Closed Life insurance books

September 2017

Trends in the Dutch Life insurance market

The Dutch Life insurance market is a mature and saturated market characterised by fierce competition and price-pressure due to contracting demand for Individual Life and traditional Group Life products. The market is confronted with challenges such as:

  • Decreasing investment returns following the low interest environment. Insurers mostly affected are those with product portfolios that carry high interest guarantees;
  • The implementation of Solvency II (effective from January 2016), generally increasing the minimum capital requirements and therefore driving the focus on capital efficiency and effective legacy management;
  • Increased life expectancy, adversely impacting the value of annuities and pension books; 
  • The mis-selling of Unit-Linked Individual Life policies leading to reputational damage and risk of (additional) claims; and
  • The introduction of tax sheltered banking products as an alternative for insurance products leading to lower new production.

As a consequence, the profitability of Dutch insurers has been under pressure for several years and production volumes are further decreasing. One of the responses of Dutch insurers has been to close new business for a part or all of their Individual Life and traditional Group Life products.

Closed Life insurance books and key challenges

Closed Life insurance books (“closed books”) have no new policy sales except for contractually allowed increases. As no new policies are sold, the number of policies (and ultimately also the size of the reserves) decreases over time leading to increasing administration costs per policy.

Without pro-active management of closed books, this expense challenge will decrease the value of the insurance block and reduce returns to shareholders. The two key challenges of closed books are:

  • Reduction of operational costs in line with the volume decline – it is therefore essential to convert fixed costs into variable costs. Most insurers are working with a patchwork of legacy systems (either grown through the years, the result of acquisitions or both) leading to a relatively large fixed cost base. 
  • Maintaining customer service and staff retention - closed books will have to be serviced long after sales date (often a maturity beyond 30 years). Over the years, service standards might deteriorate due to for example staff retention. This will accelerate the decrease in portfolio size and with that increase the cost per policy. Continuing focus on customer retention is therefore key.

The specifics of managing a closed book and also the required skills warrant special management focus as they are (somewhat) different from managing an open book.

Market response to closed Life insurance books

Dutch Life insurers have two options to address the challenges of closed books: (i) sale of their closed book; or (ii) retention of their book.

The disposal of closed books will result in the release of capital that can be deployed to support other business priorities. Also, it enables management to fully focus on new business strategy and products.

If retaining the closed book until expiry, one or a combination of the following strategies are essential to reduce the cost per policy:

  • Focus on cost reductions through Lean programmes, process standardisation and data quality improvements;
  • Outsourcing of administration (“BPO”) and/or legacy IT systems (“ITO”), whether or not in combination with Software as a Service (“SaaS”) migration, to third parties. Relevant benefits are: (i) conversion of the large fixed cost base into a more variable base; (ii) increased focus on new products; and/or (iii) improvement of customer satisfaction through higher quality service levels.
    Potential disadvantages are that the costs of migrating to an outsourcer’s system could be significant and also affect the overall business case. Furthermore, insurers are concerned with the potential impact on labour, processing, brand and products; and/or
  • Acquisition of closed books. Through the acquisition of closed books economies of scale can be achieved reducing the cost per policy. Deal activity in the Dutch market is, however, rather limited. An explanation might be that insurers are awaiting a final ruling from the courts on the mis-selling of Unit-Linked policies. Furthermore, a transfer of liabilities requires policy holder consent in the Netherlands which is relatively cumbersome to achieve.

Conclusion

Managing closed books requires management focus given their complex challenges. In the Netherlands, most Dutch insurers are currently in the process of considering the different strategies depending on the size of their closed books. Only a limited number of insurers have actually started to implement a strategy to face the challenges of a closed book.

"Only a limited number of insurers have actually started to implement a strategy to face the challenges of a closed book."

Robbert Sturm

Contact us

Bas van de Pas

Partner, PwC Netherlands

Tel: +31 (0)62 263 83 99

Wilbert van den Heuvel

Banking & Capital Markets Leader, PwC Netherlands

Tel: +31 (0)65 184 54 76

Robbert Sturm

Senior Director, PwC Netherlands

Tel: +31 (0)65 126 53 81

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