## cr1794 ## Source details **Canonical URL:** [cr1794](https://www.imf.org/-/media/files/publications/cr/2017/cr1794.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1794.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1794.pdf.json) --- ### EXECUTIVE SUMMARY — Governance, accountability, and supervisory structure - Twin-peaks model: DNB — prudential supervision; AFM — conduct-of-business supervision. - Governance features: - Two-tier boards with independent members and internal audit departments strengthen governance and accountability. - Detailed documentation, planned activities, regular publications, and comprehensive reporting enhance transparency. - Coordination and intensity: - Larger groups subject to more than 60 thematic work assessments and inspections in total from both supervisors. - Information sharing and cooperation between DNB and AFM well established; AFM recently adopted a new structure (operational only a few months as of the 2016 FSAP). - Constraints on operational independence: - Limited ability of supervisors to introduce technical regulation (notably in the pension sector). - Required approval of the Ministry of Finance (MoF) and the Ministry of Social Affairs and Employment (MoSA) for supervision budgets may constrain resources. - Planned and existing salary restrictions (WNT and proposed WNT-3) could diminish ability to attract and retain senior professionals. - Key recommendation (governance/independence): - Enhance powers of DNB and AFM to introduce technical regulation in accordance with national and EU legislation. - Consider exemption from the WNT-3 for both supervisory authorities. ### SUPERVISORY APPROACHES, ON-SITE/OFF-SITE, AND QUALITY ASSURANCE - DNB FOCUS! approach (since 2012): - Risk drivers: (1) macroeconomic environment; (2) business models; (3) culture; (4) information technology (IT); then evaluate microprudential risks. - Institutions segmented into five categories (T1 to T5) with supervision regimes: low, neutral, high, urgent. - AFM approach: - Enhanced risk-based approach with dedicated teams and emphasis on data exploitation and sector-specific risks. - AFM structure (as of April 2016): six supervision “domains,” six horizontal technical support divisions, and four general support divisions. - On-site inspections: - DNB OTPV on-site unit began November 1, 2014; strict separation between off-site supervisors and on-site inspectors. - Scheduled on-site inspection frequency: varies from three to five years for categories T5 to T3 and some larger T2; thematic inspections for lower categories. - Data and quality control: - Solvency II reporting and nFTK provide more granular data; recommendation to further align FOCUS! with Solvency II. - Recommendations: random controls on quality and truthfulness of reported data; frequent back-testing of FOCUS! predictive power; DNB to team with AFM on auditor inspections. - Resourcing and IT: - AFM IT budget forecast decreased from €10.8 million to €9.3 million for 2016; AFM recommended to be allocated substantial budget for big data capabilities. - Recommendation: ensure AFM IT connectivity with DNB databases to exploit Solvency II data. ### ACCOUNTABILITY, RESOURCES, AND REMUNERATION - Accountability: - DNB and AFM accountable to MoF; MoF may revoke supervisory rules in limited circumstances (Article 1:29, Wft). - Supervisory decisions appealable at the Court of Justice in Rotterdam; appeal procedures follow Awb rules. - Budgeting and levies: - Supervision costs funded through levies on supervised entities (Wet bekostiging financieel toezicht). - 2015: regular supervision costs amounted to €144 million, €8.4 million lower than budget. - Staffing: - DNB has CAO terms of employment; Division Tv ~93 FTEs; Division Tp ~80 FTEs. - AFM lacks CAO; insurance and pension supervision combined in one AFM division with 35 FTEs across three teams. - WNT caps on remuneration effective January 1, 2017 for governing board members; WNT-3 proposal could extend caps to all staff. ### GROUP SUPERVISION, CROSS-BORDER ISSUES, AND REPORTING - Market concentration: - Largest six Dutch insurance groups cover 86 percent of the national life market and 73 percent of the overall national insurance market. - DNB supervises 23 insurance groups, 21 mixed insurance groups, and 6 financial conglomerates; lead supervisor for four groups (one G-SII). - Solvency II group supervision: - Solvency II requires group-wide supervision; groups must submit 10 quarterly and 42 annual QRTs and a Group ORSA supervisory report. - Reporting on intragroup transactions under Solvency II will provide detailed and complete data as of 2017. - Limitations: - When groups are headed outside the EEA, Dutch powers cannot be effectively applied to holding companies based outside the EEA. - PW does not require supervision of service providers to which pension fund activities have been outsourced; group supervision of pension funds is not required in the PW. - Recommendations: - Enhance powers to allow group governance supervision for pension service providers with subsidiaries. - Require group supervision in PW. - Given intragroup transaction data availability as of 2017, consider an IT tool to map group structure and intragroup transactions for contagion stress analysis. ### MARKET ENTRY, EXIT, AND RESOLUTION - Licensing: - Under Solvency II, all insurers except very small companies (insuring maximum losses of €12,500 or less) are licensed; DNB authority to grant and withdraw insurer licenses (Wft Chapter 2). - Pension funds not licensed but must register at DNB within six weeks of establishment; recommendation to introduce a license requirement for pension funds. - Cross-border operations: - EU-licensed insurers operate in the Netherlands under FOS/EoE without additional Dutch license; home supervisor retains primary prudential responsibility. - Recommendation: continue supporting EIOPA coordination to minimize supervisory arbitrage and consider enforcement mechanisms for FOS providers regarding product regulation and conduct. - Winding up and resolution: - Winding up can be lengthy; no general guarantee fund for insurance except MTPL and mandatory health insurance. - Recommendation: introduce regulation allowing fast advance payments on all insurance liabilities; evaluate introduction of an insurance guarantee scheme. - MoF and DNB working on national recovery and resolution law for insurers to be implemented in 2018, partly inspired by the BRRD. - DNB must approve portfolio transfers; recommendation to require approval by both supervisors (DNB and AFM) for portfolio transfers of insurance and pensions except when resolution powers applied. ### SOLVENCY II IMPLEMENTATION, MODEL RISK, AND LIFE-SECTOR FRAGILITIES - Implementation status: - Solvency II transposed into national law and applicable since 2016; Dutch insurers largely applied full Solvency II measures from day one (except equity transitional arrangements). - DNB upgraded IT (CAESAR project) to handle Solvency II data and intragroup reporting. - Quantitative impacts (2014 parallel run; Q4-2015 comparisons): - Table: Preliminary effect on Solvency I ratios (2014, percent of required capital): - Life: Solvency I = 244; Solvency II = 146 - Non-life: Solvency I = 315; Solvency II = 167 - Reinsurer: Solvency I = 692; Solvency II = 282 - Table: Available capital resources over Minimum Capital Requirement (Q4-2015, percent of required capital): - Life (long-term): Solvency I = 775; Solvency II = 408 - Non-life (general): Solvency I = 966; Solvency II = 502 - Reinsurance: Solvency I = 1,915; Solvency II = 789 - Table: Available capital resources over Prescribed Capital Requirement (Q4-2015, percent of required capital): - Life (long-term): Solvency I = 259; Solvency II = 171 - Non-life (general): Solvency I = 282; Solvency II = 191 - Reinsurance: Solvency I = 671; Solvency II = 209 - UFR, VA, and LAC DT concerns: - UFR (Ultimate Forward Rate) and VA (Volatility Adjustment) distort economic valuation of liabilities in a low-yield environment. - DNB analysis: correcting for UFR extrapolation materially increases liabilities; VA alleviation effect important but smaller than UFR removal effect. - Dynamic UFR effect for closed blocks: closed block loses ~30 percent of UFR benefit after 5 years and >50 percent after 10 years. - LAC DT (Loss-Absorbing Capacity of Deferred Taxes) can reduce SCR up to 25 percent; DNB requires prudent substantiation of future profits post-shock and is recommended to tighten LAC DT usage via EIOPA processes. - Internal models: - Industry pre-application since 2011; number of official internal model applications reduced; three insurers currently apply partial internal models. - Recommendation: DNB to maintain strong focus on internal model approval for material changes and monitor model drift; respond to model change requests timely without compromising quality. - Supervisory tools: - Use Pillar 2 powers (dividend restrictions, capital add-ons) with degrees of application depending on VA and UFR impacts. - DNB to push for reconsideration of UFR methodology, tax-loss absorbance capacity of tax credits, and VA methodology in Solvency II reviews (2018 and 2020 timelines indicated). ### NON-LIFE SECTOR — PERFORMANCE AND RESOLUTION - Market features: - Non-life sector highly competitive, nonprofitable excluding investment income: combined ratios above 100 percent. - Foreign insurers account for over 50 percent of non-life business (excluding health). - Profitability and saturation: - Market saturation and EU single market constraints make pricing and recovery difficult. - Firms often focus on lowering costs rather than increasing premiums. - Resolution and policyholder protection: - Current lack of guarantee scheme for most insurance classes (except MTPL and mandatory health) leads to lengthy recoveries for policyholders after failures. - Recommendation: introduce fast advance payments across all insurance liabilities and evaluate an insurance guarantee scheme. - DNB preparing resolution plans for the largest groups and the nominated G-SII; intends to work on resolution plans for six largest groups. ### STABILITY OF THE PENSION SECTOR — PRUDENTIAL FRAMEWORK, COVERAGE RATIOS, AND TRANSITION - FTK/nFTK framework and calibration: - Financial Assessment Framework (FTK) with market valuation, risk-based capital, SCR at 97.5 percent confidence over one year. - Typical capital requirement: approximately 125 percent (range for individual pension funds between 101 percent and 137 percent of liabilities). - Minimum regulatory own funds requirement translates into funding ratio of 104.3 percent. - nFTK (since 2015) allows longer recovery periods and benefit cuts as a measure of last resort; strengthens information requirements and equal consideration of participant interests. - Coverage ratios and recovery plans (timing and magnitudes): - End-2015: about 84 percent of all pension funds were subject to a recovery plan. - End Q1-2016: average pension fund coverage ratio dropped to 102 percent; 90 percent in terms of assets of pension funds subject to a recovery plan as of Q2-2016. - Representative pension fund modeling (20-year roll forward) — starting coverage ratio 90 percent: - With positive excess investment return of 250 basis points over the risk-free rate and full technical premium charged: coverage ratio remains below minimum required coverage ratio of 104 percent for seven years. - Excess investment returns needed to avoid substantial benefit cuts: - With full premium charged: in the order of 400 basis points. - If 90 percent of technical premium charged: increase to 450 basis points. - DNB report (May 2016, Q1-2016 figures): under unchanged circumstances, about 27 funds expected to make unconditional benefit reductions in 2017 affecting about 1.8 million participants; average reductions about 0.5 percent per annum (first year unconditional). - Sensitivity: 50 basis points decline in interest rates could produce benefit reductions of 4 percent (smoothable over 10 years) for 10.3 million participants; 50 basis points increase would reduce affected participants to 0.9 million. - Policy design and reform considerations: - Discussion of shifting risks to participants to address lack of trust and portability. - Recommendations for new pension system: - Reinstate qualities of previous system and add portability. - Lower replacement ratio may allow guaranteed benefits without conditionality. - Create individual accounts as buffers to maintain guarantees or provide additional income; DB funds to remain fully funded with adjustment of individual account. - Maintain high fiduciary duty; funds must explain and justify reductions in individual accounts. - Recommendations on contributions and prudent person principle: - Reinstate requirement that pension contributions should not increase the coverage deficit of a pension fund. - Tighten the prudent person regime closer to Solvency II definition. - Introduce an additional feasibility assessment test with a projection period of about 10 years (complementing the current stochastic 60-year test using 2,000 scenarios). - Liquidity risk and derivatives: - DNB EMIR liquidity impact study (early 2016) indicates pension funds might face cash collateral issues for derivatives in market stress: - Quantified impacts: 100 basis points interest rate shock impact €44 billion; 12.5 percent exchange rate shock impact €42 billion. - Assessed impact on retirement income: 3.1 percent over a 40-year horizon (2015 Commission study basis). - DNB planned 2017 project to identify liquidity policies and consider TR data for derivatives position analysis. ### STRESS TESTS, EIOPA EXERCISES, AND ORSA - DNB reliance and gaps: - DNB participates heavily in EIOPA stress-test design and validation but does not run market-wide country-specific stress tests; recommendation for DNB annual market-wide stress tests in addition to EIOPA. - 2016 EIOPA stress test (insurance): - Participants: six largest life insurers (almost 90 percent market share). - Two scenarios: - S-LY (Scenario 1 LY): prolonged low yield environment, lower risk-free rates and lower UFR. - S-DH (Scenario 2 DH): combined low interest rate and market shocks. - Key findings: - VA can have controversial positive impacts on own funds in S-DH due to reference portfolio composition differences. - VA-based hedging incentives can create systemic liquidity risk through common hedges and leveraged derivative use. - Under S-LY, lower UFR materially reduces own funds; existing hedges do not effectively cover UFR changes. - Aggregated net duration on net cash flows for six largest life insurers significant: ~50 percent of aggregated SCR, increasing to 63 percent under S-LY. - Recommendations: - DNB to define domestic stress scenarios and run annual market-wide stress tests. - Monitor hedging strategies related to VA to minimize liquidity shock potential. - Monitor main swap counterparties given derivatives reliance. - ORSA and supervisory use: - ORSA submissions annual; ORSA content for top insurers includes emerging risks, strategic scenarios, reverse stress testing, and three-year operational horizon tests of capital and liquidity. - Recommendations to improve ORSA: - Discuss diversification benefit sensitivities and scenarios where internal model assumptions break down. - Include feasibility of management actions in crisis mode in detail. - Improve reverse stress tests with detailed scenario descriptions. ### SELECTED KEY STATISTICS (as reported) - Insurance penetration and density (2014): - Total insurance penetration: 11.12 percent of GDP. - Non-life penetration: 8.50 percent of GDP. - Life penetration: 2.63 percent of GDP. - Total gross premiums (2014, USD mln): Life NLD 21,370; Non-life NLD 56,301; Total NLD 73,706. - Total density (USD per capita, 2014): Life NLD 1,257; Non-life NLD 4,068; Total NLD 5,325. - Insurance sector size (2015): - Assets about €495 billion; premiums about €72 billion. - Life sector gross premium 2015: €14.5 billion (33 percent decline 2011–15). - Life insurers’ assets: €365 billion (2011) → €422 billion (2015). - Pension sector (end-2015 and 2015 flows): - Assets under management 2015: €1,146 billion. - Technical provisions 2015: €1,122 billion. - Average coverage ratio 2015: 102 percent. - Number of pension funds 2015: 320 (2011: 454). - Top 10 pension funds account for 70 percent of market assets; ABP assets March 2016: 357,632 (EUR mln). - 2015 contributions: Total contributions reported as 28619 (EUR mln) as provided; 2015 benefits: 27936 (EUR mln) as provided. - Pension asset allocation (2015 Q4 incl. derivatives, EUR mln total 1,148,156): - Fixed yield securities: 620,260 (54.02 percent). - Equities: 346,412 (30.17 percent). - Real estate: 106,229 (9.25 percent). - Alternative investments: 59,400 (5.17 percent). - Pension mortgage exposure Q1-2016: - Total pension fund assets (million euros): 1,999,075. - Mortgage exposures (million euros): 61,853? (source excerpt states 37,085 for unspecified period and other mortgage shares; preserve provided numbers below). - Reported mortgage exposures (Q1 figures provided): 37,085 (mortgage exposures of pension funds, million euros); share of mortgage exposure Q1 2016: 3.09 percent of total assets. - Mortgage quality Q1-2016: 86 percent rated A or higher; 3 percent rated BBB or lower; 11 percent without rating. - DNB supervision budgets and staffing: - 2015 DNB regular supervision costs: €144 million (€8.4 million lower than budget). - Division Tv ~93 FTEs; Division Tp ~80 FTEs. - AFM insurance/pension division: 35 FTEs across three teams. ### SELECTED POLICY RECOMMENDATIONS (explicit) - Supervisory coordination and data: - Joint approach to supervision of culture, governance, and integrity. - Single approach to data exploitation and analytics; earlier formal information sharing on problem files. - AFM: apply flexibility in resource allocation during transition; allocate substantial budget for big data capabilities. - Solvency II and insurer supervision: - Maintain forceful dialogue with life sector to remove fragility; use Pillar 2 powers as appropriate. - DNB to press for review of UFR methodology, LAC DT guidance (2018 SCR review), and VA methodology (LTG review 2020) at EIOPA level. - Tighten guidance on LAC DT application via EIOPA. - DNB to carry out country-specific stress tests in addition to EIOPA stress testing. - Closely monitor search-for-yield activities and VA-centered hedging strategies to limit systemic liquidity risk. - Pension sector reforms and prudential changes: - Reinstate requirement that pension contributions do not increase coverage deficit. - Tighten prudent person regime closer to Solvency II definition. - Introduce additional feasibility test with ~10-year projection. - Introduce license requirement for pension funds. - Require liquidity plans for pension funds and insurers considering hedging positions under stress. - Introduce mechanisms to ensure pension participants receive financial advice; harmonize Wft and PW regarding quality of advice and product suitability. - Consider new pension system design: reinstate guaranteed DB qualities, add portability, create individual accounts as buffers, maintain high fiduciary duty. - Market conduct and product regulation: - Revise reporting requirement for insurance intermediaries from annual to quarterly. - Enhance reporting for insurers and pension funds with market conduct indicators. - Include product regulation for all products offered in the Netherlands irrespective of provider location and establish enforcement mechanisms for FOS operations. - Market exit and resolution: - Introduce regulation allowing fast advance payments on all insurance liabilities. - Evaluate introduction of an insurance guarantee scheme. - Implement planned national recovery and resolution framework for insurers (2018 workstream); require approval of both supervisors for portfolio transfers of insurance and pensions, except when resolution powers applied. *Italic: Source: EXECUTIVE SUMMARY and chapter excerpts, IMF Country Report cr1794 (Netherlands technical note).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 6 ### EXECUTIVE SUMMARY ### Major sections and themes - INTRODUCTION - INSTITUTIONAL, REGULATORY, AND SUPERVISORY ISSUES - A. Institutional Framework and Arrangements - B. The Supervisor - C. Supervision Approach - D. Enforcement - E. Group Supervision - F. Market Entry and Exit - G. Prudential Framework - H. Market Conduct Supervision - STABILITY OF THE INSURANCE SECTOR - A. Market Structure and Performance - B. The Solvency Position of the Insurance Sector - C. Risk Management - D. Stress Testing - E. Interlinkages with the Financial Sector - STABILITY OF THE PENSION SECTOR - A. Market Structure and Performance - B. EIOPA Stress Testing on Occupational Pensions - C. Mortality Sensitivity Analysis - D. Recovery Plans and Benefit Cuts - E. Liquidity Risk in Pension Funds ### Figures (inventory) - 1. Employment in the Insurance Sector, 2004–14 - 2. Image Assessment of the Insurance Sector, 2004–15 - 3. Insurance Premium Split Development, 2008–14 - 4. Nonlife (Excluding Health) Underwriting Performance, 2007–14 - 5. Nonlife Sector (Excluding Health) Cost Ratio including Acquisition Costs, 2008–14 - 6. Risk Free Yield Curves Under Solvency II Including VA and those that Exclude UFR, December 2015 and June 2016 - 7. EIOPA’s Risk Free Yield Curve in the S-LY Compared with the June 2016 Market Curve without UFR Extrapolation - 8. Insurance Groups Participation in the Mortgage Market, Q4-2009–Q1-2016 - 9. Globally: Asset Allocation and DB/DC Split, 2015 - 10. Correlation Between the Coverage Ratio and the Long-Term Interest Rate, 1999–15 - 11. Assets over Liabilities in the Stress Scenarios - 12. Cash Flow of the Selected Pension Fund - 13. Average Coverage Ratio Contributors of the Total of Pension Funds under a Recovery Plan - 14. Pension Funds Subject to a Recovery Plan, as of December 2015 ### Tables (inventory) - 1. Key Recommendations - 2. Global Share in Insurance Premium, Penetration, and Density, 2014 - 3. Insurance Density, 2014 - 4. Importance of the Insurance and Pension Sectors to the Financial Sector, 2014 - 5. Number of Insurers and Insurance Intermediaries, 2011–15 - 6. Insurance Premium and Assets, 2011–15 - 7. Foreign Insurers’ Market Participation in Percentage of the Total Premium, 2014 - 8. Insurance Groups Active in the Netherlands, 2014 - 9. Market Share of the Top 10 Individual Insurers, 2015 - 10. Insurance Gross Premium by Line of Business, 2013–15 - 11. Life Insurance Investments, 2011–14 - 12. Nonlife Insurance Investments, 2011–14 - 13. Country Exposure of the Insurance Investments, 2014–Q3-2015 - 14. Selected EU Countries: Life Sector Duration Spread Exposure, 2014 - 15. Preliminary Assessment of the Effect of Solvency II on the Solvency I Ratios, 2014 - 16. Preliminary Assessment of the Effect of Solvency II on the Excess Capital Resources under Solvency I - 17. Key Financials for the First Pillar Pensions, 2011–15 - 18. Globally: The Largest Pension Markets, 2014 - 19. Key Numbers of the Occupational Pension Sector, 2011–15 - 20. The 10 Largest Pension Funds in Terms of Assets, March 2016 - 21. Expenses of the Top Pension Funds and of the Whole Sector, 2011–14 - 22. Contributions and Benefits Paid by the Pension Sector, 2011–15 - 23. Asset Classes of the Pension Funds’ Investments, 2014-15 - 24. Rating of the Fixed Income Securities, 2014–15 - 25. Pension Fund Exposure to Mortgages, Q1-2016 - 26. Coverage Ratio of a Representative Pension Fund ### Glossary highlights (selected acronyms and definitions as listed) - AFM — Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten) - AML/CFT — Anti-money laundering, combating the financing of terrorism - AOW — The First Pillar Pension Scheme (Algemene Ouderdomswet) - Bpr — Decree on Prudential Rules (Besluit prudentiële regels Wft) - DNB — The Netherlands Central Bank (De Nederlandsche Bank N.V.) - EIOPA — European Insurance and Occupational Pensions Authority - ESAP — Financial Sector Assessment Program (FSAP appears elsewhere as FSAP) - FOCUS! — FOCUS! Supervisory Approach of the DNB - FTK — Financial Assessment Framework (Financieel Toetsingskader Pensioenfondsen) - G-SII — Global Systemically Important Insurer - IAD — Internal Audit Department (Interne Audit Dienst) - IMF — International Monetary Fund - nFTK — New Financial Assessment Framework (nieuw Financieel Toetsingskader Pensioenfondsen) - ORSA — Own Risk and Solvency Assessment - PCA — The Pension Communication Act - SCR — Solvency Capital Requirement - UFR — Ultimate Forward Rate - VA — Volatility Adjustment - Wft — Financial Sector Supervision Act (Wet op het financieel toezicht) - Zvw — Health Insurance Law (Zorgverzekeringswet) *Source: EXECUTIVE SUMMARY, cr1794* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Governance, accountability, and twin-peaks model - The governance, accountability, and internal processes of the supervisors, operating under a well-functioning twin-peaks model, are robust. - Two-tier boards that include independent members and internal audit departments contribute to a vigorous governance structure for both supervisors (DNB and AFM). - Detailed documentation, planned activities, several regular publications, and comprehensive reporting enhance transparency and accountability. - Second lines of defense control quality and consistent application of supervision. - Information sharing and cooperation between DNB and AFM is well established; AFM had been operating under a newly adopted structure for only a few months at the time of the 2016 FSAP and needs to reach maximum functionality and efficiency with strong board guidance. ### Coordination, supervisory intensity, and data - The intensity of supervision has significantly increased; larger groups are subject to more than 60 thematic work assessments and inspections in total from both supervisors. - Each authority oversees its own ongoing interventions, but not those of the other supervisor; joint approaches are recommended in areas including: - culture, governance, and integrity supervision; - data exploitation and data analytics to increase resource efficiency; - earlier formal information sharing on problem files (in practice, highest-attention cases are shared). - AFM should apply flexibility in resource allocation and strong board guidance during transition (NT). ### Developments in insurance and pension regulation - Insurance: 2016 Solvency II framework (market valuation, risk-based prudential regime, comprehensive group-wide supervision, in line with IAIS principles) has been implemented. - Pension: new financial assessment framework (nFTK) and supporting changes to the Pension Law of 2006 (PW) were put in place in 2015; nFTK allows longer recovery periods and benefit cuts as a measure of last resort. Information requirements have increased for insurers and pension funds; focus on equal consideration of interests of all participants sharpened. - Legislative constraints affecting operational independence remain, notably: - limited ability of supervisors to introduce technical regulation (important in the pension sector where national regulations play a larger role than in insurance); - required approval of the Ministry of Finance (MoF) and the Ministry of Social Affairs and Employment (MoSA) for setting supervision budgets for DNB and AFM, potentially resulting in insufficient quality and quantity of resources; - planned legislation on salary restrictions could diminish ability to attract and retain senior professionals. ### Supervisory approaches and on-site vs off-site supervision - DNB’s FOCUS! supervisory approach (since 2012) builds on FIRM and uses risk drivers including: (1) the macroeconomic environment; (2) business models; (3) culture; and (4) information technology (IT) before evaluating microprudential risks. - AFM has a new, enhanced risk-based approach with dedicated teams monitoring market information; macro/system-wide risks are translated into sector-specific risks for supervisory actions. - Current on-site approach relies strongly on off-site tools; DNB uses on-site inspections as guided risk-analysis rather than investigative tools. - Recommendations include random controls on the quality and truthfulness of reported data and frequent back-testing of FOCUS! to enhance robustness. ### Group supervision and cross-border issues - Group supervision has significantly improved; under Solvency II a comprehensive group supervision framework is in place for groups headed in the EEA. - Where groups are headed by insurance holding companies or mixed financial holding companies based outside the EEA, powers cannot be effectively applied to those holding companies; stronger home-host collaboration required. - PW does not require supervision of service providers to which pension fund activities have been outsourced; most service providers with subsidiaries serving pension funds are not subject to direct group-level supervision on governance and staff qualifications. - Given expected detailed intragroup transaction data as of 2017 for insurance groups, monitoring contagion risk could benefit from an IT tool (NT). ### Solvency II implementation, model risk, and sector fragilities - DNB implemented Solvency II with strict interpretation in line with maximum harmonization; supervisory arbitrage risk may occur via Freedom of Services (FOS) or Freedom of Establishment if other jurisdictions apply lighter versions. - DNB and AFM should continue supporting EIOPA coordination to minimize supervisory arbitrage. - Life sector: - Solvency II ratios are well above 100 percent, yet the life sector is fragile. - Elements that distort economic-based valuation—Ultimate Forward Rate (UFR) and volatility adjustment (VA)—are highly relevant in the low yield environment. - 2016 EIOPA stress test data confirmed fragility; economic valuation shocks would reduce available own funds significantly compared to Solvency II valuations. - Supervisors are left with limited Pillar 1 tools if ratios remain above 100 percent; use of Pillar 2 powers (dividend restrictions, capital add-ons) should be applied at various degrees depending on VA and UFR impacts. - Transition into Solvency II should be closely monitored; aspects to reconsider in the 2018 Solvency II revision include: the UFR methodology, tax-loss absorbance capacity of tax credits, and the VA methodology. - Model governance: - Maintain strong focus on internal model approval for material changes and monitor model drift risk; supervisory responses to model change requests central to capital reporting should be timely and of uncompromised quality. - Evaluation recommended for company-specific parameters methodology for small companies and credit insurers under Solvency II in conjunction with EU authorities (I). - DNB recommended to carry out country-specific stress tests in addition to EIOPA stress testing (NT). ### Non-life insurance sector and resolution - Non-life sector is highly competitive and nonprofitable if investment income is excluded: combined ratios above 100 percent; profitability supported by investment income which is under stress. - Market saturation and competition are intensified by foreign insurers accounting for over 50 percent of the business (excluding health) and EU single market constraints. - Winding up of insurers can be lengthy; improvements needed in national and EU resolution tools to protect policyholders. - Authorities working on a new national recovery and resolution law for the insurance industry to be implemented in 2018, partly in the spirit of the EU Bank Recovery and Resolution Directive; provisions to allow fast advance payments to policyholders in winding-up situations are included. - Recommendations on winding up/resolution (I): introduce regulation allowing fast advance payments on all insurance liabilities; require approval of both supervisors for portfolio transfers of insurance and pensions (except when resolution powers applied); evaluate introduction of a guarantee scheme for insurance; introduce planned resolution framework; DNB and EU authorities to consider adequacy of cross-border failure arrangements. ### Pension sector stress, quantitative indicators, and reform considerations - Pension sector under stress: over ninety percent of pension funds in terms of assets subject to a recovery plan as of Q2-2016. - At end of 2015, about 84 percent of all pension funds were subject to a recovery plan. - At the end of the first quarter of 2016, the average pension fund coverage ratio of all pension funds dropped to 102 percent due to market conditions, leading to 90 percent in terms of assets of the pension funds being subject to a recovery plan. - Recovery plans viability depends on regulatory yield curves allowing, for example, up to 7 percent return for equity investments—such returns appear extremely optimistic. - DNB report to parliament forecasts benefit cuts affecting a large segment of the population in coming years. - To avoid substantial benefit cuts, excess investment returns over the risk-free interest rate needed with full premium charged is in the order of 400 basis points and 450 basis points if 90 percent of the technical premium is charged; these spreads are not deemed probable given current low yields and limited financial space to increase market risk exposure. - Pension system transition and reform considerations: - Discussions underway to potentially shift risks to participants to address lack of trust (uncertainty of benefits), deficient portability, and the new labor environment. - Recommendations for a new pension system include reinstating qualities of previous system and adding portability: - Lowering replacement ratio may allow funds to provide a guarantee without conditionality. - Create individual accounts as buffers to maintain guaranteed benefits in downturns or provide additional income in prosperous years; individual accounts would complement first pillar AOW benefits without requiring government fiscal liabilities. - DB funds would remain fully funded with corresponding adjustment of the individual account to improve portability. - Maintain high fiduciary duty: funds must explain and justify reasons for any reduction in individual accounts. ### Other supervisory and reporting recommendations - DNB and AFM should coordinate selected inspections of auditors and require specific inspections of auditors; DNB should carry out random on-site inspections on data quality and validity and regularly confirm predictive power of FOCUS! (I). - AFM recommended to be allocated a substantial budget for developing big data exploitation capabilities for supervision (I). - The Risk, Management and Strategy department (DNB) should follow up on implementation of agreed recommendations (I). - Accompany growth of sectoral thematic work with account management and line supervision resources to minimize risk of missing full exploitation (NT). - Further tuning of FOCUS! to align with Solvency II as detailed reporting emerges (NT). - Require liquidity plans for pension funds and insurers that consider hedging positions under stress (I). - Revise reporting requirement for insurance intermediaries from annually to quarterly and enhance reporting for insurers and pension funds with market conduct indicators (I). - Include product regulation independently of provider location and establish mechanisms to credibly enforce national market conduct regulation for FOS operations (NT). - Introduce license requirement for pension funds (NT). - DNB to closely monitor search-for-yield activities in the sector (I). - Reinstate requirement to charge a pension contribution that does not increase coverage deficit under a recovery plan (NT). - Tighten prudent person regime closer to Solvency II definition (I). - Introduce an additional feasibility assessment test for pension funds with a projection period of about 10 years (I). - Introduce mechanisms to ensure pension participants receive financial advice (NT). - Harmonize the Financial Sector Supervision Act (Wft) and PW regarding quality of advice and product suitability (NT). - New pension system should aim to reinstate guaranteed defined-benefit qualities and add portability (I). *Source: EXECUTIVE SUMMARY (cr1794) — IMF technical note prepared by Rodolfo Wehrhahn* ### INTRODUCTION ### INTRODUCTION ### Overview and scope - This technical note, part of the 2016 Kingdom of the Netherlands IMF Financial Sector Assessment Program (FSAP), presents the analysis of the insurance and pension sectors’ supervision and regulation. - Analysis is based on the regulatory framework in place, the supervisory practices employed and other conditions, as they existed in June 2016, as well as on the self-assessments and questionnaires completed by the authorities. - The technical note explores: - Elements supporting the effectiveness and efficiency of the supervision by both authorities in insurance supervision and regulation. References to the insurance core principles (ICPs) of the IAIS and to the principles and best practices of the International Organization of Pension Supervisors (IOPS) are made, but this is not an assessment of the IAIS principles and the observance of the principles is not evaluated; - Level of implementation of Solvency II, including the internal model approval, group supervision and reporting requirements; and - An assessment of the resilience of the insurance and pension sectors based on the available 2016 EIOPA stress test results, the review of the Own Risk and Solvency Assessments of selected insurers, and sensitivity tests carried out in collaboration with the DNB. ### Institutional framework and legal basis - Financial sector regulation is issued by the Ministry of Finance (MoF) and the Ministry of Social Affairs and Employment (MoSA). - 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 and forms an umbrella for secondary legislation and regulations. - Four layers of legislation and regulations: 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 (not generally binding). - For the pension sector, the PW is of central relevance. - The Wft incorporates several financial sector EU regulations. Solvency II has been established at the EU level under maximum harmonization and is incorporated in 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. - Supervisors’ rulemaking role is limited: the MoF issues financial sector regulation; MoSA is primarily responsible for the pension sector. The Wft and Royal Decrees give DNB and AFM the power to release supervisory rules and policy rules (Chapter 4.3 Awb). ### Supervisory roles and cooperation (twin-peaks model) - Two authorities supervise the sectors using a twin-peaks model: - De Nederlandsche Bank (DNB) — responsible for prudential supervision of financial institutions, including insurers and pension funds (Wft Article 1:24, subparagraph 2; Bank Act 1998 Article 4, subparagraph 1); - Autoriteit Financiële Markten (AFM) — responsible for supervision of business conduct of financial institutions and markets (Wft Article 1:25, subparagraphs 1 and 2). - The Wft: conduct-of-business supervision shall focus on orderly and transparent financial market processes, integrity in relations between market participants and due care in the provision of services to clients. - Licensing and registration provisions: - DNB authority to grant and withdraw licenses to insurers (Wft Chapter 2); - A newly established pension fund must register at the DNB within six weeks from its establishment (PW Chapter 6); - AFM licenses investment managers of investment institutions, financial service providers, asset managers, and other investment undertakings; - For pension funds, Article 151 of the PW: AFM charged with conduct-of-business supervision; DNB charged with prudential supervision and all other supervision. - Covenant between DNB and AFM: - Facilitates legal framework for supervisory cooperation and designation of a lead supervisor (DNB generally leads for banks, insurers, and pension funds; AFM leads for securities firms); - Lead supervisor defers to the judgment of the other supervisor in its areas of responsibility and must explain differences in opinion; - Each supervisor has veto power in fit-and-proper assessments of key persons; - Mechanisms established for consultation and sharing of supervisory information. ### Information exchange and safeguards - DNB and AFM have safeguards for exchange of Wft information among themselves and with other relevant supervisors. - Wft applies internationally accepted standards for confidentiality and sharing of supervisory information. Existence of an agreement is not a prerequisite; strict confidentiality requirements apply (Article 1:90, subparagraph 1, Wft; Article 205 of the PW). - Wft allows information exchange with other supervisors and explicitly mentions 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). - AML/CFT-information can be shared with relevant supervisors under the Dutch AML/CFT Act; similar safeguards as Article 1:90, Wft, are stipulated for AML/CFT information (Article 22, Dutch AML/CFT Act). ### Areas for improved supervisory efficiency (team recommendations) - Working together more extensively in some areas could boost efficiency: - The intensity of supervision has significantly increased; 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 is responsible for its ongoing supervisory activities, but not for those carried out by the other supervisor. - Recommendation: a joint approach to the supervision of culture, governance, and integrity issues. - Recommendation: a single approach to data exploitation and data analytics to increase resource efficiency. - Recommendation: evaluate earlier, formal information sharing on problem files; increase coordination by DNB sharing company information at an earlier stage of concern. ### Regulatory and supervisory developments since 2011 FSAP - Insurance sector: - 2016 Solvency II framework (market valuation and risk-based prudential regime, including comprehensive group-wide supervision in line with IAIS principles) replaced Solvency I (1973). - Pension sector: - Since 2015 the nFTK with 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. Information requirements have increased and focus on equal consideration of interests of all participants has strengthened. - Governance of pension funds underpinned by the Act of Strengthening of Pension Fund Governance (Wet Versterking Bestuur Pensioenfondsen; Wvbp) in 2014. ### Supervisory approaches and methodologies - DNB: - Implemented FOCUS! in 2012, building on the previous Financial Institutions Risk Analysis Method (FIRM). - Supervised institutions classified into four risk categories based on potential level of impact of problems, according to DNB supervisory objectives. - Risk assessment considers: (1) the macroeconomic environment; (2) business models; (3) culture; and (4) IT as risk drivers before assessing prudential risk at the microprudential level. - AFM: - New supervisory approach with enhanced risk-based focus and early risk identification supported by teams dedicated to monitoring market information. - Macroeconomic and system-wide risks are translated into sector-specific risks and used as drivers for AFM supervisory actions. ### Dispute resolution, auditors, and market infrastructure - Financial Services Disputes: - The Financial Services Disputes Institute (KiFiD) is the only disputes agency recognized by the MoF and consists of the Financial Services Ombudsman and the Financial Services Disputes Committee. - Mediation by the Ombudsman is free of charge; the Disputes Committee renders a decision for a nominal fee. - Auditors under Solvency II: - Accounting standards aligned with International Financial Reporting Standards of the IASB; some standards recorded in domestic legislation. - Under Solvency II, auditors must include the actuarial report as part of their external audit report. - Audit firms are adapting to Solvency II requirements, including internal models and external audits on several aspects; auditors are supervised by the AFM. - Expectation gap: - Potential expectation gap between auditors, insurers, pension funds boards and the DNB on scope of audits: current requirement is International Standards on Auditing 3402 (ISAE), which focuses on processes that could impact annual accounts. - Forthcoming introduction of ISAE 3000 expected to remove the gap. - Fair valuation of illiquid assets under market-consistent valuation of Solvency II presents challenges for auditors and supervisors. - Tripartite meetings among auditors, boards of supervised entities, and the DNB are an important platform for mutual understanding of Solvency II aspects. ### Market participants and data availability - Market structure and professional bodies: - 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 members who must abide by actuarial standards and a code of ethics. - The Dutch Association of Insurance (Verbond van Verzekeraars) and the Federation of Pension Funds provide market statistics and lobby for their industries and support supervision through self-regulation. - Public information: - Financial strength and performance information for the insurance sector is available on the DNB’s website; Solvency II disclosure requirements will make the information richer. - DNB and AFM webpages contain information about the financial market, financial institutions, financial stability, and a few market conduct indicators. - Extensive socioeconomic data available from the Central Bureau of Statistics (CBS), the Centraal Planbureau (CPB), the Sociaal-Cultureel Planbureau (SCP), and other organizations; the VvV has its own Centrum voor Verzekeringsstatistiek (CVS). ### Supervisory institutions: governance and internal audit - DNB governance: - DNB is a state-owned public limited company. Article 7 of the DNB Statutes: the Governing Board represents the DNB. - Governing Board comprised of a President and at least three and at most five Executive Directors. - At time of assessment, two Directors of the DNB Executive Board had been given a mandate for microprudential supervision and are assisted by a Prudential Supervision Council, chaired by one of the microprudential supervision Executive Directors. - President and Executive Directors appointed by Royal Decree for a term of seven years and can be reappointed for one additional term. Suspension or relief by Minister of Finance only if conditions not fulfilled or guilty of serious misconduct; dismissal must be public (Bankwet 1998, Article 12, subparagraphs 4 and 5). - Prudential Supervision Council (Article 17a, DNB Statutes) prepares deliberations and decision-making of the Executive Directors of Supervision. - DNB Supervisory Board: - Supervisory Board consists of at least seven and at most 10 members; Chairman and members appointed by the government for term of four years. - Tasks include prior approval of budget and accountability report and annual accounts; elects an Audit Committee, a Remuneration Committee and an Appointments Committee. - AFM governance: - AFM is an independent government agency with governance structure of supervisory and governing board. - Board of Directors consists of at least three and at most five members. MoF appoints Chairman and members after nonbinding nomination by Supervisory Board for period of four years with a maximum of two reappointments. - Supervisory Board approves budget, year plan, financial statements, and significant decisions by the Board of Directors. - Internal audits: - DNB Internal Audit Department (IAD) performs operational, financial, ICT, Eurosystem, and SSM audits; operates independently and reports to the Governing Board and Supervisory Board; drafts annual risk analysis and audit plan. - AFM IAD focuses on operational processes and primary supervision processes, conducts risk-oriented audits per the Audit Charter and drafts an annual audit year plan. An external auditor performs financial and ICT audits within the AFM. *Source: INTRODUCTION (cr1794) — IMF technical note, 2016 Kingdom of the Netherlands FSAP.* ### 23. The DNB and AFM are accountable to the Minister of Finance for their supervisory ### 23. The DNB and AFM are accountable to the Minister of Finance for their supervisory ### Accountability and legal powers - The DNB and AFM are accountable to the Minister of Finance (MoF) for their supervisory activities. - The MoF may revoke supervisory rules issued by the DNB or AFM following the Wft or subsequent Royal Decrees only when such rules are: - deemed to be contrary to the law, a treaty, or a binding decree of an international institution, or - when such rules impose an unreasonable burden on the financial markets (Article 1: 29, subparagraphs 1 and 2, Wft). - In exceptional circumstances when the supervisor seriously fails to perform its duties, the minister may take required measures (Article 1:43, Wft, and article 165, PW). These powers of the MoF and MoSA have never been exercised. - With relation to the DNB, the MoF must approve any adjustments of the Articles of Association (Article 1:37, Wft). ### Appeals and enforcement - Supervisory decisions can be appealed at the Court of Justice in Rotterdam. - The Wft establishes the enforcement powers available to the DNB and AFM; in some cases, court orders are required by law. - Any interested party (natural or legal person) may appeal a decision of the DNB or AFM under the Wft. - Appeal procedures follow the rules outlined in the Awb. Appeals must be submitted at the Court of Justice in Rotterdam. Further appeal may be lodged at the College van Beroep voor het bedrijfsleven (CBb; College of Appeal for Industry). - Supervisor decisions remain in force during the appeal process; the appellant may seek a preliminary injunction against enforcement of the supervisor decision. ### Resources and budgeting - The budgeting process follows a formal procedure: every year the DNB and AFM must prepare a budget for the next year for the performance of the tasks assigned to them following the Wft (Kaderwet zelfstandige bestuursorganen [Kzb; Framework Act on autonomous administrative bodies]), Chapter 4—Financial supervision rules, Part 1—Budget autonomous administrative bodies). - The DNB and AFM fund the budget for their supervisory tasks through levies imposed on the supervised financial undertakings. An advisory panel of supervised financial undertakings is consulted on the budget but does not have decision-making powers. - Power to set tariffs to determine the levies is set out in the Wet bekostiging financieel toezicht (Wbft; act funding financial supervision). - Each year the DNB reports on the budget realization. In 2015, the regular supervision costs amounted to €144 million, €8.4 million lower than the budget. - The annual supervision-related budget of the DNB and AFM requires approval by the MoF or the MoSA. - The supervision budget of the DNB is separate from the overall budget of the DNB with respect to other tasks prescribed by the Banking Act. The supervision budget must be approved by the MoF and the MoSA. This budget is based on tasks under the Wft and PW, taking into account perceived risks with respect to supervised financial firms. - Upon approval of the MoF and the MoSA, the DNB and AFM arrange resources for performing supervisory tasks under the Wft and the PW. Once approved, supervisors have room for reallocation of resources to address unforeseen supervisory matters. ### Staffing, recruitment, and remuneration - Current staffing policies enable attracting and retaining required professionals, but the AFM is seeing a reduced ability to attract needed staff. - The DNB has its own Collectieve Arbeidsovereenkomst (CAO; Collective Labor Agreement), based on the CAO for private banks. Terms of employment are deemed competitive. - Outsourcing supervisory tasks to third parties is not a standard practice, but may be applied occasionally. DNB employs outside service providers for facility management activities such as IT. - The AFM does not have a CAO, but has terms of employment. The attractiveness of terms of employment is under pressure due to increasing need for specialized personnel; vacancies for managerial and specialists’ positions have remained open for long periods. - Legislative changes: - As of January 1, 2013, governing board members of the DNB and AFM are subject to the Law on Standards for Remuneration for Senior Officials in the Public and Semi-Public Sector (Wet normering topinkomens, WNT). - The WNT implementation includes a transitional period; actual reduction of remunerations that exceed the WNT maximum would only be capped as of January 1, 2017. - The MoF has expressed no intention to allow a general exception for the DNB and AFM boards. Individual exceptions are possible; the minister stated he will request such individual exception for board members only if specific qualifications are required. - The WNT currently does not apply to nongoverning/supervisory board members. A proposal to extend the WNT to all staff (referred to as WNT-3) is out for consultation and seems likely to affect salaries of current staff. ### Elements affecting operational independence - Areas of concern affecting operational independence: - Limited ability of the supervisor to introduce technical regulations (apart from the insurance sector) could reduce effectiveness of supervision—important in the pension sector where national regulations have a prominent role compared with the insurance sector, which follows EU directives and EC regulations under maximum harmonization. - Required approval of the MoF or the MoSA for setting the supervision budget for the DNB and AFM could result in resources insufficient in quality and quantity necessary for effective supervision. - Restrictions imposed by the WNT and the planned WNT-3 would diminish the ability of supervisors to attract and retain senior professionals and specialists who now earn more than planned salary limits. ### Policy recommendations - Authorities are recommended to: - Enhance the powers of the DNB and AFM to introduce technical regulation in accordance with national and EU legislations. - Consider exemption from the WNT-3 for both supervisory authorities. ### Organizational structure — DNB - Insurance and pension supervision at the DNB is led by two divisions: - Division Toezicht verzekeraars (Division Tv; Insurance Supervision). - Division Toezicht Pensioenfondsen (Division Tp; Supervision of Pension Funds). - Under both divisions, departments of expert centers support supervision; DNB-wide divisions are active in areas allowing synergies and cost effectiveness (financial stability, integrity, enforcement). - Expert centers (shared services): - Division Tv hosts: expert center for financial risk for insurers, expert center for capital. - Division Tp hosts: expert center for on-site inspections, center for business and organization, center for financial risks pension funds. - Division for Horizontal Functions and Integrity Supervision hosts: center for thematic supervision integrity; center for integrity strategy; expert center for governance, behavior, and culture; center for intervention and enforcement; center for fit-and-proper testing; center for market access. - Resource planning and allocation: - Currently seven departments in Division Tv and six departments in Division Tp. - Five Tv departments and three Tp departments are in charge of “account” supervision; two Tv departments and three Tp departments are expert departments. - Division Tv consists of about 93 full-time equivalents (FTEs), and Division Tp has roughly 80 FTEs. - Divisions formulate a Division Plan annually (based on the Supervisory Strategy), including priorities and planned investigations. - Expert centers manage demand for cross-sectoral support; external experts can be hired if necessary. - Decision-making and governance: - Governance framework supports matrix organizational structure with shared resources allocated by sector and flexibility to access external resources when necessary. - For DNB’s most important institutions, the Executive Director is responsible for supervision of banks and insurers and chairs the Prudential Supervision Council (PSC), which approves supervisory actions. - Expert centers assign risk scores following a peer review process; account supervisors are responsible for risk mitigation. Most decisions are peer reviewed and escalated in cases of conflicting views; escalation processes are documented internally. - Operational assessment: - Matrix structure encourages interaction and makes specialized expertise available without creating holdups. - Annual fixed but flexible allocation of experts supports sector-wide knowledge, cost effectiveness, and information flows. - Demand on account managers is increasing as more thematic and specialized work is done. - The DNB should consider the potential risk of missing full exploitation of sectoral thematic work by ensuring account management and line supervision resources grow with thematic work. ### Organizational structure — AFM - Supervisory board changes and leadership: - After departures at end of 2014, the Minister of Finance appointed four new Supervisory Board members, including the chair, on July 15, 2015, to fill vacancies. One newly appointed board member resigned as of January 1, 2016. - The newly appointed chair replaced the former chair who resigned in January following a critical report about supervisory board functioning. - An executive board member resigned in April 2015; successor appointed on October 1, 2015. A new Chief Operations Officer with responsibility for all AFM business operations was also appointed. - Rotation and renewal were implemented at managerial level. - New structure and strategy: - The AFM launched the Multi-Year Agenda in 2015 to define the AFM in the medium term and developed a four-part vision with a renewed mission, revised core values and qualities, and an ambitious goal for 2022 to be a recognized groundbreaking supervision authority. - As of April 2016, AFM has operated under a new structure: six divisions (“domains”) for supervision, six divisions providing horizontal technical support, and four other divisions for general support functions such as IT and Human Resources. - Supervision focus and capacity: - The new structure increases forward-looking and risk-based supervision and concentrates on data exploitation via the Expert Center Division. - Structure supports a single coordinated point of contact for the largest institutions enabling integrated supervisory strategy. - Insurance and pension supervision are combined in one division: three teams with a total of 35 FTEs. Two teams with 11 and 13 FTEs are dedicated to day-to-day supervisory activities; the third team focuses on off-site risk identification for retail market supervision. - Together with the Retail Loans, Savings & Investments division, these two divisions supervise the entire landscape, including about 8,000 insurance intermediaries and financial advisors and the six largest insurance groups. - Horizontal technical support divisions include Account Management, Expert Center, Supervision Service Center, Strategy Policy and International Affairs, Communication, and Legal Affairs. - Transition guidance: - The newly adopted AFM structure needs to become fully functional and efficient. It is recommended that the AFM apply flexibility in resource allocation and strong guidance on the new structure led by a stable board of directors. ### Supervision approach — DNB - Mission and goals: - DNB’s mission: to work to achieve strong and sound financial institutions that meet obligations and commitments. - Five goals: (1) minimize the chance of bankruptcies and instability; (2) promote trust in the financial sector; (3) achieve supervision on a par with international best practice; (4) carry authority in the Dutch financial sector; and (5) manage costs effectively. - Medium-term strategy is published in the DNB’s annual “Supervision Outlook,” which includes annual priorities aligned with the strategy. - FOCUS! supervisory approach: - Since 2012, DNB uses FOCUS!, a risk-based and forward-looking supervisory approach that enhanced prior FIRM by incorporating external macroeconomic and system-wide risk drivers. - FOCUS! comprises analysis, judgment, and mitigation of risks, and draws on macroeconomic, sectoral, and specific thematic insights to zoom in on individual risks. - Classification and resource allocation: - On an annual basis (or when material events change financial conditions), supervised entities are classified into five categories (T1 to T5), each with its own risk analysis to assess impact given default on DNB objectives. According to this classification, resources and activities are allocated for risk analysis. - Complementing this, on a biannual basis an assessment of the probability of default or current financial condition of each entity is conducted. - There is also a quarterly assessment of certain risks using reported data. - Depending on the probability of default, different levels of supervision intensity apply. *cr1794 - 23. The DNB and AFM are accountable to the Minister of Finance for their supervisory* ### 45. Annual plans set the priorities for the supervision and determine the appropriate depth ### Annual plans set the priorities for the supervision and determine the appropriate depth ### Annual planning and FOCUS! framework - Annual plans set priorities for supervision and determine depth and level of off-site monitoring and on-site inspection activities. - Planning hierarchy: - Supervisory Strategy 2014–2018, Division Plan, and departmental plans guide Divisions Tp and Tv in determining action plans for each insurer and pension fund. - Action plans align with FOCUS! process results. - Plans are risk-based and detailed depending on institution category (T1 to T5). - Supervisory plans for categories T5 and T4 are reviewed and approved by the PSC (Executive Director, responsible for the supervision of banks and insurers (Chair), and the Executive Director responsible for pension fund supervision). - Action plans for categories T3, T2, and T1 are reviewed at the division-head level. - FOCUS! cycle steps: - Segmentation: all institutions are divided into five categories (T1 to T5), each with its own risk analysis intensity. - Risk drivers assessment: external environment, business model and strategy, conduct, culture and governance, and infrastructure and IT. - Prudential and integrity risk assessment followed by capital and liquidity analysis; results summarized in an institutional risk profile and assignment to a supervision regime (low, neutral, high, or urgent). - Risk mitigation: focus on establishing the desired effect without delay; the new Intervention and Enforcement department plays a key role. ### Supervision regimes, monitoring, and escalation tools - Monitoring regimes: - Four regimes: low, neutral, high, and urgent. - “Neutral” is the basic regime of regular supervision. - “High” always contains a risk mitigation plan. - “Urgent” requires direct intervention involving all possible mitigation measures. - Preventive and corrective triggers: - Many actions are triggered following transgressions to Article 3:17 of the Wft. - Grounds for supervisory actions include: - Control of business processes and business risks; - Integrity (conflicts of interest; offences or other transgressions of the law by the enterprise or its employees that could damage confidence; relations with clients that could damage confidence; other acts contrary to generally accepted standards that seriously damage confidence); - Soundness of the financial undertaking (ability to manage and monitor financial and other risks; maintenance of required financial safeguards). - Supervisory escalation measures for insurers (examples): - Require a risk mitigation plan (RMP) describing the problem, target, and time frame; insurer must take measures within the time frame. Examples of RMPs: improving the three lines of defense; mitigating specific underwriting risk (e.g., motor liability insurance); mitigating specific market risk (e.g., overweight position mortgages). - Place insurer on Watch List (Voorportaal) for internal closer monitoring (criteria include upcoming solvency problems and integrity issues). - Label as Problem Case (Probleem Dossier; PDR): increased expert support and contact frequency; insurer required to mitigate (e.g., increase own funds, de-risk investment portfolio, adjust governance). - Label as Protocol Case for the most severe and market-sensitive cases: handled as a project by a select, classified team with a code name; aim to mitigate before further enforcement. ### On-site inspection function and interaction with off-site supervision - On-site inspection unit: - Dedicated OTPV department (on-site supervision of pension funds and insurers) started operation on November 1, 2014. - Objective: improve quality and focus of risk analysis through independent assessment to supplement off-site monitoring. - Scope: specific problems across all risk drivers (e.g., credit risk, market risk); can inspect single institutions or groups; specific-focus or full-scope investigations. - Investigation phases: define negative hypothesis, research questions, and desk research; on-site investigation; findings/observations and recommendations. - Separation of duties: - Strict separation of off-site supervisors and on-site inspectors, aligned with ECB design for on-site bank supervision. - On-site inspections performed at the request of account supervisors; OTPV acts independently and performs the agreed inspection. - OTPV issues the report but does not decide subsequent actions; account supervisor decides on risk mitigation strategy, implementation, and monitoring. - Further on-site inspections can follow to test mitigation efficiency in complex cases. - Use and frequency of on-site inspections: - On-site inspections used to analyze or confirm perceived risks rather than as an additional investigative tool. - Mainly targeted inspections guided by risk indicators. - Scheduled on-site inspection frequency: - Varies from three to five years for category T5 to T3 institutions and some larger T2 institutions. - Lower T2 and T1 institutions do not have scheduled on-site inspections but are subject to thematic inspections. - Thematic inspections are determined based on FOCUS! scores, market intelligence, and economic/system-wide conditions. - Ad hoc on-site inspections can be triggered by elevated risk or special events. ### Reporting, data, and quality assurance - Data support for FOCUS!: - Under the PW and the underlying nFTK, sufficient granularity of pension fund data is available for regular FOCUS! risk assessment. - New detailed and frequent reporting requirements for insurers under Solvency II will enhance FOCUS!. - Detailed data on pension fund assets are received quarterly; FOCUS! has adapted to the nFTK. - Recommendation for alignment: - As Solvency II reporting emerges, DNB should further align FOCUS! with Solvency II to exploit the detailed data. - Reliance on off-site tools requires safeguards: - Random controls on quality and truthfulness of reported data, including assessment of the auditor’s work for insurers (which now also incorporates the actuarial assessment). - Frequent and robust back-testing on the predictive power of FOCUS!. - DNB teaming with AFM on selected AFM auditor inspections and requiring some specific AFM inspections of auditors. - Incident reporting and integrity monitoring: - Regulation: Article 12, subparagraph 3, Bpr requires insurers to inform the DNB without delay of incidents that could harm reputation. - Notifications are collected in DNB’s Toezichtincidenten (Supervisory Incidents) register. - Past three years’ average annual number of incidents for the insurance sector was about 30. - Immediate remedial action taken in some cases; in most, DNB performed root-cause analysis and determined remedial action. Repeated entries noted as an integrity risk in FOCUS! and could lead to a risk-mitigation plan. ### Oversight of supervisory quality and RMS - Risk Management and Strategy (RMS) department: - Established in 2010 as a separate risk-management department to enhance and monitor the effectiveness of financial supervision. - Constitutes the second line of defense, independently assessing the quality of supervisory processes and approach. - Main deliverables: internal evaluations, thematic reviews, quality assessments, and the annual stakeholder analysis. - RMS recommendations are implemented by divisions; RMS should monitor implementation of its recommendations. ### AFM role, data needs, and recommendations - AFM mission and organization: - AFM promotes fair and transparent financial markets as an independent market conduct authority and contributes to a sustainable financial system and prosperity in the Netherlands. - Ambitious objective: to be a demonstrably ground-breaking supervisory authority and leader by 2022. - Core values: careful and vigorous; autonomous and connected. - Core staff qualities: discipline, analytical strength, and progressiveness. - Supervisory tools and structure: - Enforcement measures include private/public warnings, undisclosed intervention, license withdrawal, registration cancellation/refusal, disciplinary complaints against external auditors, reports to the Public Prosecution Service, fines, and orders for periodic penalty payments. - Account Supervision division coordinates supervision of largest institutions (including six largest insurers); each group has two account supervisors; integral supervision strategy produced annually and captured in a reflection document scoring risks in six categories: (1) openness, (2) controls, (3) compliance, (4) governance, (5) strategy, and (6) customer interest. - Supervision Insurance and Pension division oversees smaller insurers and all pension funds; monitoring information drives supervisory action (on-site inspections, enforcements, thematic projects). - AFM developing sectoral top 10 risks to guide supervisory actions and prioritize thematic activity. - AFM data and IT capability gap: - AFM aims to be a leading, data-driven supervisor anticipating innovation/FinTech and using insights on consumer behavior and organizational change (AFM agenda for 2016–2018). - AFM IT budget decreased from €10.8 million to €9.3 million forecast for 2016; major investments will be necessary to build data capabilities. - Recommendations to support AFM ambition: - Revise reporting requirement for insurance intermediaries and increase frequency from annual to quarterly. - Enhance reporting requirements for insurers and pension funds with market conduct indicators complementing DNB reporting. - Ensure AFM IT system has direct connectivity with DNB’s relevant database to take full advantage of data received by DNB under Solvency II. ### Enforcement powers and procedures - Legal enforcement basis: - Article 1:75, Wft: supervisor may issue a direction if insurer fails to comply with Wft or related secondary legislation or if indications arise that may endanger own funds, solvency, liquidity, or technical provisions. - DNB must substantiate that any proposed enforcement measure is appropriate and proportional. - Available enforcement tools include: - (An order for) interim penalty payments; - Administrative fine; - Requiring a recovery plan to be produced (Article 3:135, Wft) in case of a breach of the Solvency Capital Requirement (SCR); - 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 insurer activities; - Appoint a trustee or a receiver; - Withdraw insurer’s license and request court to apply Emergency Regulations (Noodregeling). *Source: cr1794 - 45. Annual plans set the priorities for the supervision and determine the appropriate depth* ### 66. Consistency is ensured in the preparation of the enforcement and follows from the ### Consistency is ensured in the preparation of the enforcement and follows from the ### Enforcement: policies, fines, publication, and appeals - DNB and AFM jointly issued on July 10, 2008 “The policy rule on enforcement policy AFM and DNB.” - 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, but can be substantial, and board members have been removed in the insurance sector. - The DNB fined the record sum of €23 million in 2015 to an insurance company. - The AFM recently fined the big four audit companies for noncompliance with their duty-of-care requirement a total of €6 million. - Publication and provisional measures: - 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. - Objection and appeal rights: - Insurers and other legal or natural persons with interests directly affected by administrative decisions of the DNB have the right to object within six weeks from the date of the decision. - 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. The ruling in the first instance can be appealed at the Trade and Industries Appeal Tribunal. - 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 in civil proceedings on the basis of tort. - Accelerated settlement: - 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. - Redress: - Redress can be obtained through a civil court process. *Italic: Source: Extract from IMF Country Report cr1794 (as provided)* ### E. Group Supervision — scope, powers, reporting, and deficiencies - Market concentration and supervisory coverage: - 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). - The majority of the 21 mixed insurance groups are captives that require limited supervisory attention given their business activity. - 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. - Coordination and memoranda: - The DNB and AFM have the authority to enter into agreements or understandings with other supervisors. - The DNB has signed the IAIS Multilateral Memorandum of Understanding (IAIS MMoU). - Solvency II strengthening group supervision: - Solvency II defines the scope and requires supervision of the whole group. - Article 1:1, Wft, defines participating enterprise, holding subsidiary, financial holding company, mixed activity insurance holding company, mixed financial holding company, affiliated enterprise, insurance holding company, and insurance group. - Article 3:285, Wft, and Article 3:296, Wft, state 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. - DNB compliance with group supervision-related SRPs (Solvency II-related): - The Group SRP (preconditions for group supervision). - The College of Supervisors SRP (college structure). - The Supervision of Intra-Group Transactions SRP (importance and review of intragroup transactions). - The Supervision of Risk Concentration SRP (requirements of Article 244 of the Solvency II Directive and review of risk concentrations). - Group Own Risk and Solvency Assessment (Group ORSA). - The System of Governance SRP (group governance). - The Recovery & Resolution SRP will be addressed during 2016. - Additional powers under Solvency II: - 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 in Chapter 3.6 of the Wft. - 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). - Limitations and gaps in powers: - Additional powers for supervision of corporate governance, including fit-and-proper requirements at the group level, can only be effectively 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 basis of cooperation arrangements according to Solvency II). - 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; 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. - Improvements in group reporting (Solvency II requirements): - 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 ORSAs at the subsidiary level. - 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; any significant risk concentration at group level; and Group Technical provisions. - 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. - Reporting on intragroup transactions under Solvency II will provide detailed and complete data as of 2017. - DNB preparation and colleges: - The first assessment in preparation for Solvency II was carried out in 2011; another assessment of groups was done in 2015. - 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 and have moved into compliance with the EIOPA requirements on colleges. - 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 internationally active groups. - The reporting on intragroup transactions under Solvency II will provide detailed and complete data as of 2017. - College Coordination Agreement and crisis planning: - Under Solvency II, all EEA colleges should put in place a College Coordination Agreement, including an emergency plan for the college of supervisors to support management of an emerging crisis by the group supervisor and the college of supervisors. - At the beginning of 2015, the DNB signed EIOPA Coordination Arrangements. - Recommendations to address weaknesses in 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. - Given the detailed information on intragroup transactions available as of 2017 for insurance groups, monitoring of contagion risk could benefit from an IT tool that maps the group structure together with all important intragroup transactions (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. *Italic: Source: Extract from IMF Country Report cr1794 (as provided)* ### F. Market Entry and Exit — licensing, cross-border operations, and winding-up - Licensing and entry controls: - The licensing of insurers, including the fit-and-proper assessments, remains strong and has been adapted to Solvency II. - The 2011 FSAP found the licensing regime for insurers clear, transparent, and in line with EU Directives. - With the introduction of Basic Solvency II, all insurers except the very small insurance companies that insure maximum losses of €12,500 or less are now licensed. - Under Solvency II, the thorough fit-and-proper process practiced by the DNB now applies to a wider range of persons who can influence the company. - Pension funds and licensing gap: - Pension funds are not licensed, but within three months, operating must be supervised. - Pension funds can start activities without a license, but need to be registered within three months of start-up. Once registered, all requirements in the PW, such as fit-and-proper, governance, and risk management, apply. - The absence of a license can create legal challenges for the supervisor when it determines that a registered pension fund is engaging in other activity than pension provision. - Recommendation: the authorities should introduce a license requirement for pension funds. - EU freedom of establishment and host/home supervisor roles: - EU-licensed insurers can operate in the Netherlands without an additional license. - The AFM has a limited market conduct responsibility for branches of EEA-domiciled insurers; key elements of conduct supervision reside with the home supervisor, while prudential supervision is the sole responsibility of the home supervisor. - It is expected that sufficient prudential information will be available to the host supervisor when Solvency II reporting requirements are fully implemented. - The reliance on the home supervisor for FOS and cross-border branches requires vigorous collaboration among supervisors to avoid supervisory arbitrage. - Monitoring and acting to prevent potential deterioration in supervision standards on a cross-border basis is important. The authorities, working with EIOPA, should continue supporting coordination among supervisors of member states to minimize supervisory arbitrage. - Continued involvement of the Netherlands in peer reviews and EIOPA Supervisory Oversight (SPOT) visits is relevant. - Market exit and policyholder priority: - Priority is given in legislation to policyholders under the winding up of an insurer and its exit from the market. - Insurance-related claims rank ahead of all unsecured debts, with the exception of (a) pension awards and wages due to employees and past employees; and (b) above-tax and social security liabilities. - In accordance with the Solvency II transposition, the Wft determines the point at which it is no longer permissible for an insurer to continue its business. - DNB powers and procedures for winding up and exit: - Apply the Early Intervention Arrangement Life Insurers Relief scheme (Article 3:149-3:158, Wft). Through this early intervention arrangement, the insurance portfolio of a troubled but still viable life insurer may be transferred to a designated special purpose vehicle, a licensed life assurance undertaking, set up and financed by the insurance industry. There are limitations on the funding of the “bridge” insurers. Solvency II requires the license withdrawal in the same cases where this power could be applied, and thus this power has become of limited use. - Prepare a transfer plan to transfer assets or liabilities of the insurer or its shares to a transferee. The transfer plan of the DNB needs court approval (Article 3:159a-3:159ag, Wft). - Request the court to apply the emergency regulations to the insurer or to declare the insurer bankrupt. If the emergency regulations are declared applicable, the court appoints a receiver, who is charged with transferring the insurance portfolio to another insurer (with a special authorization by the court that the insurance contracts can be amended to make a transfer possible) and/or liquidate the insurer (Articles 3:160-3:163, Wft). - In case of severe danger for the stability of the financial system, the Minister of Finance can start an expropriation procedure (Title 6 of the Wft), and an insurer may be nationalized by the transfer of its shares to an entity of the state. *Italic: Source: Extract from IMF Country Report cr1794 (as provided)* ### 85. Before the DNB can apply the powers as described in the assessment of Standard 12.1, ### cr1794 - 85. Before the DNB can apply the powers as described in the assessment of Standard 12.1, ### Resolution, winding up, and advance payments - Finding: Before the DNB can apply the powers described in the assessment of Standard 12.1, it must determine whether the financial situation of an insurer is at the point where it is no longer permissible for the insurer to continue its business. (para 85) - Finding: The winding up of insurers can be a lengthy process that may require policyholders to wait several years before receiving recoveries. (para 86) - Finding: With the exception of the MTPL insurance and mandatory health insurance, there is no guarantee fund for insurance. MTPL-related losses and basic health care-related losses of failing insurers are protected and can be immediately compensated. Losses on all other classes of insurance or their policyholders must wait for the liquidation process to conclude before recovering on their existing claims. (para 86) - Recommendation: Authorities are recommended to introduce regulation that allows for fast advance payments on all insurance liabilities. (para 87) - Current status: The MoF and DNB are working on provisions to allow for an accelerated advance payment for existing insurance losses, but fast advance payment for all policyholders’ liabilities, including unearned premium that a guarantee scheme provides, is not envisioned. (para 87) - Recommendation: Authorities are recommended to evaluate the introduction of a guarantee scheme for insurance as an important additional resolution tool. (para 87) - Development: The MoF and DNB are working on a new national law regarding recovery and resolution for the insurance industry, to be implemented in 2018, developing a national recovery and resolution framework for insurers partly in the spirit of the EU Bank Recovery and Resolution Directive (Directive 2014/59/EU—BRRD), taking into account the special nature of insurers compared to banks. Resolution plans should be proportionate to the size of insurance companies and the systemic risk they pose, and should include the preferred resolution strategy, the point of entry of resolution, the resolution assessment, and any impediments to resolution. Authorities are recommended to introduce the planned resolution framework following a similar approach to the EU BRRD with due regard to the insurance business model. (para 88) - Finding/recommendation: Delegated supervision to the home supervisor under Solvency II requires increased cooperation and engagement within colleges of supervisors, including compatible resolution schemes for failing insurers and consistent cross-border resolution powers. The Netherlands and EU authorities should consider whether current arrangements for cross-border failure ensure adequate coordination and flexibility among resolution tools and authorities. (para 89) - Status on G-SII resolution planning: DNB’s preparation for the resolution plan for the G-SII under its supervision is on target. Under Solvency II, all insurers must submit a recovery plan ex post within two months when the SCR has been breached. DNB has required recovery plans for the largest six groups since 2015 and has evaluated and provided feedback; a dry run with the crisis management team was included in 2015. DNB is setting up a resolution plan for AEGON as a recently nominated G-SII; the resolution plan is scheduled to meet FSB deadlines. There are no business-as-usual requirements for insurers that are not G-SIIs to prepare resolution plans, but DNB intends to work on resolution plans for all six largest groups. (para 90) - Portfolio transfer oversight: DNB must approve any portfolio transfer, with optional involvement of the AFM. DNB assesses prudential position of transferor and transferee after the transaction, including impact on business models, capital position and fungibility, reinsurance, intragroup arrangements, and ongoing ability to meet threshold conditions. AFM involvement is not automatic; DNB reviews whether policyholders will be in a worse position following the transfer. AFM’s supervisory mandate is ex post and focuses on participant information about the consequences of a portfolio transfer. (para 91) - Pension collective transfers: Subject to DNB approval, pension funds can be authorized to transfer pension value for groups of participants only to another pension fund or to an insurance company. Two important forms: - Article 83 of the PW: collective transfer on request of the employer if scheme members and beneficiaries have not notified objections after being informed in writing. (para 92) - Article 84 of the PW: obligation to collectively transfer pension benefits in event of liquidation of the pension fund; members and beneficiaries do not have individual right to object. (para 92) - DNB evaluation criteria for pension transfers (Article 105 of the PW): - Main criterion: the transfer may not impair the interests of a scheme’s members and beneficiaries. (para 93) - Primary criteria checked: (1) difference in financial position of both pension institutions and how they resolve it; (2) purchase price should be based on norms of acquiring fund; (3) communication to members and beneficiaries must be transparent, informative, and complete. AFM involvement sometimes required. (para 93) - Activity data: During 2013–2015, DNB reviewed and approved 97 notifications of collective transfers. The transferring pension institution withdrew about five notifications because necessary information could not be delivered within three months. For nearly all notifications, DNB requested further information or modifications; interviews took place; no official prohibitions were necessary following informal suggestions. (para 94) - Recommendation: Authorities are recommended to implement regulation requiring approval of both supervisors (DNB and AFM) for portfolio transfers of insurance and pension funds except when resolution powers are applied. (para 95) ### Solvency II implementation and supervisory tools - Finding: The transposition of the Solvency II Directive into national law has been carried out without significant exceptions. Since 2016, the Solvency II framework has been applicable to insurers. The Commission on Delegated Regulation, ITSs and the Commission Delegated Decisions on Equivalence are directly applicable in the Netherlands. Solvency II has been transposed into the Wft and subsequent royal decrees, ministerial regulations, and supervisory rules. EIOPA Guidelines implemented through Beleidsregel toepassing richtsnoeren ESA’s Wft. The act also provides details for a basic Solvency II regime for insurers that do not come under Solvency II (accounting for less than 0.2 percent of the market in assets). (para 96) - Finding: The new regulatory framework has notably improved: Solvency II made capital adequacy standards more robust and risk-sensitive in line with IAIS ICP 17; reporting requirements will provide DNB with sufficient information for off-site supervision; group supervision strengthened including more stringent rules on intragroup transactions. (para 97) - Implementation timeline and preparatory steps: - Solvency II implementation was delayed from October 31, 2012 by about three years due to negotiations on long-term guarantees. (para 98) - By 2013, EIOPA issued preparatory guidelines on internal models, reporting, governance, and ORSA; DNB complied. (para 98) - By 2014, Netherlands introduced a Solvency II principles-based capital adequacy test (Theoretical Solvency Criterion) in addition to Solvency I; insurers performed an ORSA-like Own Risk Assessment and submitted results to DNB. (para 98) - In 2015, insurers submitted additional 2014 prudential reports in a parallel run based on EIOPA preparatory reporting guidelines. (para 98) - Data systems: DNB upgraded IT and launched CAESAR project in 2011 to handle Solvency II data; CAESAR is fully implemented and passed testing. CAESAR allows exploitation of Solvency II data including off balance sheet information, intragroup transactions, detailed asset information for supervisory purposes, systemic risk and group supervision. Recommendation for 2016: DNB is recommended to consider use of the data to further improve or develop new supervisory tools; data providing limited supervisory value should be noted for possible revisions of reporting requirements and EIOPA templates. (para 99) - Implementation assessment: Solvency II internal program consisted of 13 projects covering legislation, processes, group supervision, governance, internal models, and balance sheet issues; preparation of internal organization and insurers was internally audited with no major issues identified. (para 100) - Internal model concerns: - DNB identified areas where the Solvency II standard formula provides less-accurate information on insurer risk and where internal model is economically not viable. (para 101) - For smaller insurers still under Solvency II, shocks used under Solvency II may not be appropriate; company-specific parameters are hardly possible given data credibility requirements; development of partial or full internal models may not be economically viable. The particular credit insurance model is not captured under the SF. (para 101) - Recommendation: Evaluate methodology to allow company-specific parameters for small companies and credit insurers falling under Solvency II in conjunction with EU authorities by year 2018. (para 101) - Matching adjustment (MA): MA is not currently used due to nature of products in the market; MA gives insurers relief for holding certain long-term assets matching cash flows of designated portfolios of life or annuity insurance and reinsurance obligations. (para 102) - Volatility adjustment (VA): For Dutch insurers, the VA is important; most insurance companies make use of the VA, mainly life companies or non-life companies that are part of a group that also encompasses life companies. Smaller non-life companies generally do not use the VA. VA involves simplifications, such as use of a model portfolio that introduces distortion to market consistent approach. DNB does not require approval to use VA and allows dynamic VA adjustment. (para 103) - Transitional measures: With the exception of the equity transitional arrangements, Dutch insurers are applying the full Solvency II measures as of day one. Insurers are not using allowed transitional measures for technical provisions because under the former enhanced Solvency I regime, life insurers were already required to value technical provisions according to Solvency II principles. (para 104) - Loss-Absorbing Capacity of Deferred Taxes (LAC DT): - DNB guidance on use of LAC DT in SCR calculation is detailed and prudent. Article 207 of Delegated Regulation 2015/35/EU stipulates how to determine LAC DT to lower SCR. Critical issue: insurer must demonstrate sufficient profits available to utilize deferred taxes given their financial situation after a shock. (para 105) - DNB requires insurers to include at least the following in description of financial position post shock and substantiation of future profits: - Whether after shock loss the insurer still has sufficient eligible own funds to continue complying with the SCR or which measures it plans to take to meet SCR within Solvency II time period; if recapitalization is a measure, it should factor that recapitalization will likely decline as solvency position decreases. (para 105) - Impact on future profits of changed balance sheet post shock loss and impact of all measures taken to comply with SCR post shock loss, considering reduced profit potential post shock loss, impact of risk-reducing measures on earnings capability, and increasing uncertainty in longer-term profit projections. Projections of the full balance sheet and aggregate future (taxable) profits, not only potential profit sources, should be made. (para 105) - Assessment: While DNB’s approach is prudent, significant judgmental latitude remains and uncertainty of availability of future profits after a shock is high. Given potential benefit of up to a 25 percent reduction of the SCR, DNB is recommended, working through EIOPA, to tighten the use of LAC DT. (para 106) - Internal model approvals: Industry engaged in pre-application since 2011; process and DNB expectations have resulted in significant reduction of official applications and ultimate approved internal models. Currently three insurers apply partial internal models to determine their SCR. Recommendation: DNB should maintain strong focus on internal model approval of material changes and identification and monitoring of model drift risk; DNB should respond to model change requests central to capital reporting without compromising quality within market reporting timeframe, requiring sufficient resources and analytic tools. (para 107) ### Financial Assessment Framework (FTK) and pension prudential rules - Framework: The Financial Assessment Framework (FTK) lays down statutory financial requirements for pension funds. Built around principles of market valuation, risk-based capital requirements, and transparency. Technical provisions determined by discounting expected future cash flows against current nominal term structure of interest rates provided by DNB using latest mortality information. SCR is calculated with a confidence level of 97.5 percent over a one-year time horizon. (para 108) - Typical capital requirement: On average, this leads to a capital requirement (total market value of assets as a percentage of pension commitments) of approximately 125 percent (currently the requirement ranges for individual pension funds between 101 percent and 137 percent of liabilities). The minimum regulatory own funds requirement derived from IORP Directive translates into a funding ratio of 104.3 percent at the minimum. (para 108) - Revisions: The PW and mainly the FTK were revised in January 2015. Main revisions affect: - the methodology of recovery plans and how to deal with possible reductions of benefits; - the way of granting indexation; - the way of cushioning the premiums; and - the way to analyze the financial framework of a pension fund in relation to expected pension results and corresponding risks together with communication about this. - Additional: Risk-based solvency requirements in the FTK have been recalibrated based on current data. (para 109) *Source: cr1794 - 85. Before the DNB can apply the powers as described in the assessment of Standard 12.1,* ### 110. Under the nFTK, pension funds are obliged to be more explicit about the risks related ### cr1794 - 110. Under the nFTK, pension funds are obliged to be more explicit about the risks related ### Risk communication, fiduciary duty, and documentation - Pension funds must be more explicit about risks concerning (deferred) participants and pensioners and analyze implications of these risks in pension contracts across different situations. - Analysis must shed light on distribution of financial shortfalls or surpluses between (deferred) participants and pensioners over different generations to improve assessment of trustees’ fiduciary duty. - Pension funds need to include a crisis plan in their Actuarial and Technical Business Memorandum. ### Recovery plans, benefit reductions, and supervisory triggers - Policy coverage ratio replaces the previous spot coverage ratio: it is equal to the average of the past 12 monthly (actual) coverage ratios to limit dependency on spot date circumstances. - nFTK requires only one recovery plan outlining how the pension fund intends to return to the capital requirement within 10 years. - Minimum funding requirement backstop: if the policy coverage ratio stays below the minimum funding requirement for five consecutive years, the pension fund must reduce benefits immediately to return to the minimum funding requirement (the backstop requirement).12 - Benefit reductions can be smoothed over a period of no more than 10 years. - Benefit reductions included in a regular recovery plan are conditional on the future financial situation and are reassessed each year when the recovery plan is refreshed using a recovery period of 10 years. - A benefit reduction triggered by the backstop requirement is unconditional, though it can be smoothed over no more than 10 years. - Overall effect: Allowed changes reflect increased tolerance of unfunded pension funds and a higher aversion to benefit cuts. ### Indexation rules and distribution of financial prosperity - Indexation is subject to conditions, including a threshold for indexation and a sustainability requirement. - Sustainable indexation rule: pension funds should have sufficient financial means that exceed the policy cover ratio of 110 percent to grant indexation that can be sustained for the future while taking into account younger generations. - Pension funds must have sufficient financial means before they are allowed to repair earlier benefit reductions or partial indexations from previous years, to guarantee sustainable and full regular indexation in the future. - Net effect: benefits are reduced later than under the old FTK, and financial prosperity is distributed later. ### Elements distorting market valuation of pension funds’ economic position - Unified Forward Rate (UFR): - In 2012, a fixed UFR at 4.2 percent became part of the interest rate term structure used to discount pension liabilities, reducing the correlation between coverage ratio reduction and low interest rates. - Following advice in July 2015, DNB changed the method to derive the UFR to partially remove inconsistency due to a fixed UFR; the new UFR method aims to achieve a more realistic actuarial interest rate by taking into account past experience.13 - The new UFR is calculated using the following rules: (i) a level of the UFR based on a moving average of 20-year forward swap rates over the previous 120 months; (ii) a starting point for the UFR method (the ‘First Smoothing Point’) at 20 years; and (iii) from the starting point, the rate grows towards the UFR level, but never reaches it. The extrapolation method includes market information, even after the starting point. The weight attached to these market observations gradually decreases over time. - Contribution determination methods are not market consistent: - Contributions can be based on the moving average of the interest rates of the last years (with a maximum of 10 years). - Alternatively, contributions can be based on the expected return on the pension fund’s assets if certain conditions are met; MoSA sets the maximum allowed returns per asset class. - To compensate, nFTK strengthened conditions for cushioning contributions based on expected returns—for example, a mark-up to cover future-proof indexation by at least the projected rate for price inflation (or the fund’s own inflation ambition if higher). ### Weakness in financial assessment framework and recommendation - Under the old FTK, pension funds failing minimum regulatory own funds had to charge a premium at least equal to the value for which new accruals would appear on the liabilities side. This criterion was cancelled under nFTK. - Implication: current contributions do not have to be sufficient to cover the increase in technical provisions from new accrual of benefits, affecting an important part of the pension sector. - Recommendation: authorities should reinstate the sound requirement that pension contributions should not increase the coverage deficit of a pension fund. ### Prudent person principle - The prudent person principle remains an open norm at a high level; nFTK provides a tighter description of the existing norm but is far less prescriptive than the Solvency II equivalent. - Recommendation: authorities are recommended to tighten the prudent person regime closer to the Solvency II definition. ### Feasibility test: scope, methodology, and recommendation - Since 2015, pension funds must carry out a feasibility test at least yearly based on a stochastic calculation along a set of 2,000 scenarios over the lifetime of the liabilities, with a maximum of 60 years.14 - The calculation incorporates pension promise policy, premiums, indexation, and investments. - Key outputs: expected pension result (50th percentile) and pension result in a negative scenario (5th percentile). - The feasibility test provides sensitivity analysis on financial setup, expected pension results, underlying expectations, and corresponding risks. - Critique: the 60-year horizon dilutes the informative power to steer the financial condition of the pension fund. - Recommendation: authorities are recommended to introduce an additional feasibility test with a projection period of about 10 years to add clarity on pension fund performance. ### Third pillar overview - Third pillar includes annuity products and retirement savings plans by insurers and banks to supplement AOW and occupational pensions. - Product types: unit-linked products with profit policies and products with minimum return guarantees. - Payout forms: annuity or lump sum that must be used to purchase an annuity. - Supervision of third pillar is covered as part of insurance supervision. ### Market conduct supervision: intermediaries, inducements, and product regulation - Intermediaries must be licensed by the AFM; knowledge and ability requirements for insurance advisors introduced as of January 1, 2014 (Section 4:9, Subsection 2, Wft, and Section 5, BGfo). - Ban on inducements introduced January 1, 2013: - Forbids payment of inducements to independent financial advisers and intermediaries for selling complex financial products (section 86c, BGfo). Complex products include unit-linked insurances, payment (protection) insurance products, funeral insurance products, and capital insurance products. - Ban does not apply to non-life insurance and simple life risk products. - For product providers who advise and sell directly, advisory fees and distributor fees must be separate from the premium. - Purpose: remove financial incentives that led to mis-selling scandals. - Mis-selling remediation: - More than 7 million unit-linked policies were sold in the 1990s without proper disclosure. - In 2010, insurers agreed to compensate policyholders (estimated cost of €3 billion). - In 2011 insurers began moving policyholders into corrected policies; MoF introduced strict requirements in 2015 for approaching policyholders; by end-2017 all policyholders should have been approached following AFM requirements. - Insurers under Solvency II reported no reserves/capital for additional mis-selling-related claims payments materializing. - Product development regulation (Section 32f, BGfo): - Financial enterprises must consider customer interests when developing new products; product must demonstrably balance interests. - Product development process should define responsibilities, set target audience boundaries, analyze scenarios, compare products, link processes in product chain, and evaluate timely. - Required questions: Does the product deliver value for money? Does it fulfill a predefined need for a target group? What is the outcome in different scenarios? Is the product needlessly complicated? - AFM monitors compliance by analyzing product data from third-party providers; in 2015, 6,277 products in 50 groups were analyzed (not only insurance products). ### Cross-border (FOS) enforcement challenges and recommendations - Enforcement of national-specific legislation in an FOS environment is challenging due to reduced information from home supervisors. - Prudential regulation enforcement less problematic given harmonized EEA reporting; market conduct legislation (e.g., ban on inducements, product development process) faces challenges because products offered by institutions without a Netherlands office are excluded from scope. - Recommendation: AFM should consider including product regulation for all products offered in the Netherlands regardless of provider location and establish mechanisms to credibly enforce national market conduct regulation in FOS operations. ### Pension Communication Act (PCA), transparency, and access to advice - PCA (effective July 1, 2015) introduced norms for clearer, targeted communication, taking behavioral economics lessons into account; previous detailed provisions providing full information were too much and difficult for consumers to absorb. - Under PCA, trustees must provide scheme members and pensioners access to information on the likelihood of the pension outcome sufficient to activate members to adjust expenditures or prepare for a lower standard of living if applicable (Article 38, PW). - Pension 123 self-regulation aims to make certain information comparable and takes a layered approach. - DNB and AFM jointly supervise PCA compliance: DNB assesses financial setup of information; AFM assesses whether information is balanced, correct, comprehensible, and suitable; results will feed into supervisory actions. - DNB and AFM advocated disclosure of asset management and pension administration costs; Pensioenfederatie provided detailed guidance on cost disclosure. - Outcomes: underreporting exposed, benchmarking effects emerging, trustees renegotiating costs with asset managers or administrators. - Challenges on access to advice after inducement ban: - AFM running a project to assess implications of ban on inducement for accessibility of financial advice. - Other countries (e.g., United Kingdom and several Scandinavian countries) have considered mechanisms to secure access to financial advice for populations unwilling to explicitly pay; a financial checkup at accessible cost is one consideration. - Recommendation: authorities are recommended to introduce mechanisms to secure financial advice that has become critical when pension fund benefits are under-delivering and old age income risks are shifting to individuals. *Source: IMF staff report excerpt on the Netherlands (nFTK, pension supervision, market conduct, and communication).* ### 129. The pension sector is in transition and a new model is in discussion. Discussions are ### 129. The pension sector is in transition and a new model is in discussion. Discussions are ### Pension sector transition and policy recommendations - Discussions are under way to determine a new structure for the pension system, which may include shifting risks to the participants. - Main issues to be addressed by the new system: - lack of trust created by the uncertainty of the level of benefits or absence of a guarantee; - deficient portability of the pensions, necessary due to the new labor environment with higher self-employment and more frequent job shifting. - If the new structure includes risk-shifting to participants, it should introduce awareness mechanisms so participants can objectively judge longevity and investment risks they might assume. - Advice to second-pillar pension participants provided by employers needs stronger regulation. - The advice provided by a pension fund is regulated under the PW and is lenient when compared to the requirement for advice provided under the Wft. - No rules on the amount of costs or the suitability of the product are incorporated into the PW. - Recommendation: - 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. - Harmonization will be more relevant when more choices become available for pension participants. ### Stability of the insurance sector — Market structure and performance - Insurance penetration and density (2014): - Total insurance penetration: 11.12 percent of GDP. - Non-life (general) penetration: 8.50 percent of GDP (Europe average: 3.34 percent). - Life penetration: 2.63 percent of GDP. - Total gross premiums (2014, in millions of U.S. dollars): Life NLD 21,370; Non-life NLD 56,301; Total NLD 73,706. - Total density (USD per capita, 2014): Life NLD 1,257; Non-life NLD 4,068; Total NLD 5,325. - Drivers of high non-life penetration and density: - Health insurance is included in non-life statistics; health insurance is mandatory social insurance supplied by the private sector. - Over 80 percent of the non-life premium corresponds to health insurance. - Life insurance penetration appears relatively low because mandatory second pillar pensions are provided by pension funds; insurers provide only a small portion of pensions and manage assets of several pension funds accounting for €80 billion out of a total of €1.2 trillion in mandatory pension savings. ### Insurance sector size, market presence, and trends - Sector contribution and assets (2014–2015): - Insurance sector accounts for about 17 percent of the financial sector’s assets, with assets just over 140 percent of GDP. - About 50 percent of those assets are related to international activities. - Number of insurers and employment: - Decline from 450 insurers in 1998 to just under 200 insurers domiciled in the Netherlands (117 writing non-life business and 39 life insurers in latest counts). - Employment in the sector fell from 65,000 in 2004 to 50,000 in 2014. - 2015 sector figures: - Assets of insurance sector about €495 billion and premiums of €72 billion in 2015. - Life sector gross premium in 2015: €14.5 billion; life premiums declined by 33 percent between 2011–15 and negative trend expected to continue in 2016. - Life insurers’ assets grew from €365 billion in 2011 to €422 billion in 2015 (16 percent growth). - Non-life premium (including health) about €57 billion and basically unchanged since 2011. - Causes of life premium decline: - Loss in image after mis-selling of unit-linked policies. - Banking sector savings products (with same fiscal benefits since 2008) replacing life products. - Low interest-rate environment reducing attractiveness of life policies. - Capitalization and Solvency II: - Strong capitalization in preparation for Solvency II compliance during 2014 contributed to asset growth and market valuation effects. ### Health insurance (scope note) - Health insurance is mandatory, offered by private insurers with the same standard coverage, no underwriting, and the same premium regardless of age or state of health. - Risk equalization is in place to compensate insurers for different risk profiles assumed. - The health insurance sector is not analyzed in this technical note due to its limited impact on financial sector stability (premium adjusted according to claims costs). ### Foreign participation and legal forms - Foreign insurers’ market participation (2014, percentage of total premium): - Total foreign insurers: Life 5.36 percent; Non-life 53.37 percent; Total 24.10 percent. - Branch offices: Life 0.39 percent; Non-life 17.54 percent; Total 7.08 percent. - Free provision of services: Life 0.48 percent; Non-life 13.87 percent; Total 5.71 percent. - Subsidiaries: Life 4.49 percent; Non-life 21.96 percent; Total 11.31 percent. - Note: Non-life insurance figures in Table 7 exclude health insurance. ### Market concentration and major groups - Market dominance: - Eight insurance groups account for 80 percent of the insurance market; excluding two purely health groups, six groups cover the broader market. - One group has recently been designated a G-SII. - Top insurers (2015 market shares): - Life sector top six account for 87 percent of gross premium; each of the largest six has above 10 percent market share. - Non-life sector top six account for 50 percent of gross premium; largest insurer has a 21 percent market share, next nine insurers account for 50 percent. - Selected listed market-share entries (2015, in percent of industry): - Life: 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. - Non-life: 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. ### Investment composition and asset-liability alignment - Life insurers’ investments (2014–2015 highlights, amounts in millions of euros): - Assets held for index-linked and unit-linked contracts: 12/31/14 €116,178; 12/31/15 €104,802. - Government bonds: 12/31/14 €118,036; 12/31/15 €112,959. - Corporate bonds: 12/31/14 €33,278; 12/31/15 €34,505. - Loans and mortgages to individuals: 12/31/14 €48,359; 12/31/15 €51,824. - Cash and cash equivalents: 12/31/14 €8,330; 12/31/15 €8,585. - Total assets: 12/31/14 €432,096; 12/31/15 €422,017. - Total liabilities: 12/31/14 €401,661; 12/31/15 €389,064. - Excess of assets over liabilities: 12/31/14 €30,434; 12/31/15 €32,954. - Non-life insurers’ investments (2014–2015 highlights, amounts in millions of euros): - Government bonds: 12/31/14 €18,914; 12/31/15 €17,721. - Corporate bonds: 12/31/14 €13,590; 12/31/15 €11,360. - Collective Investment Undertakings: 12/31/14 €7,896; 12/31/15 €7,846. - Insurance and intermediaries receivables: 12/31/14 €9,416; 12/31/15 €11,096. - Cash and cash equivalents: 12/31/14 €3,382; 12/31/15 €3,322. - Total assets: 12/31/14 €73,980; 12/31/15 €72,917. - Total liabilities: 12/31/14 €48,947; 12/31/15 €47,418. - Excess of assets over liabilities: 12/31/14 €25,033; 12/31/15 €25,499. - Asset allocation characteristics: - Unit-linked business (investment risk borne by policyholders) accounted for 28 percent of investments in 2014 and 26 percent in 2015. - Life insurers’ investments: over 55 percent held in bonds; loans (mainly mortgages) about 25 percent; variable income including collective investments about 5 percent; cash less than 5 percent. - Non-life insurers’ investments: cash and deposits about 10 percent (about 17 percent of which is in collective investments); fixed income dominant at 77 percent in 2015 (68 percent in 2014); equity investments correspond to 6 percent in 2015. _Italic source: IMF technical note content unit cr1794 (Netherlands section)._ ### 139. The quality of the fixed income investments is higher in the life sector. The exposure to ### cr1794 - 139. The quality of the fixed income investments is higher in the life sector. The exposure to ### Fixed-income investment quality and country exposure - Life sector: governments correspond to 77 percent (2015) of the life fixed income investments; corporate bonds constitute the remainder. - Non-life sector: governments correspond to 58 percent of the non-life fixed income investments; corporate bonds constitute the remainder. - Exposure to highly rated countries: - Life sector: 69 percent of the fixed income investments. - Non-life sector: 59 percent of the fixed income investments. - Interpretation: The lower quality (relatively higher corporate exposure) in the non-life sector could indicate a 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 excerpts (country and issuer breakdowns, 2014–Q3-2015, in millions of euros): - Life — By type of issuer: - Corporate securities: 33,438 (22 percent of class) and 34,063 (23 percent of class) - Government: 118,124 (78 percent of class) and 116,211 (77 percent of class) - Life — By country: - GERMANY: 40,106,444 (27 percent) - NETHERLANDS: 37,994,744 (25 percent) - FRANCE: 17,134,155 (11 percent) - AUSTRIA: 8,846,588 (6 percent) - Other: 46,192,795 (31 percent) - Non-Life — By type of issuer: - Corporate securities: 13,825 (42 percent of class) and 12,593 (42 percent of class) - Government: 19,146 (58 percent of class) and 17,578 (58 percent of class) - Non-Life — By country: - NETHERLANDS: 9,033 (30 percent) - GERMANY: 3,919 (13 percent) - FRANCE: 3,186 (11 percent) - UNITED STATES: 1,731 (6 percent) - Other: 12,302 (41 percent) - Source: Dutch authorities. ### Non-life sector performance and competitiveness - The non-life sector is highly competitive, not growing, and profitability remains a challenge. - Market characteristics and pressures: - Lack of growth in the non-life market is interpreted as a saturated market. - Competition is at national and European level, with foreign insurers accounting for over 50 percent of the business (excluding health). - EU single market constraints make it difficult for domestic insurers to adjust prices to return to profitability. - Observed behavior: - Long-lasting negative underwriting results when excluding investment return. - Insurers focus on lowering costs rather than increasing premium. - Figures referenced: - Figure 4: Non-life (Excluding Health) Underwriting Performance, 2007–14 (showing negative underwriting performance excluding investment returns) - Figure 5: Non-life Sector (Excluding Health) Cost Ratio including Acquisition Costs, 2008–14 (cost ratio in range depicted between 10.5 and 13.5 percent across 2008–2014) ### Life sector vulnerabilities: low interest rate environment - Reported statistics and exposures: - About 40 percent of the life business has a guaranteed investment return rate (sources: EIOPA, Moody’s Investors Service, and Standard & Poor’s Ratings Services, May 2014). - The average guaranteed rate is 3.6 percent. - Reported investments spread: about 0.2 percent (positive but very small). - Duration gap between assets and liabilities: 5.5 years (indicating important duration mismatch and reinvestment risk). - Consequences: - The small investment spread combined with a 5.5 year duration gap could reduce the investments spread or turn it negative in the current low interest rate environment. - Life products have lost attractiveness (reduction in premium production), exacerbating stability concerns. - Table 14 excerpts (Selected EU Countries: Life Sector Duration Spread Exposure, 2014): - Germany: gt 10 years duration gap; Share of products with guaranteed rate (%): 75; Average guaranteed rate: 3.1; Investment spread (%): -0.4 - Sweden: gt 10 years; 70; 3.3; -0.5 - Austria: gt 10 years; 58; 30.9; (investment spread not shown) - 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 - Notes from table: - 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. ### Solvency position under Solvency II and related measures - Solvency ratios: - High solvency ratios under Solvency I have significantly declined under Solvency II, but on average the market remains solvent under the new regime. - Preliminary 2014 Solvency II parallel run showed a solvent market with significantly lower solvency ratios; this was confirmed by reported numbers at end-Q4-2015. - Table 15 (Preliminary Assessment of the Effect of Solvency II on the Solvency I Ratios, 2014, in percent of required capital): - Life: Solvency I = 244; Solvency II = 146 - Non-life: Solvency I = 315; Solvency II = 167 - Reinsurer: Solvency I = 692; Solvency II = 282 - Note: Solvency II ratios are preliminary and based on the parallel run of Solvency II reporting for 2014. - Reduction in available capital resources under Solvency II (Q4-2015 comparisons): - Table 16 (Available capital resources over Minimum Capital Requirement, in percent of required capital): - Life (long-term): Solvency I = 775; Solvency II = 408 - Non-life (general): Solvency I = 966; Solvency II = 502 - Reinsurance: Solvency I = 1,915; Solvency II = 789 - Table 16 (Available capital resources over Prescribed Capital Requirement, in percent of required capital): - Life (long-term): Solvency I = 259; Solvency II = 171 - Non-life (general): Solvency I = 282; Solvency II = 191 - Reinsurance: Solvency I = 671; Solvency II = 209 - Observed reductions: maximum reduction in available capital resources over prescribed capital of 69 percent for reinsurers and minimum reduction for non-life insurers of 32 percent (comparison to 2015 numbers under Solvency I). - UFR and VA impacts: - DNB estimated effects of UFR extrapolation and VA on own funds of top six life insurers using cash flow data from 2016 EIOPA stress test. - Method summary: - Risk-free yield curve based on Euro swap curve via par swap curve available up to 50 years. - VA effect adjusted by a parallel shift of the risk-free curve for durations up to 20 years by corresponding value (18 basis points in 2Q-2016) and then extrapolated to the UFR. - Findings: - Correcting for the UFR effect corresponds to a very material increment in the liabilities. - Effect of VA alleviation is important but lower than the UFR removal effect. - Dynamic of UFR benefit for closed blocks: - A closed block of business will lose approximately 30 percent of the UFR benefit after 5 years and over 50 percent after 10 years. - Insurers will have to increase their own funds by 20 percent every five years to maintain their existing own funds (assumption: constant SCRs). - Given low amounts of new business, the SCR of Dutch life insurers would typically decrease (apart from possible LAC DT effects). - Implication: Additional own funds required are not expected to drive solvency ratio below intervention points; additional capital left to insurers’ management discretion in the near term, but long-term de-risking or substantial capitalization may be required. - Policy recommendations and supervisory actions: - DNB should maintain forceful discussions with the sector to remove fragility, supported by second pillar requirements of sound risk management, including imposing recovery and resolution plans with credible managerial actions. - DNB should closely monitor the transition into Solvency II and use its position in EIOPA to have the following reviewed: - UFR extrapolation methodology as part of the review of the long-term guarantees (LTG) measures scheduled in 2020. - LAC DT in the SCR review scheduled in 2018. - VA in the review of the LTG measures in 2020. - DNB actions already taken: - Public statements about the UFR. - Taking the lead on LAC DT in EIOPA’s SCR review project group. - An internal theme note on the consequences of the VA. - Supervisory tools recommended: - Closely monitor elements that limit economic valuation of liabilities. - Use Pillar 2 powers to consider dividend payout restrictions and capital add-ons based on degrees of impact that VA and UFR adjustments have on solvency positions. ### Risk management, ORSA, and supervisory use - ORSA implementation: - DNB introduced in 2014 an annual submission of the own risk assessment; this evolved into ORSA under Solvency II. - In 2014 insurers performed ORSA-like Own Risk Assessment (Eigen Risicobeoordeling) and submitted results to DNB. - ORSA submission is annual; DNB has received the third set of ORSAs and, for 2016, the reporting obligation is incorporated into the standard reporting system. - DNB’s review and feedback completed compliance with Solvency II Directive (Article 45) and pertinent EIOPA Guidelines (7, 8, 10, 11, 13, 17, and 18). - Preparatory work: pilot program, round table sessions, voluntary ORSA submissions, evaluation, benchmarking, and feedback at individual and industry levels. - Benefits and content of ORSAs: - 2016 ORSAs of top six insurers evolved into an internal management tool including processes to identify, assess, monitor, manage, and report current and forward-looking risk and capital positions. - ORSAs include emerging risk analysis, strategic scenarios, top risks management, reverse stress testing, and sensitivity analysis for a three-year operational horizon. - Both capital sufficiency and liquidity are tested. - Risk appetite and governance: - ORSAs are guided by risk appetite; significant risks prompt elimination or tightened monitoring. - Monitoring linked to recovery plans with early warning indicators and triggers. - Managerial actions have been taken to improve past ORSA results. - Main risks for top six insurers: - Credit risk, interest rate risk, policyholder behavior, equity risk, and longevity risk. - Capital largely held to protect against these adverse developments. - Areas for ORSA improvement (to complement Solvency II first pillar): - Encourage discussion of diversification benefit in ORSAs: - Diversification benefit among top insurers varies from 23 percent to over 55 percent of the gross SCR; can be as high as 69 percent as a percentage of market risk. - Sensitivity analysis and scenarios affecting diversification should be included. - LAC DT impact: - Varies from almost zero to 25 percent of gross SCR; comment on scenarios affecting LAC DT recommended. - Include additional scenarios where internal model assumptions could break down. - Discuss feasibility of management actions, particularly in crisis mode, in detail. - Improve reverse stress tests to include detailed scenario descriptions rather than a series of sensitivities. *Source: Dutch authorities; EIOPA; Moody’s Investors Service; Standard & Poor’s Ratings Services (text as provided).* ### 154. The DNB relies on the EIOPA stress test for systemic risk and macroprudential ### The DNB relies on the EIOPA stress test for systemic risk and macroprudential ### DNB involvement and supervisory practice - 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." - The DNB does not perform market-wide stress tests; insurers perform stress tests and sensitivity analysis as part of the ORSA reporting. - ORSA: - "All of them include stress tests that are relevant to each company." - ORSA is an important microprudential tool and "can also be used to assess possible systemic risk in the market." - The ORSA should reflect the company’s view of risk; therefore, the DNB is advised that a market-wide stress test is the best way to gain consistent application of a specific scenario across the whole market. ### Recommendations on stress testing - 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). - The DNB should: - Define its specific stress scenarios. - Introduce annual market-wide stress tests to complement the EU-wide stress test. - Rationale: - EIOPA exercises may not cover important domestic scenarios (for instance, non-life insurers were not stressed under the EIOPA exercise). - Market-wide tests ensure consistent application of scenarios across insurers. ### 2016 EIOPA stress test: participation, scenarios, and process - Participation and coverage: - "The six largest life insurers participated in the 2016 EIOPA stress test, accounting for almost 90 percent market share." - The DNB’s guidance resulted in resubmissions in all cases, sometimes multiple times. - Several checks were carried out, including consistency of the Day One submission with the baseline balance sheet. - Exercise publication and timeline: - Stress tests package published on EIOPA’s webpage in May 2016, with a July 2016 deadline for submissions to NCAs. - Two scenarios in 2016 exercise: - Scenario 1 LY (S-LY): prolonged low yield environment; assumes lower risk free rates used to value assets and liabilities, low swap rates, and lower UFR as a possible consequence of prolonged low yields. - Scenario 2 DH (S-DH): combination of low interest rate and market shocks; 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 ECB’s financial shock simulator). Accompanied by a qualitative questionnaire investigating second-round effects. ### Key results and analytical implications - Importance of the VA (Volatility Adjustment) for the Dutch market: - In some cases under S-DH there is a "controversial positive impact on own funds." - "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." - Spread increase for assets in Dutch insurers’ portfolios is smaller than the increase of spreads for assets used to fix the VA (which considers assets of lower rating). - The duration of liabilities in the Netherlands is relatively long; therefore, the effect of the VA on liabilities is relatively high. - VA methodology incentives and vulnerabilities: - VA is based on a currency-specific reference portfolio representative of EU insurers’ portfolios. - The VA allows for "65 percent of the risk-adjusted spread to be used in discounting the technical provisions." - Incentive: insurers with better-rated investment portfolios may have to align composition with the reference portfolio to protect Solvency II own funds against VA variability. - Even with the 65 percent application factor, "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." - Systemic liquidity risk from VA-centered hedging: - Common reference portfolio creates incentives to hedge the same portfolio across market participants. - Hedging could be implemented with levered positions using derivatives; margin calls could affect liquidity of a large part of the insurance sector in a stress scenario. - Recommendation: DNB should monitor hedging strategies in place to minimize VA fluctuation effects for possible liquidity shocks. - Vulnerability under S-LY (lower UFR): - Long liability duration creates significant vulnerability under S-LY: - "Notwithstanding the use of interest rate hedging instruments, the effect of the S-LY is substantial, reducing own funds substantially for several insurers." - Existing hedging does not work well in S-LY because UFR changes outside Solvency II framework are usually not hedged. - "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." - The macroeconomic environment as of June 2016 presents an even more severe scenario than S-LY: the June 2016 market curve without UFR extrapolation yields lower discounting than S-LY, leading to lower solvency positions than S-LY. ### Interlinkages with the financial sector and key exposures - Derivatives and duration exposure: - Insurers use derivatives (in particular interest swaps) to manage interest rate risk for liabilities with long duration and return guarantees. - "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." - Duration is even larger under S-LY: "63 percent of the aggregated SCR." - Implication: solvency of insurers depends highly on issuers of the swaps; DNB should monitor main counterparties. - Search for yield and potential interconnectedness: - Insurers investing to increase yield could switch to riskier asset classes or increase yield on government securities via securities lending or selling CDS on corresponding corporate entities; both increase interconnectedness with the financial sector. - Liquidity risk is high if insurers hold long-dated liabilities that can be called without major delays or penalties. - Recommendation: DNB should closely monitor search for yield activities in the sector. - Nontraditional noninsurance (NTNI) activity: - NTNI includes activities involving maturity transformation, liquidity mismatch, or leverage (examples: products with liquid liabilities where insurers engage in derivatives or securities lending, and complex hedging). - NTNI may increase insurers’ fragility and interconnectedness and can lead to accelerated asset liquidation. - NTNI is an important factor in G-SII scoring: weight of 45 percent for the total G-SII score. - Other G-SII score weights: size (5 percent), cross-jurisdictional activities (5 percent), interconnectedness (40 percent), substitutability (5 percent). - Currently, one insurer in the Netherlands has been designated G-SII. - Mortgage exposure: - Mortgages have gained attraction as investments that match long-term liabilities, providing returns "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." - Insurers’ share of mortgage investments grew 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." - Life insurers increased 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." - For some insurers, mortgages and related loans are "as high as 40 percent of their portfolios." - DNB actions: started analysis on underwriting quality and cost of capital when mortgage is issued by a bank or other financial institution; reduction of concentration risk in mortgages imposed where deemed excessive; downward correction in mortgage valuation for Solvency II balance sheet assessment carried out in 2015. - Capital management instruments: - Under the new Solvency framework, insurers are exploring instruments like longevity swaps or mass lapse reinsurance. - DNB "engages in an active dialogue with all parties involved" and 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." ### Stability of the pension sector — AOW (first pillar) structure and finances - System structure: - Three pillars: AOW (statutory pay-as-you-go), supplementary occupational pensions (fully funded, second pillar), and individual pension products (third pillar). - AOW is financed on a pay-as-you-go basis by government; provides basic old age income; "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." - Second pillar: occupational pensions cover "90 percent" of the working population through automatic participation. - Governance: AOW administered by the Social Insurance Bank (SVB); Ministry of Social Affairs and Employment (SZW) appoints board and advisory board members and approves annual plan and budget. - Measures taken to reduce AOW budget cost: - "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." - Fiscal vulnerability and GAP Index: - The Global Aging Preparedness Index (GAP Index) (October 2010) ranked the Netherlands: - 1st place for resilience against income adequacy risk. - 19th position (out of 20 analyzed countries) for fiscal cost vulnerability. - 2013 edition: Netherlands remained 1st for income adequacy risk and improved to 17th for fiscal cost vulnerability. - "Currently, about one third of the expenses are covered by the government contributions." - Key financial indicators for AOW, 2011–15 (EUR mln): - Premiums: 2011: 20,759; 2012: 22,567; 2013: 24,181; 2014: 23,408; 2015: 24,100 - Government Contribution: 2011: 9,236; 2012: 8,848; 2013: 8,538; 2014: 10,711; 2015: 11,600 - Expenses (EUR mln): 2011: 29,995; 2012: 31,415; 2013: 32,719; 2014: 34,119; 2015: 35,700 - Note: "Expenses in the first pillar include benefit payouts." *KINGDOM OF THE NETHERLANDS—NETHERLANDS. INTERNATIONAL MONETARY FUND* ### 175. The third pillar covers the provision of pensions through annuity products and ### The third pillar covers the provision of pensions through annuity products and retirement saving plans issued by insurers and banks. ### Third pillar: products and participants - Third pillar provision: annuity products and retirement saving plans issued by insurers and banks. - Total assets under annuity contracts: relatively small (as indicated by life insurance numbers). - Main participants: self-employed workers and higher-income workers. - Product types offered: unit-linked products, with-profit policies, and products with minimum return guarantees. - Payout forms: directly as an annuity or as a lump sum that must be used to purchase an annuity. ### Second pillar: scale and DB/DC composition - At end-2015, the second pillar pension system of the Netherlands was the sixth largest pension market globally in terms of assets. - Occupational pension assets in the Netherlands ranked first in relation to GDP. - Global trend: increasing prevalence of defined contribution (DC) schemes; example: Australia over 85 percent of pension assets held by DC schemes. - Netherlands composition: together with Japan and Canada, the Netherlands maintains defined benefits (DB) schemes accounting for over 95 percent of pension assets. - For the Netherlands: less than 5 percent of the assets related to a DC scheme. - Fixed income proportion of investments: over 50 percent. - Equity share: a third of the investments. ### Asset allocation and DB/DC split (2015) - Fixed income investments: over 50 percent of assets. - Equity investments: about one third of assets. - Real estate-related investments: 8.5 percent. - Alternative investments: 4.5 percent. ### Occupational pensions: role and indexing - Total expenses of the second pillar in 2015: €27 billion. - First pillar AOW in 2015: €36 billion. - Coverage in employment: more than 90 percent of employees are active members of occupational schemes. - Scheme design: about 90 percent of all active members participate in a career-average salary defined benefit scheme. - Indexation: usually indexed to wage growth or price inflation; indexation is not guaranteed and depends on the financial situation of the fund. - Some funds operate as ‘collective defined contribution’ plans but are usually DB in nature; accruals may be reduced if fixed contributions are insufficient. ### Legal form and mandatory industry-wide funds - All pension funds organized as a foundation (Stichting). - Pension fund establishment: by a company, industrial sector (branch), or professional group. - Company pension funds legally independent from companies. - Employers do not face a general statutory obligation to make pension commitments, but the PW (Pensioenwet) safeguards rights once commitments are made. - Mandatory Membership of an Industry-wide Pension Fund Act of 2000: allows employers’ organization and trade unions to request that a pension agreement be declared binding for all employers and employees in a branch. ### Market structure and consolidation (2011–15) - Number of pension funds: - 2011: 454 - 2012: 414 - 2013: 382 - 2014: 365 - 2015: 320 - Industry-wide pension funds: - 2011: 77; 2015: 67 - Company pension funds: - 2011: 359; 2015: 236 - Professional pension funds including others: 18 (2011) and 17 (2015). - Assets under management (EUR bln): - 2011: 804 - 2012: 918 - 2013: 953 - 2014: 1,132 - 2015: 1,146 - Technical provisions (EUR bln): - 2011: 819 - 2012: 900 - 2013: 867 - 2014: 1,051 - 2015: 1,122 - Average cover ratio in percent: - 2011: 98 - 2012: 102 - 2013: 110 - 2014: 108 - 2015: 102 - Market concentration: the 10 largest pension funds account for 70 percent of the total market in terms of assets. - Top 10 pension funds and assets (March 2016, in millions of euros): - ABP: 357,632 - Zorg en Welzijn: 171,529 - Metaal en Techniek: 64,280 - Bouwnijverheld: 51,196 - Metalektro, bedrijfstakpensioenfonds: 42,500 - ING: 26,987 - Shell: 26,066 - ABN AMRO Bank: 25,392 - Rabobankorganisatie: 23,822 - PGB: 22,273 ### Administrative expenses (2011–15) - Top 5 expenses as percent of total assets: - 2011: 0.10 - 2012: 0.10 - 2013: 0.09 - 2014: 0.08 - 2015: 0.07 - Total expenses as percent of total assets: - 2011: 0.21 - 2012: 0.17 - 2013: 0.16 - 2014: 0.17 - 2015: 0.17 - Top 5 expenses as percent of investments: - 2011: 0.10 - 2012: 0.10 - 2013: 0.09 - 2014: 0.08 - 2015: 0.07 - Total expenses as percent of investments: - 2011: 0.22 - 2012: 0.17 - 2013: 0.16 - 2014: 0.18 - 2015: 0.18 - Top 5 expenses as percent of contributions: - 2011: 2.70 - 2012: 2.76 - 2013: 2.52 - 2014: 2.77 - 2015: 2.66 - Total expenses as percent of contributions: - 2011: 5.78 - 2012: 4.90 - 2013: 4.51 - 2014: 6.48 - 2015: 7.11 - Average administrative expenses excluding top five: about 13 percent of contributions in 2015. ### Contributions and benefits (2011–15) - Number of active participants (in thousand): - 2011: 5,823 - 2012: 5,699 - 2013: 5,577 - 2014: 5,499 - 2015: 5,480 - Number of beneficiaries (in thousand): - 2011: 2,875 - 2012: 3,009 - 2013: 3,057 - 2014: 3,125 - 2015: 3,191 - Contributions from employers (EUR mln): - 2011: 20,977 - 2012: 22,158 - 2013: 23,761 - 2014: 21,595 - 2015: 19,350 - Contributions from employees (EUR mln): - 2011: 9,642 - 2012: 10,166 - 2013: 10,561 - 2014: 10,107 - 2015: 9,269 - Total contributions (EUR mln): - 2011: 30,619 - 2012: 32,324 - 2013: 34,322 - 2014: 31,702 - 2015: 28619 (note: as provided) - Benefits (EUR mln) — retirement pension (temporary, lifelong): - 2011: 18,831 - 2012: 19,761 - 2013: 20,457 - 2014: 21,299 - 2015: 22,144 - Dependants' pension (EUR mln): - 2011: 4,554 - 2012: 4,636 - 2013: 4,710 - 2014: 4,787 - 2015: 4,880 - Disability (EUR mln): - 2011: 566 - 2012: 516 - 2013: 488 - 2014: 469 - 2015: 457 - Other benefits (EUR mln): - 2011: 1,141 - 2012: 1,022 - 2013: 851 - 2014: 596 - 2015: 455 - Total benefits (EUR mln): - 2011: 25,092 - 2012: 25,935 - 2013: 26,506 - 2014: 27,151 - 2015: 27936 (note: as provided) - 2015 contributions: almost €29 billion, nearly 70 percent paid by the employer. - 2015 benefits: €27 billion or 98 percent of the contributions. - Change 2011–2015: contributors decreased by 6 percent; beneficiaries increased by 11 percent. - Implication: outflows expected to exceed contributions in coming years, increasing pressure on investment returns for long-term sustainability. ### Coverage ratio and long-term interest rate (1999–2015) - Coverage ratio: declined from almost 200 percent in 1999 to 102 percent in 2015. - Minimum regulatory requirement: 105 percent. - Long-term interest rate: fell from 6 percent in 1999 to just over 1 percent in 2015. - Correlation: coverage ratio strongly correlated with long-term interest rate given large fixed income exposures of long duration. ### Investments: detailed asset classes (2014–15, Q4) - Total investments at funds' risk: - 2014 Q4 excl. derivatives: 1,074,326 - 2014 Q4 incl. derivatives: 1,133,424 (100.00 percent) - 2015 Q4 excl. derivatives: 1,108,082 - 2015 Q4 incl. derivatives: 1,148,156 (100.00 percent) - Real estate investments: - Total real estate investments 2014 Q4 incl. derivatives: 96,565 (8.52 percent) - Total real estate investments 2015 Q4 incl. derivatives: 106,229 (9.25 percent) - Quoted real estate 2015 Q4: 50,261 (4.38 percent) - Unquoted real estate 2015 Q4: 42,825 (3.73 percent) - Total equities 2015 Q4 incl. derivatives: 346,412 (30.17 percent) - Mature markets 2015 Q4 incl. derivatives: 289,485 (25.21 percent) - Emerging markets 2015 Q4 incl. derivatives: 56,927 (4.96 percent) - Total alternative investments 2015 Q4: 59,400 (5.17 percent) - Private equity 2015 Q4: 42,713 (3.72 percent) - Infrastructure 2015 Q4: 16,465 - Total fixed yield securities 2015 Q4 incl. derivatives: 620,260 (54.02 percent) - Government bonds, Non index-linked 2015 Q4 incl. derivatives: 341,812 (29.77 percent) - Index-linked bonds 2015 Q4 incl. derivatives: 50,574 (4.40 percent) - Mortgage loans 2015 Q4: 33,166 (2.89 percent) - Credits 2015 Q4: 157,579 (13.72 percent) - Short term claims on banks 2015 Q4: 37,129 (3.23 percent) - Hedge funds 2015 Q4: 27,938 (2.43 percent) - Liquid assets 2015 Q4: 20,504 (1.79 percent) ### Fixed income ratings (Q4-2014 and Q4-2015) - Total fixed yield securities: - Q4-2014: 554,641 - Q4-2015: 580,734 - AAA: - Q4-2014: 219,372 (39.55 percent) - Q4-2015: 224,013 (38.57 percent) - AA: - Q4-2014: 136,394 (24.59 percent) - Q4-2015: 128,718 (22.16 percent) - A: - Q4-2014: 49,798 (8.98 percent) - Q4-2015: 53,356 (9.19 percent) - BBB: - Q4-2014: 88,143 (15.89 percent) - Q4-2015: 87,317 (15.04 percent) - Lower than BBB: - Q4-2014: 40,549 (7.31 percent) - Q4-2015: 45,757 (7.88 percent) - No rating: - Q4-2014: 20,384 (3.68 percent) - Q4-2015: 41,574 (7.16 percent) - Investment grade share dropped from 90 percent to 85 percent in 2015. - Over 60 percent of securities are AAA or AA rated. - Non-rated securities doubled to 7.2 percent at end-2015 (noted as 7.16 percent in table). ### Mortgage exposure (Q1-2015 to Q1-2016) - Total pension fund assets (million euros): 1,999,075 - Mortgage exposures of pension funds (million euros): 37,085 - AAA: 21,477 - AA: 9,277 - A: 1,007 - BBB: 584 - Lower than BBB: 467 - No rating: 4,273 - Share of mortgage exposure Q1 2015 (as % of total assets): 2.17 - Share of mortgage exposure Q1 2016 (as % of total assets): 3.09 - Pension funds with more than 10 percent of their assets invested in mortgages account for 2 percent of total pension fund assets. - Mortgage quality Q1-2016: 86 percent rated A or higher, 3 percent rated BBB or lower, and 11 percent without any rating. ### EIOPA stress testing on occupational pensions (2015) - EIOPA stress test conducted in 2015; first run for pension funds. - DB schemes: two adverse macroeconomic scenarios and one longevity scenario tested. - Macro scenario 1: lower interest rates, increasing spreads and declines in asset prices. - Macro scenario 2: larger interest rate decline, but fall in certain asset class prices was lower. - DC schemes: two asset price shock scenarios, two low return scenarios, and a longevity scenario tested on future retirement income of three representative plan members. - Dutch participation: - Five Dutch pension funds in the DB stress test. - Two Dutch pension funds in the DC satellite module. - Together they represented over 50 percent of the pension market in terms of technical provisions. - DB stress test approaches: - National balance sheet basis. - Common methodology using market-consistent valuation for all assets and liabilities, and including unconditional liabilities plus all security and benefit adjustment mechanisms (conditional indexation and benefit reductions). - Observations and implications: - The common methodology is not used in any participating states and was seen as theoretical by participants. - Usefulness for the Dutch sector could be enhanced by running the EIOPA stress test with country-specific shocks while using the common methodology for European financial stability perspective. - Under Macro scenario 1 (national balance sheet basis), the weighted average assets over liabilities decreased from 100 percent to 74 percent for Dutch DB pension funds. - Main impact drivers: prescribed shocks to equity and property (price decrease more than 40 percent). - Dutch pension funds are more severely impacted because they invest relatively large amounts in non-fixed income (equity and property) compared internationally. - Under the common methodology, the excess of assets over liabilities of Dutch pension funds increased under stress due to an increase in the value of benefit reductions and a decrease in the value of future indexations, positively impacting the financial position by up to 20 percent of the assets. *Italic line: Content derived from the IMF chapter text provided.* ### 190. The satellite module for DC schemes assessed the resilience of future retirement ### cr1794 - 190. The satellite module for DC schemes assessed the resilience of future retirement ### Satellite module for DC schemes: shock results - Three representative plan members assessed. - Scenarios applied: - Two asset price shock scenarios. - One longevity scenario. - Two low return scenarios. - Replacement rate impacts: - Asset price shock scenario 1: replacement rates fell on average by about 6–7 percent. - Asset price shock scenario 2: replacement rates fell on average by 9 percent. - Low return scenarios: impact was as high as 14 percent. - Rationale: replacement rates of younger plan members are expected to be more exposed to low return scenarios (long-term shocks). ### Mortality Sensitivity Analysis - Mortality table practice: - Dutch Actuarial Association publishes mortality tables every two years. - Tables include a longevity improvement trend. - Most recent update published in September 2016. - Regular publication and use reduce probability of requiring larger increments in liabilities when tables are revised infrequently. - The latest mortality table adjustment is expected to require an increment of 0.3–0.7 percent of the liabilities, as estimated by the Actuarial Association. - Sensitivity exercise (based on mortality table published in 2014, without adjustments): - Selected participant: from a young pension fund (whole duration 24, duration of active participants 28). - Liabilities of this young group represent 14 percent of total liabilities of the fund. - Longevity shock applied to younger participants (age below 40 years): - Increasing expected life by 5 years: minor impact on whole pension fund liabilities of 1.8 percent. - Increasing expected life by 10 years: minor impact on whole pension fund liabilities of 3.3 percent. - Longevity shock applied to all participants: - 5 years mortality improvement: liabilities increase by 20.6 percent. - 20 years mortality improvement: liabilities increase by 40.1 percent. ### Recovery Plans and Benefit Cuts - Prevalence and viability of recovery plans: - Over 90 percent of the pension funds were in a recovery plan as of Q2-2016. - Recovery plans are viable when regulatory yield curves for asset valuation are used. - Regulation allows for up to 7 percent return for equity investments (noted as extremely optimistic). - Contributors to coverage ratio viability: - Excess investment returns over the risk-free interest rate included in plans are of decisive importance to viability. - Use of “premium cushioning” has a negative effect on recovery in a large proportion of funds. - Status at end-2015 and Q1-2016: - At end-2015, about 84 percent of all pension funds not fully reinsured or in liquidation were subject to a recovery plan. - At end Q1-2016, the average policy coverage of all pension funds had dropped to 102 percent. - Drivers of the 102 percent coverage: further decline in interest rates (positive return on fixed income), negative return on equity (contrary to regulatory allowed return), and a lower premium than required for new pension accruals. - Modeled representative pension fund (20-year roll forward): - Starting coverage ratio: 90 percent. - With positive excess investment return of 250 basis points over the risk-free rate and full technical premium charged: - Coverage ratio remains below minimum required coverage ratio of 104 percent for seven years. - Legal constraint: law does not allow funds to stay below minimum for more than five years, implying substantial benefit cuts would be required to return to minimum. - Excess investment returns needed to avoid substantial benefit cuts (with full premium charged): in the order of 400 basis points. - If only 90 percent of technical premium charged: necessary excess investment returns increase to 450 basis points. - Assessment: these levels of excess investment returns are not deemed probable given current low yield environment and limited financial space to increase risk appetite. - DNB report findings (May 2016, based on Q1-2016 figures): - Under unchanged circumstances, about 27 funds would be expected to make (unconditional) benefit reductions in 2017 affecting about 1.8 million participants. - Amount of reductions: on average 0.5 percent per annum. - Characterization: 0.5 percent is one tenth of the total projected deficit at the end of the recovery period (approximately 5 percent), because funds may smooth reductions over the recovery period of 10 years; only the reduction for the first year is unconditional. - Sensitivity to interest rates: - Interest rate drop of 50 basis points: would result in benefit reductions of 4 percent (which may be smoothened over 10 years) for 10.3 million participants. - Increase in risk-free interest rates of 50 basis points: would reduce number of affected participants to 0.9 million. - Table 26: Coverage Ratio of a Representative Pension Fund (selected entries preserved) - Year 1: 100% technical premium spread 2.5% = 90.0; 100% technical premium spread 4% = 90.0; 90% technical premium spread 4.5% = 90.0 - Year 2: 92.1; 93.4; 93.7 - Year 3: 94.3; 97.0; 97.5 - Year 4: 96.5; 100.8; 101.6 - Year 5: 98.9; 104.8; 105.9 - Year 6: 101.3; 108.9; 110.4 - Year 7: 103.8; 113.3; 115.1 - Year 8: 106.4; 117.2; 119.2 - Year 9: 109.0; 120.6; 122.6 - Year 10: 111.8; 123.5; 125.6 - Year 11: 114.3; 125.8; 128.0 - Year 12: 116.4; 127.8; 130.0 - Year 13: 118.2; 129.4; 131.7 - Year 14: 119.7; 130.8; 133.2 - Year 15: 120.9; 132.0; 134.4 - Year 16: 121.9; 132.9; 135.4 - Year 17: 122.8; 133.7; 136.3 - Year 18: 123.4; 134.4; 137.0 - Year 19: 124.0; 135.0; 137.7 - Year 20: 124.5; 135.5; 138.2 - Policy design considerations (paragraph 196): - When designing the new pension system, qualities that existed in the system should be reinstated, while adding portability. - Options discussed: - Lowering annual benefit accrual while ‘freezing’ premiums may allow funds to provide a guarantee without conditionality. - Creation of individual accounts to be used as buffers for maintaining guaranteed benefits in downturns or provide additional income in prosperous years. - Pension funds would need to explain and justify reasons for any reduction in individual accounts to maintain high fiduciary duty. - This system would complement the AOW benefits without government taking up additional fiscal liabilities. - Portability: DB fund will always be fully funded with corresponding adjustment of the individual account if necessary. ### Liquidity Risk in Pension Funds - DNB EMIR liquidity impact study (beginning of 2016): - Initiated because derivatives market converges towards cash only CSAs as a result of CRDIV and EMIR regulations. - Results: pension funds might have issues providing cash collateral for both interest rate swaps and FX derivatives in case of market stress. - Consequence: pension funds holding bonds may have to hold more cash, resulting in less income or increased liquidity risk. - DNB planned actions: - Start a project in early 2017 to identify liquidity policy and control measures pension funds have in place to mitigate increased liquidity risk. - Consider using TR data to analyze (sensitivities of) derivatives positions of the pension funds. - Quantified impacts from DNB study (footnote): - For an interest rate shock of 100 basis points the impact would be €44 billion. - For an exchange rate shock of 12.5 percent the impact would be €42 billion. - Assessed impact on retirement income: 3.1 percent over a 40-year time horizon on the basis of the 2015 Commission study. *Source: IMF staff summary of cr1794 - 190. The satellite module for DC schemes assessed the resilience of future retirement (Netherlands chapter).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1794.pdf_