been active for a few years with annual physical meetings taking place, and have moved into compliance with the EIOPA requirements on colleges.¹⁰ The risk assessment of the group follows an adapted FOCUS! risk scoring. Core Colleges of Supervisors have been established in cases where cross-border insurers using an internal model met frequently in person or by teleconference. Joint on-site inspections have taken place for international active groups. The reporting on intragroup transactions under Solvency II will provide detailed and complete data as of 2017.

77. Under Solvency II, all EEA colleges should put in place a College Coordination Agreement. The agreement under Solvency II includes an emergency plan for the college of supervisors. This emergency plan is intended to support the management of an emerging crisis by the group supervisor and the college of supervisors. The plan should define the means for crisis handling of the group and, in case of an emergency situation, provide a common understanding of the division of tasks, such as communication to the public of measures taken. At the beginning of 2015, the DNB signed EIOPA Coordination Arrangements.

78. Going forward, the authorities are recommended to consider addressing the following weaknesses present in the group supervision:

• The powers to allow for group governance supervision should be enhanced. Working together with EU authorities, the Dutch authorities are recommended to enhance their powers to include group governance supervision for pension service providers that are companies with one or more subsidiaries that provide services to pension funds;

• The PW should require group supervision; and

• Given the detailed information on intragroup transaction that will be available as of 2017 for insurance groups, the monitoring of the contagion risk could benefit from an IT tool that maps the group structure together with all important intragroup transactions, like loans, reinsurance, and guarantees. The tool should allow for stressing the different transactions to gain an overview of the contagion risk within the group and the transmission channels.

F. Market Entry and Exit

G. Prudential Framework

H. Market Conduct Supervision

118. Intermediaries must be licensed by the AFM. In recent years, additional legislation has been passed in order to improve the quality of intermediary services. As of January 1, 2014, knowledge and ability requirements were introduced for the insurance advisors. Financial institutions are responsible for monitoring compliance with the requirements among their employees (Section 4:9, Subsection 2, Wft, and Section 5, BGfo).

119. On January 1, 2013, a ban on inducements was introduced in the Netherlands. The ban forbids the payment of inducements to independent financial advisers and intermediaries for selling complex financial product (section 86c, Decree on Conduct of Business Supervision of Financial Institutions [BGfo]). Complex financial products include unit-linked insurances, payment (protection) insurance products, funeral insurance products, and capital insurance products. The ban does not apply to non-life insurance and simple life risk products. It does apply to product providers who sell their products directly to consumers (advising or execution only). For product providers who advise and sell to consumers directly, this implies that they have advisory fees and distributor fees separate from the premium paid by the consumer. The ban on inducements is intended to remove the financial incentives that may have been generated by them, and that have led to the mis-selling scandals involving unit-linked insurance and payment protection insurance policies.

120. The image of the insurance industry is recovering from the unit-link policies mis-selling. More than 7 million unit-linked policies were sold in the 1990s without proper disclosure. Only a few years later, when the market conditions deteriorated, hidden costs and other elements in the policy came to light that had not been properly disclosed. The selling arguments to have either planned retirement benefits or sufficient savings to pay off associated mortgages in a bullet payment were far from realistic, as the policies were underperforming according to the disclosed projections at sale. In 2010, insurers agreed to compensate policyholders (estimated cost of €3 billion). In 2011, under the influence of the MoF, insurers started to actively move their policyholders into new policies that corrected the identified issues. The AFM monitored the process and the MoF introduced in 2015 strict requirements in the form of legislation for the way the policyholders were to be approached and motivated for the change. By the end of 2017, all policyholders should have been approached following the AFM requirements. Insurers under Solvency II reported no reserves/capital for the risk of additional mis-selling-related claims payments materializing, as the insurers view this risk as small or difficult to quantify. A recent insurer’s IPO took place, indicating that the mis-selling costs might have been priced by the market already.

121. The development of retail financial products, including life insurance products with a savings or investments component, is regulated. The product development regulation (Section 32f, BGfo) requires that financial enterprises should, when developing new products, also take into account the interests of the customer. The financial product must demonstrably be a result of the balance of different interests:

• The product development process should: clearly define responsibilities, set boundaries for the target audience, analyze scenarios and compare products, link up with other processes in the product chain, and call for a timely evaluation of the product; and

• The following questions should be answered: Does the product deliver value for the money? Does the product fulfill a predefined need for a target group? What is the outcome of the product in different scenarios? Is the product needlessly complicated?

122. The AFM monitors compliance with this regulation by analyzing product data obtained from third-party providers, such as MoneyView. In 2015, 6,277 products in 50 groups were analyzed (not only insurance products).

123. Enforcement of national specific legislation in an FOS environment becomes a challenge. Given the reduced amount of information that the host supervisor foresees will be received from the home supervisor in an FOS environment, the supervision and enforcement of national specific regulations becomes difficult. The enforcement of prudential regulations appears less problematic given the harmonized reporting requirements at the EEA level. Market conduct legislation specific to the Netherlands, such as the ban on inducement regulation or the product development process legislation, on the other hand, faces challenges for the FOS operations—in particular because products offered by financial institutions without an office in the Netherlands are excluded from the regulation’s scope. The AFM is recommended to consider the inclusion of the product regulation for all products offered in the Netherlands independently of the location of the provider and to establish mechanisms to credibly enforce national market conduct regulation for the FOS operations.

124. The PW’s lenient requirements on market conduct have been complemented through the Pension Communication Act (PCA). The PW states the requirements of transparency and information for the participants, but provides no further guidance. On July 1, 2015, the PCA introduced a number of norms for clearer and more targeted communication to detailed provisions aimed at providing full information, which turned out to be too much and too difficult for consumers to absorb. The new law takes into account lessons from behavioral economics, thus improving communication on pension benefits and the inevitable uncertainty around these future pension outcomes.

125. Important obligations on transparency and communication for pension trustees have been introduced. Under the PCA, trustees are responsible for providing scheme members and pensioners access to information on the likelihood of the pension outcome. This information should be of such quality so as to activate scheme members to either decrease their expenditures or to otherwise prepare for a lower standard of living if applicable (Article 38, PW). In addition, the self-regulation introduced in collaboration with the MoSA, Pension 123,¹⁵ with the explicit aim of making certain information comparable, takes a layered approach.

126. Compliance with the PCA is now supervised by a joint effort between the DNB and AFM. After a pilot investigation into the provision of information on the ambition of the pension schemes, both the DNB and AFM have started a larger, joint investigation into the extent to which pension funds provide information that is balanced, that is, realistic about the possibility of rights cuts and/or loss of purchasing power in the coming years, taking into account the financial solidity of the pension scheme. The DNB assesses the financial setup of the information, whereas the AFM assesses the degree to which information is balanced, correct, comprehensible, and suitable. The results of the investigation will feed into supervisory actions.

127. Both the DNB and AFM have advocated disclosure of costs of asset management and pension administration with positive results. The pension industry body, (Pensioenfederatie), has provided subsequent detailed guidance on cost disclosure. The level of underreporting has been exposed, the effects of benchmarking are starting to show, and trustees have become aware that costs do matter in terms of pension outcome, in relation to risk, returns, and pension outcomes. Several pension funds have renegotiated cost with their asset managers or administrators.

128. While more transparency and better information to pension participants is now available, important challenges remain. Given the recent introduction of a ban on inducements in the Netherlands after the mis-selling of unit-linked insurance to pension participants, the question was raised whether access to advice could have become more difficult. The AFM is currently running a project to assess possible implications of the ban on inducement to the accessibility of financial advice. Other countries¹⁶ that have introduced the ban on inducement for financial advice, such as the United Kingdom, are considering mechanisms to secure access to financial advice for that segment of the population that needs most but is unwilling to explicitly pay for that service. The idea of a financial checkup for an accessible cost is one consideration. The authorities are recommended to introduce mechanisms to secure the financial advice that has become of critical importance when pension fund benefits are under-delivering on the expectations¹⁷ and old age income risks are being shifting to the individuals.

129. The pension sector is in transition and a new model is in discussion. Discussions are under way to determine a new structure for the pension system, which may include shifting risks to the participants. The new system should address the main issues of the current system: lack of trust created by the uncertainty of the level of benefits or absence of a guarantee and the deficient portability of the pensions that becomes necessary due to the new labor environment with higher self-employment and more frequent job shifting. The forthcoming discussions to determine the new structure of the pension system when including risk-shifting to the participants should introduce awareness mechanisms to make sure that participants can objectively judge the risks that they might be assuming in longevity and investments. In this context, the advice given to second-pillar pension participants employers needs stronger regulations. The advice provided by a pension fund is regulated under the PW is lenient when compared to the requirement for advice provided under the Wft. Also, no rules on the amount of costs or the suitability of the product are incorporated into the PW. The authorities are recommended to harmonized the Wft and the PW with respect to the regulations on the quality of advice and suitability of product. This will be more relevant when more choices become available for pension participants.

A. Market Structure and Performance

130. The Netherlands has a high level of insurance penetration and insurance density. With an insurance premium of 11 percent of GDP, the insurance penetration is one of the highest in Europe. The non-life or general insurance penetration of 8.5 percent of GDP appears very high when compared with the average in Europe of 3.34 percent. This is the result of health insurance being included in non-life statistics, contrary to most countries. Health insurance in the Netherlands is a mandatory social insurance, which is supplied by the private sector. Over 80 percent of the non-life premium corresponds to health insurance. The insurance density or premium per capita is also high due to the inclusion of the health insurance expenditure. Otherwise, it is in line with the advance markets’ insurance density average of just over US$3,000. On the other hand, life insurance penetration appears to be relatively low. This is a result of the fact that the mandatory second pillar pensions are provided by pension funds, and only a small portion of pensions are provided by insurers. Insurers manage the assets of several pension funds. However, this only accounts for €80 billion out of a total of €1.2 trillion in mandatory pension savings (Tables 2 and 3).

Table 1.

Netherlands: Key Recommendations

¹I (immediate): within one year; NT (near term): one–three years.

Table 1.

Netherlands: Key Recommendations

Recommendations	Timeframe1	Authorities Responsible for Implementation
To enhance effectiveness in the insurance and pension supervision under the twin-peaks model, the supervisors should consider strengthening the already robust cooperation (para. 11), as follows: While the focus of the DNB and AFM is different, there are areas where a single approach could be taken. In particular, for the culture, governance and integrity supervision, a single joint approach is recommended; Data exploitation and data analytics are areas where a single approach would increase resource efficiency; and Earlier formal information sharing on problem files should be considered.	I	DNB, AFM
The authorities are recommended to enhance the powers of the DNB and AFM to introduce technical regulation in accordance with national and EU legislations (para. 29-30).	I	MoF
Exemption from the WNT-3 for both supervisory authorities should be considered (para. 29-30).	I	Dutch government
For a smooth transition and effective functioning of the new structure, the AFM is recommended to apply flexibility in the resources allocation and strong guidance on the functioning of the new structure under a stable board of directors (para. 41).	NT	AFM
The AFM is recommended to be allocated a substantial budget for the development of capabilities to exploit big data for supervision (para. 63).	I	MoF, AFM
The Risk, Management and Strategy department should be in charge of following up on the implementation of the recommendations that the departments have agreed to implement (para. 56).	I	DNB
The potential risk of missing full exploitation of the sectoral thematic work carried out should be minimized by accompanying its growth with the account management and line supervision resources (para. 36).	NT	DNB
As the detailed and extensive reporting under Solvency II emerges, further tuning of FOCUS! to enhance its alignment with Solvency II is recommended (para. 48).	NT	DNB
The DNB is recommended to carry out random on-site inspections on the quality and validity of the data. The DNB should join selected AFM inspection of auditors and require specific inspections of auditors. On a regular basis, the predictive power of FOCUS! should be confirmed (para. 57).	I	DNB, AFM
The authorities are recommended to consider addressing the following weaknesses present in the group supervision (para. 78), as follows: The PW should require group supervision; and Given the detailed information on intragroup transactions expected as of 2017 for insurance groups, the monitoring of the contagion risk could benefit from an IT tool.	NT	MoF, MoSA
The authorities working together with EIOPA should continue supporting the coordination among supervisors of member states to minimize supervisory arbitrage (para. 82)	I	DNB, AFM
The winding up regulation needs to be upgraded (paras. 87-89), as follows: The authorities are recommended to introduce regulation that allows for fast advance payments on all insurance liabilities and requires the approval of both supervisors for the portfolio transfers of insurance and pensions, except when resolution powers are applied; The authorities are recommended to evaluate the introduction of a guarantee scheme for insurance as an important additional esolution tool; The authorities are recommended to introduce the planned resolution framework following a similar approach to the EU Bank Recovery and Resolution Directive with due regard to the insurance business model; and The DNB, in conjunction with EU authorities, should consider whether the current arrangements in the case of a cross-border failure ensure adequate coordination and flexibility between the various resolution tools and authorities.	I	MoF
An evaluation of the methodology to allow for company-specific parameters for small size companies and credit insurers falling under Solvency II is recommended. This should be done by the Netherlands in conjunction with the EU authorities over the coming years (para. 101).	I	Dutch and EU authorities
A strong focus on internal model approval of material changes and on the identification and monitoring of model drift risk should be maintained. Supervisory responses to model change requests that are central for capital reporting should be provided without compromising on quality of the approval within the market reporting timeframe (para. 107).	I	DNB
Elements that limit the economic valuation of the liabilities should be closely monitored. Using Pillar 2 powers, a series of well-defined actions should be taken at different levels of the impact that VA and UFR have on the solvency position of the insurers (para. 148).	I	DNB
The transition into Solvency II should be closely monitored. In particular, the following aspects should be included in the next revision of the framework: the UFR methodology, the tax-loss absorbance capacity of tax credits, and the VA methodology (para 148)	NT	DNB
The DNB is recommended to carry out country-specific stress tests in addition to the EIOPA stress testing (para. 157).	NT	DNB
Pension funds and insurers should be required to have liquidity plans that consider the effect on their hedging positions under stress (paras. 162, 198).	I	DNB
The reporting requirement for insurance intermediaries should be revised and its frequency increased from annually to quarterly. In addition, the reporting requirements for insurers and pensions funds should be enhanced with market conduct indicators complementing the reporting requirements set by the DNB (para. 64).	I	MoSA,, MoF, AFM, DNB
The authorities are recommended to include the product regulation independently of the location of the provider and to establish mechanisms to credibly enforce national market conduct regulation for the FOS operations (para. 123).	NT	MoSA, MoF
The authorities are recommended to introduce a license requirement for pension funds (para. 80).	NT	MoSA
The DNB is recommended to closely monitor search for yield activities in the sector (paras. 166).	I	DNB
The authorities are recommended to reinstate the sound requirement to charge a pension contribution that does not increase the coverage deficit under a recovery plan (para. 114).	NT	MoSA, DNB
The authorities are recommended to tighten the prudent person regime closer to the Solvency II definition (para. 115).	I	MoSA
The authorities are recommended to introduce an additional test to the feasibility assessment of the pension funds with a projection period of about 10 years (para. 116).	I	MoSA
The authorities are recommended to introduce mechanisms to ensure pension participants receive financial advice (para. 128).	NT	MoSA
The authorities are recommended to harmonize the Financial Sector Supervision Act (Wft) and the PW with respect to the regulations on the quality of advice and suitability of product. This will be critical when more choices become available for pension participants (para. 129).	NT	MoSA, MoF
The new pension system should aim to reinstate the qualities that existed in the system, confidence in a guaranteed defined benefit and add portability (para. 197).	I	MoSA

¹I (immediate): within one year; NT (near term): one–three years.

View Table

Table 1.

Netherlands: Key Recommendations

Recommendations	Timeframe1	Authorities Responsible for Implementation
To enhance effectiveness in the insurance and pension supervision under the twin-peaks model, the supervisors should consider strengthening the already robust cooperation (para. 11), as follows: While the focus of the DNB and AFM is different, there are areas where a single approach could be taken. In particular, for the culture, governance and integrity supervision, a single joint approach is recommended; Data exploitation and data analytics are areas where a single approach would increase resource efficiency; and Earlier formal information sharing on problem files should be considered.	I	DNB, AFM
The authorities are recommended to enhance the powers of the DNB and AFM to introduce technical regulation in accordance with national and EU legislations (para. 29-30).	I	MoF
Exemption from the WNT-3 for both supervisory authorities should be considered (para. 29-30).	I	Dutch government
For a smooth transition and effective functioning of the new structure, the AFM is recommended to apply flexibility in the resources allocation and strong guidance on the functioning of the new structure under a stable board of directors (para. 41).	NT	AFM
The AFM is recommended to be allocated a substantial budget for the development of capabilities to exploit big data for supervision (para. 63).	I	MoF, AFM
The Risk, Management and Strategy department should be in charge of following up on the implementation of the recommendations that the departments have agreed to implement (para. 56).	I	DNB
The potential risk of missing full exploitation of the sectoral thematic work carried out should be minimized by accompanying its growth with the account management and line supervision resources (para. 36).	NT	DNB
As the detailed and extensive reporting under Solvency II emerges, further tuning of FOCUS! to enhance its alignment with Solvency II is recommended (para. 48).	NT	DNB
The DNB is recommended to carry out random on-site inspections on the quality and validity of the data. The DNB should join selected AFM inspection of auditors and require specific inspections of auditors. On a regular basis, the predictive power of FOCUS! should be confirmed (para. 57).	I	DNB, AFM
The authorities are recommended to consider addressing the following weaknesses present in the group supervision (para. 78), as follows: The PW should require group supervision; and Given the detailed information on intragroup transactions expected as of 2017 for insurance groups, the monitoring of the contagion risk could benefit from an IT tool.	NT	MoF, MoSA
The authorities working together with EIOPA should continue supporting the coordination among supervisors of member states to minimize supervisory arbitrage (para. 82)	I	DNB, AFM
The winding up regulation needs to be upgraded (paras. 87-89), as follows: The authorities are recommended to introduce regulation that allows for fast advance payments on all insurance liabilities and requires the approval of both supervisors for the portfolio transfers of insurance and pensions, except when resolution powers are applied; The authorities are recommended to evaluate the introduction of a guarantee scheme for insurance as an important additional esolution tool; The authorities are recommended to introduce the planned resolution framework following a similar approach to the EU Bank Recovery and Resolution Directive with due regard to the insurance business model; and The DNB, in conjunction with EU authorities, should consider whether the current arrangements in the case of a cross-border failure ensure adequate coordination and flexibility between the various resolution tools and authorities.	I	MoF
An evaluation of the methodology to allow for company-specific parameters for small size companies and credit insurers falling under Solvency II is recommended. This should be done by the Netherlands in conjunction with the EU authorities over the coming years (para. 101).	I	Dutch and EU authorities
A strong focus on internal model approval of material changes and on the identification and monitoring of model drift risk should be maintained. Supervisory responses to model change requests that are central for capital reporting should be provided without compromising on quality of the approval within the market reporting timeframe (para. 107).	I	DNB
Elements that limit the economic valuation of the liabilities should be closely monitored. Using Pillar 2 powers, a series of well-defined actions should be taken at different levels of the impact that VA and UFR have on the solvency position of the insurers (para. 148).	I	DNB
The transition into Solvency II should be closely monitored. In particular, the following aspects should be included in the next revision of the framework: the UFR methodology, the tax-loss absorbance capacity of tax credits, and the VA methodology (para 148)	NT	DNB
The DNB is recommended to carry out country-specific stress tests in addition to the EIOPA stress testing (para. 157).	NT	DNB
Pension funds and insurers should be required to have liquidity plans that consider the effect on their hedging positions under stress (paras. 162, 198).	I	DNB
The reporting requirement for insurance intermediaries should be revised and its frequency increased from annually to quarterly. In addition, the reporting requirements for insurers and pensions funds should be enhanced with market conduct indicators complementing the reporting requirements set by the DNB (para. 64).	I	MoSA,, MoF, AFM, DNB
The authorities are recommended to include the product regulation independently of the location of the provider and to establish mechanisms to credibly enforce national market conduct regulation for the FOS operations (para. 123).	NT	MoSA, MoF
The authorities are recommended to introduce a license requirement for pension funds (para. 80).	NT	MoSA
The DNB is recommended to closely monitor search for yield activities in the sector (paras. 166).	I	DNB
The authorities are recommended to reinstate the sound requirement to charge a pension contribution that does not increase the coverage deficit under a recovery plan (para. 114).	NT	MoSA, DNB
The authorities are recommended to tighten the prudent person regime closer to the Solvency II definition (para. 115).	I	MoSA
The authorities are recommended to introduce an additional test to the feasibility assessment of the pension funds with a projection period of about 10 years (para. 116).	I	MoSA
The authorities are recommended to introduce mechanisms to ensure pension participants receive financial advice (para. 128).	NT	MoSA
The authorities are recommended to harmonize the Financial Sector Supervision Act (Wft) and the PW with respect to the regulations on the quality of advice and suitability of product. This will be critical when more choices become available for pension participants (para. 129).	NT	MoSA, MoF
The new pension system should aim to reinstate the qualities that existed in the system, confidence in a guaranteed defined benefit and add portability (para. 197).	I	MoSA

¹I (immediate): within one year; NT (near term): one–three years.

Table 2.

Netherlands: Global Share in Insurance Premium, Penetration, and Density, 2014 ^1/2/

Source: Dutch authorities. Based on Swiss Re Sigma 4/2015 (adjusted).

^1/Advanced markets include Canada, Israel, Japan, Oceania, the United States, Western Europe, and the other advanced Asian economies (Hong Kong, Singapore, South Korea and Taiwan).

^2/EU figures exclude Lithuania and Latvia, as these countries are not included in the Swiss Re Sigma report.

Table 2.

Netherlands: Global Share in Insurance Premium, Penetration, and Density, 2014 ^1/2/

	Jurisdictions	Gross premiums		Penetration	Density
		In millions of U.S. dollars	% share	As % of GDP	USD per capita
Life	NLD	21,370	0.81	2.63	1,257
	EU	944,311	35.57	5.13	1,878
	Advanced markets	2,232,490	84.10	4.81	2,162
	World	2,654,549	100.00
Non-life	NLD	56,301	2.65	8.50	4,068
	EU	616,028	29.01	3.34	1,225
	Advanced markets	1,706,373	80.35	3.68	1,653
	World	2,123,699	100.00
Total	NLD	73,706	1.58	11.12	5,325
	EU	1,560,339	33.35	8.47	3,103
	Advanced markets	3,938,863	84.20	8.48	3,815
	World	4,678,248	100.00

Source: Dutch authorities. Based on Swiss Re Sigma 4/2015 (adjusted).

^1/Advanced markets include Canada, Israel, Japan, Oceania, the United States, Western Europe, and the other advanced Asian economies (Hong Kong, Singapore, South Korea and Taiwan).

^2/EU figures exclude Lithuania and Latvia, as these countries are not included in the Swiss Re Sigma report.

View Table

Table 2.

Netherlands: Global Share in Insurance Premium, Penetration, and Density, 2014 ^1/2/

	Jurisdictions	Gross premiums		Penetration	Density
		In millions of U.S. dollars	% share	As % of GDP	USD per capita
Life	NLD	21,370	0.81	2.63	1,257
	EU	944,311	35.57	5.13	1,878
	Advanced markets	2,232,490	84.10	4.81	2,162
	World	2,654,549	100.00
Non-life	NLD	56,301	2.65	8.50	4,068
	EU	616,028	29.01	3.34	1,225
	Advanced markets	1,706,373	80.35	3.68	1,653
	World	2,123,699	100.00
Total	NLD	73,706	1.58	11.12	5,325
	EU	1,560,339	33.35	8.47	3,103
	Advanced markets	3,938,863	84.20	8.48	3,815
	World	4,678,248	100.00

Source: Dutch authorities. Based on Swiss Re Sigma 4/2015 (adjusted).

^1/Advanced markets include Canada, Israel, Japan, Oceania, the United States, Western Europe, and the other advanced Asian economies (Hong Kong, Singapore, South Korea and Taiwan).

^2/EU figures exclude Lithuania and Latvia, as these countries are not included in the Swiss Re Sigma report.

Table 3.

Netherlands: Insurance Density, 2014

(Premium in €1,000, Insurance Density in euros)

Source: Dutch authorities.

Table 3.

Netherlands: Insurance Density, 2014

(Premium in €1,000, Insurance Density in euros)

Premiums	2014	Insurance density
Life	17,405,000	1,034
Non-life excl. Health	11,253,000	669
Health	45,048,000	2,677
Reinsurance	1,236,000	73
Natura	114,000	7
Total	75,056,000	4,460
Population of the Netherlands	16,829,289

Source: Dutch authorities.

View Table

Table 3.

Netherlands: Insurance Density, 2014

(Premium in €1,000, Insurance Density in euros)

Premiums	2014	Insurance density
Life	17,405,000	1,034
Non-life excl. Health	11,253,000	669
Health	45,048,000	2,677
Reinsurance	1,236,000	73
Natura	114,000	7
Total	75,056,000	4,460
Population of the Netherlands	16,829,289

Source: Dutch authorities.

131. The insurance sector is an important contributor to the financial sector. In terms of assets, the insurance sector accounts for about 17 percent of the sector’s assets, with assets just over 140 percent of GDP. About 50 percent of those assets are related to international activities (Table 4). Notwithstanding a constant decline in the number of insurers in the past two decades, from 450 insurers in 1998, a large number of insurers remain active in the market with just under 200 insurers domiciled in the Netherlands.¹⁸ Of those, 117 are writing non-life business (down from 172 in 2011 through mergers and acquisitions) and 39 are life insurers (Table 5). Also, the number of employment in the sector is important but has come down from 65,000 in 2004 to 50,000 in 2014 (Figure 1).

Table 4.

Netherlands: Importance of the Insurance and Pension Sectors to the Financial Sector, 2014

Source: Dutch authorities.

Table 4.

Netherlands: Importance of the Insurance and Pension Sectors to the Financial Sector, 2014

Netherlands	2014	2014	Market share as a percentage of financial sector (consolidated)
Based on total assets	In millions of euros	Percentage of GDP
Insurers (national activities)	520,753	78.57	9.69
Insurers (consolidated)	928,358	140.07	17.28
Pension Funds (2nd pillar)	1,133,424	170.93	20.76
Financial sector (national activities)	4,885,947	737.20
Financial sector (consolidated)	5,373,759	810.80

Source: Dutch authorities.

View Table

Table 4.

Netherlands: Importance of the Insurance and Pension Sectors to the Financial Sector, 2014

Netherlands	2014	2014	Market share as a percentage of financial sector (consolidated)
Based on total assets	In millions of euros	Percentage of GDP
Insurers (national activities)	520,753	78.57	9.69
Insurers (consolidated)	928,358	140.07	17.28
Pension Funds (2nd pillar)	1,133,424	170.93	20.76
Financial sector (national activities)	4,885,947	737.20
Financial sector (consolidated)	5,373,759	810.80

Source: Dutch authorities.

Table 5.

Netherlands: Number of Insurers and Insurance Intermediaries, 2011–15

Source: Dutch authorities.

Table 5.

Netherlands: Number of Insurers and Insurance Intermediaries, 2011–15

		2011	2012	2013	2014	2015
Domestic insurers
	Life (long-term)	44	43	40	39	39
	Non-life (general)	172	158	140	123	117
	Reinsurance	8	4	5	5	7
	Captive	14	14	13	11	8
	Others* (funeral insurers)	29	28	28	26	26
		267	247	226	204	197
Insurance intermediaries
	Agents	NA	NA	NA	45	58
	Brokers	8,425	8,158	7,932	7,665	7,468
Supplementary information
	Foreign branches	76	74	64	66	50
	Local insurers’ branches abroad	12	11	11	13	13
	Insurance groups	67	67	67	65	NA

Source: Dutch authorities.

View Table

Table 5.

Netherlands: Number of Insurers and Insurance Intermediaries, 2011–15

		2011	2012	2013	2014	2015
Domestic insurers
	Life (long-term)	44	43	40	39	39
	Non-life (general)	172	158	140	123	117
	Reinsurance	8	4	5	5	7
	Captive	14	14	13	11	8
	Others* (funeral insurers)	29	28	28	26	26
		267	247	226	204	197
Insurance intermediaries
	Agents	NA	NA	NA	45	58
	Brokers	8,425	8,158	7,932	7,665	7,468
Supplementary information
	Foreign branches	76	74	64	66	50
	Local insurers’ branches abroad	12	11	11	13	13
	Insurance groups	67	67	67	65	NA

Source: Dutch authorities.

Netherlands: Employment in the Insurance Sector, 2004–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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Netherlands: Employment in the Insurance Sector, 2004–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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Netherlands: Employment in the Insurance Sector, 2004–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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132. The insurance sector is significant with assets of about €495 billion and a premium of €72 billion in 2015 but the sector is not growing. The life sector, accounting for €14.5 billion in premium in 2015, has been experiencing a reduction trend in premiums between 2011–15 of 33 percent (Table 6). This negative trend is expected to continue in 2016. The decline in premium has been attributed to a general loss in image of the sector after the mis-selling of unit-linked policies, which continues to bring political, public, and supervisory attention (Figure 2). Also, the banking sector, having similar saving products with the same fiscal benefits since 2008, has replaced an important share of the life products with their savings products. Finally, the low interest environment has reduced the attractiveness of life policies. On the other hand, the assets of life insurers have grown from €365 billion in 2011 to €422 billion in 2015, a 16 percent growth. This is mainly the result of a strong capitalization in preparation for the Solvency II compliance during 2014 and the low interest rate environment, which increased the market value of existing bonds. The amount of non-life premium of €57 billion (including health insurance) has basically not changed since 2011. The health sector has been continuously growing and thus has offset the losses in premium of the other non-life lines of business that have resulted mainly due to a change in the legal structure of a large insurer from a subsidiary to a branch operation (Figure 3).

Table 6.

Netherlands: Insurance Premium and Assets, 2011–15

(In millions of euros)

Source: Dutch authorities.

Table 6.

Netherlands: Insurance Premium and Assets, 2011–15

(In millions of euros)

	2011	2012	2013	2014	2015
life
Gross premiums	22,020	19,102	18,384	17,694	14,796
Net premiums	20,176	18,124	17,519	15,851	13,889
Total assets	365,202	398,829	375,398	432,096	422,017
Nonlife
Gross premiums	56,734	55,898	56,938	56,054	57,438
Net premiums	51,493	52,447	53,689	53,051	55,357
Total assets	68,580	75,104	72,956	73,980	72,917

Source: Dutch authorities.

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Table 6.

Netherlands: Insurance Premium and Assets, 2011–15

(In millions of euros)

	2011	2012	2013	2014	2015
life
Gross premiums	22,020	19,102	18,384	17,694	14,796
Net premiums	20,176	18,124	17,519	15,851	13,889
Total assets	365,202	398,829	375,398	432,096	422,017
Nonlife
Gross premiums	56,734	55,898	56,938	56,054	57,438
Net premiums	51,493	52,447	53,689	53,051	55,357
Total assets	68,580	75,104	72,956	73,980	72,917

Source: Dutch authorities.

Netherlands: Image Assessment of the Insurance Sector, 2004–15

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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Netherlands: Image Assessment of the Insurance Sector, 2004–15

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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Netherlands: Image Assessment of the Insurance Sector, 2004–15

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Association of Insurers.

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Netherlands: Insurance Premium Split Development, 2008–2014

(In percent)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities; and the Association of Insurers.

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Netherlands: Insurance Premium Split Development, 2008–2014

(In percent)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities; and the Association of Insurers.

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Netherlands: Insurance Premium Split Development, 2008–2014

(In percent)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities; and the Association of Insurers.

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133. Health insurance that is offered as part of the social security program is not analyzed in this technical note. Health insurance is mandatory and is offered as part of the social security program by private insurers with the same standard coverage, no underwriting, and the same premium, regardless of age or state of health. To compensate insurers for the different risk profiles assumed, a risk equalization is in place. Due to its limited impact on the stability of the financial sector, given that the premium is adjusted according to the claims costs, the health insurance sector is not covered in this technical note.¹⁹

134. Most of the foreign large global insurers operate in the market with an important share in the non-life business. Life insurance is largely provided by national insurers with only 5.4 percent of foreign insurers’ participation, of which the majority use a subsidiary presence (4.5 percent). In the non-life sector, the foreign insurers account for over 50 percent of the premium. The three legal forms used by insurers are equally important: subsidiaries (22 percent); branches (18 percent); and cross-border insurers under the FOS provision (14 percent) (Table 7).

Table 7.

Netherlands: Foreign Insurers’ Market Participation in Percentage of the Total Premium, 2014

(In millions of euros)

Source: Dutch authorities.Note: Non-life insurance does not include health insurance.

Table 7.

Netherlands: Foreign Insurers’ Market Participation in Percentage of the Total Premium, 2014

(In millions of euros)

	Life	Non-life	Total
Total Premium	17,578	11,250	28,828
Branch offices	0.39	17.54	7.08
Free provision of services	0.48	13.87	5.71
Subsidiaries	4.49	21.96	11.31
Total foreign insurers	5.36	53.37	24.10

Source: Dutch authorities.Note: Non-life insurance does not include health insurance.

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Table 7.

Netherlands: Foreign Insurers’ Market Participation in Percentage of the Total Premium, 2014

(In millions of euros)

	Life	Non-life	Total
Total Premium	17,578	11,250	28,828
Branch offices	0.39	17.54	7.08
Free provision of services	0.48	13.87	5.71
Subsidiaries	4.49	21.96	11.31
Total foreign insurers	5.36	53.37	24.10

Source: Dutch authorities.Note: Non-life insurance does not include health insurance.

135. The insurance sector is dominated by eight insurance groups, two of them focus on health insurance and another is a designated G-SII. Eight insurance groups account for 80 percent of the insurance market. Excluding two groups that are solely providing health insurance, the insurance market is covered by six groups. Of the 10 insurance groups in Table 8, with 2 exceptions, all business is domestic (one of the groups has less than 6 percent of its premium is from outside the Netherlands). The two groups that are globally active have 48 percent and 24.5 percent of their premium related to domestic business. The latter has recently been designed a G-SII.

Table 8.

Netherlands: Insurance Groups Active in the Netherlands, 2014

Source: Dutch authorities.

^1/Generali includes only the Dutch business.

Table 8.

Netherlands: Insurance Groups Active in the Netherlands, 2014

	Assets			Premiums
	Consolidated	Domestic Operations	Domestic Operations	Consolidated	Domestic Operations	Domestic Operations
	(In millions of euros)		(In percent)	(In millions of euros)		(In percent)
1 NN Group N.V.	165,000	146,000	88.48	9,340	4,500	48.18
2 Aegon N.V.	424,902	106,031	24.95	19,864	4,864	24.49
3 Achmea B.V.	93,205	85,942	92.21	20,002	18,893	94.46
4 VIVAT N.V.	60,525	60,525	100.00	3,105	3,105	100.00
5 ASR Nederland N.V.	51,137	51,137	100.00	3,953	3,953	100.00
6 Delta Lloyd N.V.	63,883	52,641	82.40	3,964	3,172	80.02
7 Coöperative VGZ U.A.	7,709	7,709	100.00	10,514	10,514	100.00
8 CZ Groep Zorgverzekeringen	6,314	6,314	100.00	8,322	8,322	100.00
9 Generali Verzekeringsgroep N.V. 1/	5,934	5,934	100.00	383	383	100.00
10 ABN AMRO Verzekeringen B.V.	5,882	5,882	100.00	583	583	100.00
Total	884,491	528,115	59.71	80,030	58,289	72.83

Source: Dutch authorities.

^1/Generali includes only the Dutch business.

View Table

Table 8.

Netherlands: Insurance Groups Active in the Netherlands, 2014

	Assets			Premiums
	Consolidated	Domestic Operations	Domestic Operations	Consolidated	Domestic Operations	Domestic Operations
	(In millions of euros)		(In percent)	(In millions of euros)		(In percent)
1 NN Group N.V.	165,000	146,000	88.48	9,340	4,500	48.18
2 Aegon N.V.	424,902	106,031	24.95	19,864	4,864	24.49
3 Achmea B.V.	93,205	85,942	92.21	20,002	18,893	94.46
4 VIVAT N.V.	60,525	60,525	100.00	3,105	3,105	100.00
5 ASR Nederland N.V.	51,137	51,137	100.00	3,953	3,953	100.00
6 Delta Lloyd N.V.	63,883	52,641	82.40	3,964	3,172	80.02
7 Coöperative VGZ U.A.	7,709	7,709	100.00	10,514	10,514	100.00
8 CZ Groep Zorgverzekeringen	6,314	6,314	100.00	8,322	8,322	100.00
9 Generali Verzekeringsgroep N.V. 1/	5,934	5,934	100.00	383	383	100.00
10 ABN AMRO Verzekeringen B.V.	5,882	5,882	100.00	583	583	100.00
Total	884,491	528,115	59.71	80,030	58,289	72.83

Source: Dutch authorities.

^1/Generali includes only the Dutch business.

136. The top six life insurers accounted for 87 percent, and the top six non-life insurers for 50 percent of the gross premium in 2015. The largest six life insurers have all above 10 percent market share, while the next insurers have market shares of 2 percent or less. The non-life sector (excluding health) is less concentrated. With the exception of the largest insurer having a 21 percent market share, the next nine insurers accounted for 50 percent of the market in terms of gross premium in 2015 (Table 9).

Table 9.

Netherlands: Market Share of the Top 10 Individual Insurers, 2015

(In percent)

Source: Dutch authorities.

Table 9.

Netherlands: Market Share of the Top 10 Individual Insurers, 2015

(In percent)

Life sector - as percentage of total assets	% of industry
Nationale-Nederlanden Levensverzekering Maatschappij N.V.	21
Aegon Levensverzekering N.V.	21
SRLEV N.V.	13
Achmea Pensioen- en Levensverzekeringen N.V.	12
Delta Lloyd Levensverzekering N.V.	10
ASR Levensverzekering N.V.	10
Optas Pensioenen N.V.	2
Generali levensverzekering maatschappij N.V.	1
ABN AMRO Levensverzekering N.V.	1
Allianz Nederland Levensverzekering N.V.	1
Non-life sector - as percentage of total gross premium	% of industry
Achmea Schadeverzekeringen N.V.	21
Nationale-Nederlanden Schadeverzekering Maatschappij N.V.	9
Delta Lloyd Schadeverzekering N.V.	7
ASR Schadeverzekering N.V.	7
Atradius Credit Insurance N.V.	6
REAAL Schadeverzekeringen N.V.	5
Aegon Schadeverzekering N.V.	5
Amersfoortse Algemene Verzekering Maatschappij, N.V.	4
Amlin Europe N.V.	4
Univé Schade, N.V.	3

Source: Dutch authorities.

View Table

Table 9.

Netherlands: Market Share of the Top 10 Individual Insurers, 2015

(In percent)

Life sector - as percentage of total assets	% of industry
Nationale-Nederlanden Levensverzekering Maatschappij N.V.	21
Aegon Levensverzekering N.V.	21
SRLEV N.V.	13
Achmea Pensioen- en Levensverzekeringen N.V.	12
Delta Lloyd Levensverzekering N.V.	10
ASR Levensverzekering N.V.	10
Optas Pensioenen N.V.	2
Generali levensverzekering maatschappij N.V.	1
ABN AMRO Levensverzekering N.V.	1
Allianz Nederland Levensverzekering N.V.	1
Non-life sector - as percentage of total gross premium	% of industry
Achmea Schadeverzekeringen N.V.	21
Nationale-Nederlanden Schadeverzekering Maatschappij N.V.	9
Delta Lloyd Schadeverzekering N.V.	7
ASR Schadeverzekering N.V.	7
Atradius Credit Insurance N.V.	6
REAAL Schadeverzekeringen N.V.	5
Aegon Schadeverzekering N.V.	5
Amersfoortse Algemene Verzekering Maatschappij, N.V.	4
Amlin Europe N.V.	4
Univé Schade, N.V.	3

Source: Dutch authorities.

137. The premium split is characteristic of a mature market with a balanced business mix. At end 2015, the life business consisted of 70 percent annual premium and 30 percent single premium. The participating policies account for 40 percent of the business, while 60 percent of the premium is related to nonparticipating policies. The non-life premium in dominated by motor and property business, each accounting for about 35 percent and 33 percent, respectively, of the non-life business excluding health insurance. Other lines of business are general liability and financial guarantees, each accounting for about 10 percent of the premium. Health insurance is over four times higher than all other non-life business (Table 10).

Table 10.

Netherlands: Insurance Gross Premium by Line of Business, 2013–15

(In billions of euros)

Source: Dutch authorities.

Table 10.

Netherlands: Insurance Gross Premium by Line of Business, 2013–15

(In billions of euros)

Life		2013	2014	2015
Regular premiums
	Non-participating	7.35	6.99	6.64
	Participating	4.87	4.21	3.60
Single premiums
	Non-participating	3.56	3.41	2.11
	Participating	2.49	2.96	2.34
Indirect business		−0.0	5.4	6.8
		18.27	17.58	14.70
Non-life
Motor		4.38	3.93	3.88
Property		4.02	3.73	3.72
General Liability		1.12	1.06	1.03
Financial Guarantee		1.15	1.17	1.22
Accident & health		45.11	45.05	46.54
Other		1.40	1.36	1.30
		57.19	56.30	57.70

Source: Dutch authorities.

View Table

Table 10.

Netherlands: Insurance Gross Premium by Line of Business, 2013–15

(In billions of euros)

Life		2013	2014	2015
Regular premiums
	Non-participating	7.35	6.99	6.64
	Participating	4.87	4.21	3.60
Single premiums
	Non-participating	3.56	3.41	2.11
	Participating	2.49	2.96	2.34
Indirect business		−0.0	5.4	6.8
		18.27	17.58	14.70
Non-life
Motor		4.38	3.93	3.88
Property		4.02	3.73	3.72
General Liability		1.12	1.06	1.03
Financial Guarantee		1.15	1.17	1.22
Accident & health		45.11	45.05	46.54
Other		1.40	1.36	1.30
		57.19	56.30	57.70

Source: Dutch authorities.

138. The insurance sector investments are well diversified and consistent with the type of assumed liabilities. The unit-linked business, where the investment risk is borne by the policyholders, accounted for 28 percent of the investments in 2014 and 26 percent in 2015. Life insurers’ liabilities, where the investment risk is retained, are traditionally matched by fixed income investments. As such, the life insurers’ investment assets are mainly fixed income securities with over 55 percent of the investments held in bonds. Loans (mainly mortgages) that also produce fixed income account for about 25 percent of the investments. Only about 5 percent of the investments are held in variable income including the collective investments, and less than 5 percent is held in cash (Table 11). Non-life insurers having shorter-term liabilities generally need more liquid assets, and this is reflected partly in their investments. Non-life insurers invest in cash and deposits at about 10 percent of the assets, about 17 percent of which is in collective investments. Fixed income investments are dominant and account for 77 percent of the investments in 2015 (68 percent in 2014). Equity investments correspond to 6 percent of the investments (Table 12).

Table 11.

Netherlands: Life Insurance Investments, 2011–14

(In billions of euros)

Source: Dutch authorities.

Table 11.

Netherlands: Life Insurance Investments, 2011–14

(In billions of euros)

	12/31/14	12/31/15
Intangible assets	35.83	−
Deferred tax assets	4,744	5,492
Property held for own use	233	251
Property	5,542	4,615
Holdings and participations	8,133	14,370
Equities - listed	6,677	6,580
Equities unlisted	1,497	871
Government bonds	118,036	112,959
Corporate bonds	33,278	34,505
Structured bonds	209	59
Collateralised securities	11,699	8,318
Collective Investment Undertakings	6,429	9,295
Derivatives assets	19,376	18,288
Deposits other than cash equivalents	4,529	1,785
Assets held for index-linked and unit-linked contracts	116,178	104,802
Loans on policies	51	289
Loans and mortgages to individuals	48,359	51,824
Other loans and mortgages	19,778	26,781
Reinsurance recoverables	7,701	4,666
Insurance and intermediaries receivables	1,477	1,056
Cash and cash equivalents	8,330	8,585
Other assets	9,805	6,624
Total assets	432,096	422,017
Total liabilities	401,661	389,064
Excess of assets over liabilities	30,434	32,954

Source: Dutch authorities.

View Table

Table 11.

Netherlands: Life Insurance Investments, 2011–14

(In billions of euros)

	12/31/14	12/31/15
Intangible assets	35.83	−
Deferred tax assets	4,744	5,492
Property held for own use	233	251
Property	5,542	4,615
Holdings and participations	8,133	14,370
Equities - listed	6,677	6,580
Equities unlisted	1,497	871
Government bonds	118,036	112,959
Corporate bonds	33,278	34,505
Structured bonds	209	59
Collateralised securities	11,699	8,318
Collective Investment Undertakings	6,429	9,295
Derivatives assets	19,376	18,288
Deposits other than cash equivalents	4,529	1,785
Assets held for index-linked and unit-linked contracts	116,178	104,802
Loans on policies	51	289
Loans and mortgages to individuals	48,359	51,824
Other loans and mortgages	19,778	26,781
Reinsurance recoverables	7,701	4,666
Insurance and intermediaries receivables	1,477	1,056
Cash and cash equivalents	8,330	8,585
Other assets	9,805	6,624
Total assets	432,096	422,017
Total liabilities	401,661	389,064
Excess of assets over liabilities	30,434	32,954

Source: Dutch authorities.

Table 12.

Netherlands: Non-life Insurance Investments, 2011–14

(In billions of euros)

Source: Dutch authorities.

Table 12.

Netherlands: Non-life Insurance Investments, 2011–14

(In billions of euros)

	12/31/14	12/31/15
Intangible assets	3	1
Deferred tax assets	243	201
Property held for own use	190	191
Property	171	93
Holdings and participations	5,070	5,482
Equities - listed	2,415	2,059
Equities unlisted	526	137
Government bonds	18,914	17,721
Corporate bonds	13,590	11,360
Structured bonds	5	16
Collateralised securities	830	982
Collective Investment Undertakings	7,896	7,846
Derivatives assets	179	185
Deposits other than cash equivalents	1,503	864
Assets held for index-linked and unit-linked contracts	24	19
Loans and mortgages to individuals	775	1,002
Other loans and mortgages	633	928
Reinsurance recoverables	2,382	2,273
Insurance and intermediaries receivables	9,416	11,096
Cash and cash equivalents	3,382	3,322
Other assets	5,831	7,136
Total assets	73,980	72,917
Total liabilities	48,947	47,418
Excess of assets over liabilities	25,033	25,499

Source: Dutch authorities.

View Table

Table 12.

Netherlands: Non-life Insurance Investments, 2011–14

(In billions of euros)

	12/31/14	12/31/15
Intangible assets	3	1
Deferred tax assets	243	201
Property held for own use	190	191
Property	171	93
Holdings and participations	5,070	5,482
Equities - listed	2,415	2,059
Equities unlisted	526	137
Government bonds	18,914	17,721
Corporate bonds	13,590	11,360
Structured bonds	5	16
Collateralised securities	830	982
Collective Investment Undertakings	7,896	7,846
Derivatives assets	179	185
Deposits other than cash equivalents	1,503	864
Assets held for index-linked and unit-linked contracts	24	19
Loans and mortgages to individuals	775	1,002
Other loans and mortgages	633	928
Reinsurance recoverables	2,382	2,273
Insurance and intermediaries receivables	9,416	11,096
Cash and cash equivalents	3,382	3,322
Other assets	5,831	7,136
Total assets	73,980	72,917
Total liabilities	48,947	47,418
Excess of assets over liabilities	25,033	25,499

Source: Dutch authorities.

139. The quality of the fixed income investments is higher in the life sector. The exposure to governments correspond to 77 percent (2015) of the life fixed income investments and 58 percent of the non-life fixed income investments. The rest corresponds to corporate bonds. The exposure to highly rated countries in the life sector corresponds to 69 percent of the fixed income investments, while it constitutes 59 percent for the non-life fixed income investments (Table 13). This could be an indication of the search for yield in the non-life sector to compensate for poor technical results that materialize much faster than in the life sector.

Table 13.

Netherlands: Country Exposure of the Insurance Investments, 2014–Q3-2015

(In millions of euros)

Source: Dutch authorities.

Table 13.

Netherlands: Country Exposure of the Insurance Investments, 2014–Q3-2015

(In millions of euros)

	Economic Value
	2014		Q3-2015
	Amount	% of class	Amount	% of class
Life
By type of issuer
Corporate securities	33,438	22	34,063	23
Government	118,124	78	116,211	77
By Country
GERMANY			40,106,444	27
NETHERLANDS			37,994,744	25
FRANCE	NA		17,134,155	11
AUSTRIA			8,846,588	6
Other			46,192,795	31
Non-Life
By type of issuer
Corporate securities	13,825	42	12,593	42
Government	19,146	58	17,578	58
By Country
NETHERLANDS			9,033	30
GERMANY			3,919	13
FRANCE	NA		3,186	11
UNITED STATES			1,731	6
Other			12,302	41

Source: Dutch authorities.

View Table

Table 13.

Netherlands: Country Exposure of the Insurance Investments, 2014–Q3-2015

(In millions of euros)

	Economic Value
	2014		Q3-2015
	Amount	% of class	Amount	% of class
Life
By type of issuer
Corporate securities	33,438	22	34,063	23
Government	118,124	78	116,211	77
By Country
GERMANY			40,106,444	27
NETHERLANDS			37,994,744	25
FRANCE	NA		17,134,155	11
AUSTRIA			8,846,588	6
Other			46,192,795	31
Non-Life
By type of issuer
Corporate securities	13,825	42	12,593	42
Government	19,146	58	17,578	58
By Country
NETHERLANDS			9,033	30
GERMANY			3,919	13
FRANCE	NA		3,186	11
UNITED STATES			1,731	6
Other			12,302	41

Source: Dutch authorities.

140. The highly competitive non-life sector is not growing and profitability remains a challenge. The lack of growth in the non-life market (see Table 6 and Figure 3) is a sign of a saturated market where competition is not only at national level but at European level, with foreign insurers accounting for over 50 percent of the business (excluding health) (see Table 7). The EU single market makes it even more difficult to adjust prices for domestic insurers to return to profitability. The market’s openness might be a possible explanation for the long-lasting negative results of the sector when excluding investments return (Figure 4) and the efforts of insurers to lower costs rather than increase the premium (Figure 5).

Netherlands: Non-life (Excluding Health) Underwriting Performance, 2007–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Non-life (Excluding Health) Underwriting Performance, 2007–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Non-life (Excluding Health) Underwriting Performance, 2007–14

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Non-life Sector (Excluding Health) Cost Ratio including Acquisition Costs, 2008–14

(As a percentage of premium)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Non-life Sector (Excluding Health) Cost Ratio including Acquisition Costs, 2008–14

(As a percentage of premium)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Non-life Sector (Excluding Health) Cost Ratio including Acquisition Costs, 2008–14

(As a percentage of premium)

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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141. The low interest rate environment poses a serious threat to the stability of life insurers. Based on reported information from EIOPA, Moody’s Investors Service, and Standard & Poor’s Ratings Services (May 2014), about 40 percent of the life business has a guaranteed investment return rate (Table 14). The average guaranteed rate of 3.6 percent is one of the highest in the EU. The reported investments spread remains positive, albeit very small at about 0.2 percent. In addition, the duration gap between assets and liabilities of 5.5 years indicates an important level of duration mismatch that could reduce the investments spread or turn it negative as a result of the reinvestment risk in the current low interest rate environment. In addition, life products, as seen by the reduction in premium production, have lost attractiveness exacerbating the concerns on the stability of the sector.

Table 14.

Netherlands: Selected EU Countries: Life Sector Duration Spread Exposure, 2014

Sources: European Insurance and Occupational Pensions Authority; Moody’s Investors Service; and Standard & Poor’s Ratings Services (May 2014).Notes:• gt= greater than, lt= less than, na= not available.• Investment spread is the difference between the internal rate of return on assets and the internal rate of return on liabilities.• Duration gap is the difference between the average duration of liabilities and assets.

Table 14.

Netherlands: Selected EU Countries: Life Sector Duration Spread Exposure, 2014

	duration gap	Share of products with guaranteed rate (%)	Average guaranteed rate	Investment spread (%)
Germany	gt 10 years	75	3.1	−0.4
Sweden	gt 10 years	70	3.3	−0.5
Austria	gt 10 years	58	3	0.9
The Netherlands	5.5 year	40	3.6	0.2
France	4.75 years	na	0.5	−0.6
Denmark	4.75 years	75	2.6	0.1
Spain	lt 1 year	na	3.8	1.1
Italy	lt 1 year	na	2.5	0.6
Ireland	lt 0 year	na	1.5	1.3
UK	lt 0 year	19	0.5	−0.1

Sources: European Insurance and Occupational Pensions Authority; Moody’s Investors Service; and Standard & Poor’s Ratings Services (May 2014).Notes:• gt= greater than, lt= less than, na= not available.• Investment spread is the difference between the internal rate of return on assets and the internal rate of return on liabilities.• Duration gap is the difference between the average duration of liabilities and assets.

View Table

Table 14.

Netherlands: Selected EU Countries: Life Sector Duration Spread Exposure, 2014

	duration gap	Share of products with guaranteed rate (%)	Average guaranteed rate	Investment spread (%)
Germany	gt 10 years	75	3.1	−0.4
Sweden	gt 10 years	70	3.3	−0.5
Austria	gt 10 years	58	3	0.9
The Netherlands	5.5 year	40	3.6	0.2
France	4.75 years	na	0.5	−0.6
Denmark	4.75 years	75	2.6	0.1
Spain	lt 1 year	na	3.8	1.1
Italy	lt 1 year	na	2.5	0.6
Ireland	lt 0 year	na	1.5	1.3
UK	lt 0 year	19	0.5	−0.1

Sources: European Insurance and Occupational Pensions Authority; Moody’s Investors Service; and Standard & Poor’s Ratings Services (May 2014).Notes:• gt= greater than, lt= less than, na= not available.• Investment spread is the difference between the internal rate of return on assets and the internal rate of return on liabilities.• Duration gap is the difference between the average duration of liabilities and assets.

142. Considering that traditional business models in the insurance sector are under pressure, insurance companies should adapt their business models. Without sustainable business models, financial soundness of insurers will be undermined. In the longer run, they may be in danger of not meeting their obligations towards policyholders. The DNB is therefore rightly raising awareness among insurance companies to make their business models future proof, including by lowering costs, and by exploring new innovative business propositions in a risk-controlled environment.

B. The Solvency Position of the Insurance Sector

143. The high solvency ratios under Solvency I have significantly declined under Solvency II, but, on average, the market remains solvent under the new solvency regime. The preliminary 2014 solvency ratios under Solvency II based on the parallel run of Solvency II reporting showed a solvent market, but with significantly lower solvency ratios (Table 15). This parallel reporting in 2014 was a good indication of the expected effect of Solvency II as confirmed by the reported numbers at the end of Q4-2015. The excess of capital over the required minimum capital and over the prescribed capital required has also suffered a significant reduction under the new solvency regime. When compared with the 2015 numbers under Solvency I, the reported numbers for Q4-2015 show the maximum reduction in the available capital resources over the prescribed capital of 69 percent for reinsurers and the minimum reduction for non-life insurers of 32 percent (Table 16). These ratios are preliminary as the first reporting ratios under Solvency II will only be available in 2017. However, an EU-wide comparison of Solvency II ratios will still not be possible given that Dutch insurers are not using the transitional technical provisions like insurers in other countries do.

Table 15.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Solvency I Ratios, 2014

(In percent of required capital)

Source: Dutch authorities.Note: Solvency II ratios are preliminary and based on the parallel run of Solvency II reporting for 2014.

Table 15.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Solvency I Ratios, 2014

(In percent of required capital)

	Solvency ratio
	Solvency I	Solvency II
Life	244	146
Non-life	315	167
Reinsurer	692	282

Source: Dutch authorities.Note: Solvency II ratios are preliminary and based on the parallel run of Solvency II reporting for 2014.

View Table

Table 15.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Solvency I Ratios, 2014

(In percent of required capital)

	Solvency ratio
	Solvency I	Solvency II
Life	244	146
Non-life	315	167
Reinsurer	692	282

Source: Dutch authorities.Note: Solvency II ratios are preliminary and based on the parallel run of Solvency II reporting for 2014.

Table 16.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Excess Capital Resources under Solvency I

(In percent of required capital)

Source: Dutch authorities.

Table 16.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Excess Capital Resources under Solvency I

(In percent of required capital)

	Solvency I 2015	Solvency II Q4-2015
Available capital resources over
Minimum Capital Requirment
Life (long-term)	775	408
Non-life (general)	966	502
Reinsurance	1,915	789
Available capital resources over
Prescribed Capital Requirement
Life (long-term)	259	171
Non-life (general)	282	191
Reinsurance	671	209

Source: Dutch authorities.

View Table

Table 16.

Netherlands: Preliminary Assessment of the Effect of Solvency II on the Excess Capital Resources under Solvency I

(In percent of required capital)

	Solvency I 2015	Solvency II Q4-2015
Available capital resources over
Minimum Capital Requirment
Life (long-term)	775	408
Non-life (general)	966	502
Reinsurance	1,915	789
Available capital resources over
Prescribed Capital Requirement
Life (long-term)	259	171
Non-life (general)	282	191
Reinsurance	671	209

Source: Dutch authorities.

144. However, the impact of the UFR extrapolation and the VA are significant for the Dutch market in terms of own funds. Taking advantage of the detailed information provided by the insurers on their cash flows in the 2016 EIOPA stress test, the DNB has estimated the effect of the UFR extrapolation and the VA on the solvency position of the top six life insurers. To determine the impact of the UFR extrapolation, the DNB uses the risk-free yield curve based on the Euro swap curve by means of the par swap curve (fixed rates that are exchanged against six-month Euribor) for which rates are available up to a maturity of 50 years.²⁰ The effect of the VA is adjusted by a parallel shift of the risk-free curve for durations up to 20 years by the corresponding value (18 basis points in 2Q-2016) and then the risk-free yield curve is extrapolated to the UFR (Figure 6). The DBN estimations²¹ show that correcting for the UFR effect corresponds to a very material increment in the liabilities. The effect of the VA alleviation is important but lower than the UFR removal effect.

Netherlands: Risk Free Yield Curves Under Solvency II Including VA and those that Exclude UFR, December 2015 and June 2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Risk Free Yield Curves Under Solvency II Including VA and those that Exclude UFR, December 2015 and June 2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Risk Free Yield Curves Under Solvency II Including VA and those that Exclude UFR, December 2015 and June 2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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145. The substantial impact of the UFR extrapolation under Solvency II will decline gradually. The shape of the UFR extrapolation after 20 years results in an accelerated reduction of its impact. A closed block of business will lose approximately 30 percent of the UFR benefit after 5 years and over 50 percent after 10 years. Accordingly, the insurers will have to increase their own funds by 20 percent every five years to maintain their existing own funds.²² Given that the additional own funds required in the coming years are not expected to drive the solvency ratio below intervention points, the needed additional capital will be left to the insurers’ management discretion. In the long term, de-risking or substantial capitalization will be required.

146. Without an adjustment of the UFR, Solvency II does not reflect well the economic conditions of insurers in the current low yield environment. The impact of the UFR extrapolation on the solvency position of the insurers, in a manner that allows them to maintain adequate solvency ratios, are not economically substantiated given that the yield of risk-free available investments with long duration are far below the EIOPA risk-free yield curve. Thus, a shock would trigger intervention by the supervisor, a subsequent transfer of liabilities to another entity would reveal a gap in the coverage of assets over the value of the liabilities calculated without the UFR. This is because the amount of assets that the acquiring entity would need when assuming the liabilities would arguably be close to the value of liabilities calculated without UFR. Hence, in such a case a successful transfer of liabilities would only be possible after a reduction of benefits of policyholders. The DNB is recommended to maintain its forceful discussions with the sector to remove the fragility of the insurers, supported by the second pillar requirements of sound risk management, including the imposition of recovery and resolution plans with credible managerial actions.

147. The DNB should closely monitor the transition into Solvency II. Without taking away the merits of Solvency II, which represents a substantial improvement in the prudential framework, its effectiveness remains untested. In particular, the DNB should use its position in EIOPA to have the following aspects reviewed: the UFR extrapolation methodology as part of the review of the long-term guarantees (LTG) measures scheduled in 2020, the LAC DT in the SCR review scheduled in 2018, and the VA in the review of the LTG measures in 2020. The DNB has already taken several actions towards these goals, such as public statements about the UFR, taking the lead on LAC DT in EIOPA’s SCR review project group, and an internal theme note on the consequences of the VA. The DNB is recommended that elements that limit the economic valuation of the liabilities should be closely monitored and, using Pillar 2 powers, a series of well-defined actions, such as dividend payout restrictions and capital add-ons, should be considered based on the degrees of impact that VA and UFR adjustments have on the solvency positions of insurers.

C. Risk Management

148. The DNB introduced in 2014 an annual submission of the own risk assessment for insurers. This document has evolved into the ORSA submission as required under Solvency II. In 2014, the authorities introduced a Solvency II principles-based capital adequacy test in addition to the Solvency I capital requirements, the so-called Theoretical Solvency Criterion (Theoretisch Solvabiliteitscriterium). In that context, insurers had to perform, as part of their risk management, an ORSA-like Own Risk Assessment (Eigen Risicobeoordeling) and submit the results to the DNB.

149. Working together with the insurers, the ORSAs have been implemented based on the extensive Solvency II requirements. The ORSA submission is annual, and the DNB has already received the third set of ORSAs. The DNB’s review of the ORSAs and the corresponding feedback transmitted to the insurers has completed compliance with the Solvency II Directive (Article 45) and pertinent EIOPA Guidelines (7, 8, 10, 11, 13, 17, and 18). In the run-up to the implementation of Solvency II, the DNB actively engaged with insurers to prepare for ORSA reporting. Through a pilot program and extensive round table sessions, insurers were motivated to voluntarily send ORSA reports. These reports were evaluated and benchmarked. Feedback was given on the individual and industry levels. In 2015, the DNB received ORSA reports from almost all insurers. For 2016, the reporting obligation is incorporated in the standard reporting system. The quality and content of the ORSAs are evaluated to ensure compliance with the Solvency II requirements, and, if necessary, supervisory actions are taken.

150. The timely preparation for the submission of the ORSA has benefited the insurers’ risk management systems. The DNB has already received the third set of ORSAs. The 2016 ORSAs of the top six insurers have evolved into an internal management tool which includes a range of processes and procedures to identify, assess, monitor, manage, and report both current and forward looking risk and capital positions. The ORSAs include emerging risk analysis, strategic scenarios, top risks management, reverse stress testing, and sensitivity analysis to determine the ability of the company to maintain operations in the coming three years. Both the sufficiency of the capital resources as well as the liquidity are tested.

151. The ORSAs are guided by the risk appetite and risks are managed accordingly. Where significant risks have been identified, action is being taken to either eliminate the risks or tighten the monitoring process. The monitoring process is linked to the required recovery plan, which establishes guidelines on contingency actions the insurers can take. Early warning indicators and triggers are put in place and monitored to determine the recovery measures that need to be taken. All companies have taken managerial actions to improve their past ORSA results.

152. The main risks to which the top six insurers are exposed include credit risk, interest rate risk, policyholder behavior, equity risk, and longevity risk. Most capital is held to protect the company against adverse developments impacting the risks mentioned above. Each of these main risks are closely monitored and ranges are determined where assuming further risk is possible, where the targeted risk profile is met, where the risk exposure is within a warning area and where the violation of the risk tolerance is reached. The ranges are set following board approval of the risk appetite and available capital.

153. Notwithstanding the existing quality of the ORSAs, further improvement to effectively complement the Solvency II first pillar is necessary:

• The diversification benefit is a key quantity for the solvency determination. The discussion of those quantities in the ORSAs should be encouraged. The diversification benefit varies among the top insurers, from 23 percent to over 55 percent of the gross SCR. As a percentage of the market risk, it can be as high as 69 percent. With such a relevance for the net SCR determination, sensitivity on the diversification benefit as well as a discussion on scenarios or combination of scenarios affecting the diversification component should be included in the ORSA discussion;

• The LAC DT impact on the SCR calculation is lower than the diversification benefit, but it shows a wide variation from almost zero to 25 percent of the gross SCR. Commenting on scenarios affecting the LAC DT will also be recommended as part of the ORSA, in particular when the amount is relevant for the SCR calculation;

• Where necessary, additional scenarios that could involve the internal models’ assumptions breaking down should be included;

• The feasibility of management actions, in particular in a crisis mode, should be discussed in detail; and

• The quality of the reverse stress tests needs to be improved to include a detailed description of the pertinent scenarios rather than a series of sensitivities.

D. Stress Testing

154. The DNB relies on the EIOPA stress test for systemic risk and macroprudential supervision, and its involvement is significant. The DNB is a member of the EIOPA task force and is involved heavily in designing, validating, and ultimately drafting the stress tests and providing input according to the risks viewed to be important for the insurance sector in the Netherlands. Given that the life sector is concentrated in six players of significant size, the risks identified for them are in line with the EU-wide macroeconomic risks that affect the whole region: persistent low risk free rates and increased asset price volatility, making market risk the main source of concern for the life insurance industry’s stability.

155. The DNB does not perform market-wide stress tests but, as part of the ORSA reporting, insurers are requested to carry out stress tests and sensitivity analysis. As mentioned in the section on risk management, the ORSAs have evolved well and all of them include stress tests that are relevant to each company. This is an important microprudential tool, and can also be used to assess possible systemic risk in the market. By comparing the different stress tests that the sector has implemented, the DNB might want to have the picture for the whole market under some of those scenarios. While there is the temptation to require the ORSA’s to include the risks/scenarios that other insurers have considered, the application of such scenarios will not be consistent with the DNB’s view of the risk as the ORSA should reflect the company’s view of risk. For this reason, a market-wide stress test is the best way to gain the consistent application of a specific scenario for the whole market.

156. The DNB is recommended to carry out country-specific stress tests in addition to the EIOPA stress testing (Article 34 (4) of the Solvency II Directive).²³ While the EIOPA 2016 stress test scenarios correspond to the main risks also seen in the Dutch market, this might not always be the case and important specific domestic scenarios might not necessarily be covered by the EU-wide stress test. For instance, the non-life insurers have not been stressed under the EIOPA exercise. The DNB should define its specific stress scenarios and introduce annual market-wide stress test that should complement the EU-wide stress test.

157. The 2016 EIOPA stress test was highly representative of the industry, and involved strong guidance from the DNB. The six largest life insurers participated in the 2016 EIOPA stress test, accounting for almost 90 percent market share. The DNB’s involvement in guiding the insurers’ submission resulted in resubmission(s) in all cases, sometime multiple times. Several checks were carried out, including the consistency of the Day One submission with the baseline balance sheet.

158. The 2016 EIOPA stress test exercise consisted of two scenarios, one devoted to a prolonged low yield environment and the other is a combination of low interest rate and market shocks. Scenario 1 LY (S-LY) assumes lower risk free rates used to value assets and liabilities. In particular, it assumes low swap rates as well as lower UFR as one of the possible consequences if yields were to remain low for a considerable amount of time. EIOPA’s stress scenario 2 DH (S-DH) consists of a set of price shocks for a large spectrum of assets triggered by two simultaneous events: a shock in asset prices and a drop in the risk-free rate curve as calibrated by the European Central Bank’s (ECB) financial shock simulator. This scenario is accompanied by a qualitative questionnaire, which investigates the second-round effects.²⁴ The stress tests package was published on EIOPA’s webpage in May 2016, with a July 2016 deadline for submissions by participants to their corresponding NCAs.

159. The results reaffirm the importance of the VA for the Dutch market. Namely, in some cases, there is a controversial positive impact on own funds under the S-DH exercise. The participating insurers’ benefit from the VA is in some cases stronger than the loss in value afflicting their portfolios due to the holding of high quality assets. In general, the spread increase for the assets in Dutch insurers’ portfolios is smaller than the increase of spreads for the assets that are used to fix the VA that considers assets of lower rating. In addition, the duration of the liabilities in the Netherlands is relatively long, and, therefore, the effect of the VA on the liabilities is relatively high.

160. The VA methodology generates disturbing incentives to move to the average portfolio of the EU insurers in order to stabilize the solvency ratios. The VA is based on a currency-specific reference portfolio that is representative for the EU insurers’ portfolio. The VA allows for 65 percent of the risk-adjusted spread to be used in discounting the technical provisions. The stated original intention of the VA is to account for the illiquidity of the insurer’s liabilities by applying (in an incomplete manner) elements of the replicating portfolio valuation technique. The use of the reference portfolio for the determination of the VA creates worrying incentives when the actual insurer’s investment portfolio has a better credit rating. To protect against the effect of variations in the level of the VA on the Solvency II value of liabilities, insurers would have to align the composition of their investment portfolios with that of the reference portfolio. At first glance, the application factor of 65 percent seems to dampen this incentive as it results in only 65 percent of the variability of the spread on the reference portfolio being translated into variability in the level of the VA.²⁵ However, due to the relatively high duration of Dutch life insurers’ liabilities as compared to the duration of the reference portfolio, the sensitivity of the liability value to changes in the VA is relatively high. Therefore, to protect Solvency II own funds against movements in the VA, the investment portfolio has to be highly geared toward the reference portfolio, both in terms of size and composition.

161. The widespread use of the VA can be a source of systemic liquidity risk in the Dutch insurance market. The VA benefit is linked to a reference portfolio that is common to all market participants. From a managerial point of view, hedging that portfolio would stabilize the solvency ratio. Given that reducing the volatility of the solvency ratio is a strong incentive, a large part of the market might end up hedging the reference portfolio, possibly with levered positions in the reference portfolio through the use of derivatives. If this is the case, margin calls could affect the liquidity of a large part of the insurance sector in a stress scenario, and the liquidity plans of insurers should include this risk. The DNB is recommended to monitor the hedging strategy that might be in place to minimize the effect of VA fluctuations for possible liquidity shocks.

162. The long duration of the insurers’ liabilities creates significant vulnerability under EIOPA’s stress scenario 1 LY (S-LY) that includes the lowering of the current UFR:

• Notwithstanding the use of interest rate hedging instruments, the effect of the S-LY is substantial, reducing own funds substantially for several insurers. It is to be noted that the existing hedging does not work well in the stress scenario given that the UFR changes that are outside the Solvency II framework are usually not hedged; and

• The application of the LAC DT in the stress scenario becomes important but needs stronger guidance for a consistent application by the insurers. In particular, the calculation of the LAC DT in the derivatives module after the stress varies significantly among the insurers.

163. Notwithstanding the required change in the Solvency II framework to realize the S-LY with a lower UFR, this stress scenario is to be taken seriously. The macroeconomic environment as of June 2016 presents an even more severe scenario than the S-LY. Figure 7 shows the risk-free yield curve that has no UFR but an economic extrapolation beyond the last liquid point that is lower than the yield curve used to discount the liabilities under the S-LY. Thus, the valuation of the liabilities under the June 2016 market conditions without extrapolating to the UFR would lead to even lower solvency positions than those found under the S-LY.

Netherlands: EIOPA’s Risk Free Yield Curve in the S-LY Compared with the June 2016 Market Curve without UFR Extrapolation

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: EIOPA’s Risk Free Yield Curve in the S-LY Compared with the June 2016 Market Curve without UFR Extrapolation

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: EIOPA’s Risk Free Yield Curve in the S-LY Compared with the June 2016 Market Curve without UFR Extrapolation

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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E. Interlinkages with the Financial Sector

164. Large insurers are connected to the financial system through their use of financial instruments, in particular derivatives. Liabilities with long duration that entail return guarantees are important for the Dutch market. To manage the interest rate risk, insurers enter into interest swap contracts. The net duration on net cash flows is significant for the six largest life insurers, in the order of 50 percent of the aggregated SCR. The duration is even larger under the S-LY (63 percent of the aggregated SCR). Thus, under the current low yield environment, the solvency of insurers depends highly on the issuers of the swaps, and the DNB should monitor the main counterparties.

165. The search for yield could lead to financial engineering, with new activities potentially creating important linkage with the financial sector. Although there is limited evidence so far, the current market conditions entail the risk of search for yield by insurance companies. To match their long duration liabilities with a low risk capital, life insurers heavily invest in government securities with low yield. To increase their yield insurers could switch to more risky asset classes or increase the yield of those government securities through securities lending or the transformation of the government bonds to corporate paper by selling CDS of the corresponding corporate entities. Both practices lead to interconnectedness with the financial sector. If in addition the insurer is holding long duration liabilities that can be called-on without major delays or penalties, the liquidity risk is high. The DNB is recommended to closely monitor search for yield activities in the sector.

166. Insurers are directly interconnected with the financial sector though their nontraditional noninsurance (NTNI) activity that can lead to accelerated asset liquidation. NTNI captures a range of activities that can involve maturity transformation, liquidity mismatch, or leverage. Examples include products involving liquid liabilities, where insurers engage in derivatives or securities lending for efficient portfolio management or yield enhancement, and where they undertake complex hedging. Such activities may increase insurers’ fragility and inter-connectedness.

167. NTNI activities are one of the most import factors (with a weight of 45 percent for the total G-SII score) that determine the G-SII score, and thereby the G-SII classification. Other factors are (with their relative score weights in brackets): size (5 percent), cross-jurisdictional activities (5 percent), interconnectedness (40 percent), and substitutability (5 percent). Currently, one insurer in the Netherlands has been designated G-SII.

168. Mortgages investments have been rising. Mortgages have gained attraction for the insurers as investments to match their long-term liabilities with instruments that are providing returns that are about 2 to 2.5 percent above swap with historical low default experience of a maximum of 20 basis points in a given year in the last 30 years. Banks remain the main issuers but have reduced their activity and the share of the insurers in this investment has rapidly grown, from 3 percent in 2009 to 8 percent in 2016. Mortgages held by insurance groups (that include banks and other mortgage originating entities) comprise 14 percent of mortgages as of 2016Q1 (Figure 8).

Netherlands: Insurance Groups Participation in the Mortgage Market, Q4-2009–Q1-2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Insurance Groups Participation in the Mortgage Market, Q4-2009–Q1-2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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Netherlands: Insurance Groups Participation in the Mortgage Market, Q4-2009–Q1-2016

Citation: IMF Staff Country Reports 2017, 094; 10.5089/9781475593983.002.A001

Source: Dutch authorities.

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169. The mortgage exposure is closely monitored by the DNB. Life insurers have increased their exposure to mortgages from 21.6 percent of the assets held on own account at the end of 2014 to 24.9 percent at the end of Q1-2016. This growing trend has stopped in the second quarter of 2016. For some insurers, the percentage of mortgages and related loans are as high as 40 percent of their portfolios. Notwithstanding the positive past performance of mortgages with respect to defaults, because of the fast increment in the insurers portfolio, the DNB has started an analysis on the underwriting quality of the mortgages as well as on the cost of capital when the mortgage is issued by a bank or other financial institution to determine and correct any regulatory arbitrage that may be underestimating risk. Also, a reduction of the concentration risk in mortgages has been imposed where deemed excessive and a downward correction in mortgage valuation for solvency II balance sheet assessment was carried out in 2015.

170. Under the new Solvency framework, insurance companies are exploring new capital management instruments like longevity swaps or mass lapse reinsurance. The DNB is very aware of these developments and engages in an active dialogue with all parties involved, including the sellers of such instruments. The DNB should continue to do so and take proper action in case these instruments lead to an improvement of the solvency position that is not in line with the actual change of the risk profile.

A. Market Structure and Performance

171. The Dutch pension system consists of three pillars: the AOW, the supplementary occupational pensions and the individual pension products. The AOW is the only statutory pension scheme in the Netherlands. This pension layer is financed on a pay-as-you-go basis by the government and provides basic old age income to all citizens. The flat-rate pension benefit in principle guarantees 70 percent of the statutory minimum wage. About 3.4 million people received €35.7 billion in 2015. The second pillar is provided through occupational pensions that are primarily financed by means of contributions paid by employer and employees. It is a fully funded system and, for most employees, participation in a pension plan is automatically linked to their contract of employment, resulting in 90 percent coverage of the working population. The third pillar consists of private savings for retirement. These products are offered by insurers and banks and are usually incentivized by favorable tax treatment. This TN covers in detail the second pillar. The first pillar is discussed briefly as it mainly has fiscal implications, and the third pillar is covered as part of the insurance sector.

172. The governance of the AOW is well defined. The AOW is administered by the Social Insurance Bank (SVB), which operates independently from the government. The board manages the SVB in consultation with an advisory board. The Ministry of Social Affairs and Employment (SZW) appoints the members of the board and the advisory board, and approves its annual plan and budget. The SVB is also monitored by the Inspection on Social Affairs and Employment, a section of the Ministry that supervises the administration of statutory employees’ insurance schemes carried out by a number of organizations.

173. Several measures have been taken to reduce the budget cost of the AOW. The AOW is an integral part of government finances, as it is financed on a pay-as-you-go basis. The AOW is financed by a premium that is collected through the income tax. The (negative) balance (of the expenses and income) of the AOW is consolidated within the national fiscal balance and debt.

• Since 2011, the income tax has been gradually adjusted to increase the taxation basis for financing the AOW. Currently the income tax is set at the legal maximum of 17.9 percent of taxable income (subject to a maximum income level);

• In 2015, the AOW supplement for non-working partners younger than 65 was abolished;

• Since 2013 the retirement age for the AOW-benefit has been gradually increasing, from 65 in 2012 (and before) to 67 in 2021. A possible further increase of this age depends on the future life expectancy. This will be determined annually, for the first time before 2017, with an implementation of a necessary increase of the retirement age that will be five years after the date of determination (i.e., if the determination at the end of this year concludes that the retirement age must be increased, the actual increase will take place on 2022); and

• The age of the start of counting the years of residence relevant to accrue benefits under the AOW will be gradually increased from 15 in 2012 (and before) to 17 in 2021.