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In late 2012, Delta Lloyd, the sixth largest insurance group in the Netherlands, announced it was withdrawing from the sector after being forced to reserve an additional €60.1 million to cover higher-than-expected claims. Months earlier, Allianz had also stopped offering this type of product.
The retreat of some of the major industry players hints at the trouble facing this niche market. Insurers, which eagerly tapped the group disability market after 2006, are now counting the cost of miscalculating the risks inherent in these products and how much they must reserve for claims. The resulting shortfall in provisions has grown over the past couple of years.
Actuaries warn it is too soon to say whether insurers have seen the worst. But under pressure from supervisors and shareholders, firms are now taking radical action to control the damage. "This product has already imposed huge losses on the industry, but this might not be over yet," warns Maud Rommers, Amstelveen-based consultant actuary at Towers Watson. Those insurers that remain active in the class are dramatically increasing premiums, sometimes as much as threefold, and are doing much more risk analysis than they used to, says Rommers.
The problem was that insurers failed to understand fully the risks they were taking as well as the impact of adverse conditions that were beyond their control, say actuaries. "The insurance risk of these products is very difficult to predict and changes over time. Insurers have learned how much they depend on other parties and how much they depend on the economic situation," says Rommers.
The dual nature of the system, which forces insurers to compete against a state-backed agency, is the first hurdle insurers are struggling to overcome. Insurers claim there is an uneven playing field, which is apparent in the premiums charged. The average premium the state-backed UWV currently charges is 0.12% of the employers' wage bill. In contrast, Aegon, which has increased its premium in some cases by more than 300% over the past few years, charges an average premium that is seven times higher.
The way insurers have to reserve for claims also puts them at a competitive disadvantage to the state-backed insurer. "If a worker from a company that is insured with us falls ill, then we must immediately build up our reserves, but the state agency does not have to do that until the worker actually enters the WGA," says Tilleman. She explains that because of the way the state agency calculates its premiums, it can benefit from a delay of almost four years before having to hold reserves.
The shortcomings of this hybrid system stretch far beyond unequal competition between state and private insurers, though. The DNB has identified the dependence on government bodies as another cause of insurers' difficulty in thoroughly measuring and managing the risks associated with their policies.
Seven years after the occupational disability market opened, Dutch insurers are paying a high price for their original haste and overly optimistic assumptions. Poor risk analysis and the absence of stringent controls have created a reserve shortfall, which is proving hard to rectify.
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