Fitch Ratings says the rating outlook for the Dutch insurance sector is stable, indicating that a vast majority of Dutch insurer ratings are likely to be affirmed over the next 12-24 months.

Fitch's outlook assumes a continued, but weak, economic recovery in the Netherlands, with modest GDP growth. The outlook does not take into account potential exogenous shocks to the Dutch economy but will be updated to reflect such events if they occur.

"The Netherlands insurance market is well established, sophisticated and highly competitive," says David Prowse, senior director in Fitch's insurance team in London. "Ratings already take into account the severe pricing pressure threatening the profitability and even the viability of certain product lines. However, ratings also reflect the ambitious cost-cutting that insurers are carrying out to bolster their profitability. Successful implementation of these measures will be essential for insurers' prospects and is likely to be the main driver of ratings."

In the non-life sector, crucial success factors are disciplined underwriting, lower expense bases and cost-effective sales platforms. Fitch expects established insurers to develop web-based platforms in response to competition from increasingly popular internet providers.

Overall, Dutch insurers look set to be well capitalised under Solvency II. Aggregate capital surplus for the Dutch market under the fifth Quantitative Impact Study (QIS5), which captures more risks than the currently regulatory capital requirements, was EUR17.5bn. This figure is around EUR7.5bn lower than under the current regime, broadly mirroring the Europe-wide trend of reporting a reduced level of surplus capital under Solvency II.

Although Dutch insurers' earnings benefited from higher equity-market valuations and the tightening of credit spreads in 2010, in the medium term, Fitch expects profitability to be lower than pre-crisis levels as a consequence of lower interest rates and insurers' more cautious investment portfolios.

Fitch considers that the main risks to Dutch insurers' ratings over the next 12-24 months are failure to report sufficient operating profits, most likely caused by an inability to cut costs, and potentially unsustainable price competition. These risks are exacerbated by muted GDP growth and, for life insurers, the threat of prolonged low interest rates. However, the established insurers continue to have strong market positions and will be well placed if they succeed with their efficiency programmes.

The Dutch insurance sector is the fourth largest in the euro zone after France, Germany and Italy with total assets in excess of EUR400bn at end-March 2011. Total premiums in 2010 amounted to EUR76.9bn, comprising EUR21.5bn for life insurance, EUR13.1bn for non-life insurance and EUR42.4bn for accident and health insurance.

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