Solvency IIA comparison of the Dutch Non-Life Insurance MarketFY2016

September 2017

Solvency II finally in placeDiverse position of major players

After many years of deliberations, 2016 was the first year in which insurance companies had to report their solvency on Solvency II standard.

Although the regulations were provided a while ago, the details of all submissions and first independent reviews showed adjustments in several areas.

The main areas of attention and change related to:

The offsetting effect of tax (LAC DT) on required capital

Treatment of intra-group and non-insurance operations

Risk margin determinations

Contract boundaries for income protection products

NN NL Schade and Achmea Schade apply a Partial Internal Model, the other insurers apply the Standard Formula.

The size of the bubble represents the Solvency II ratio. The bigger the bubble, the higher the ratio.

Note: Univ contains both non-life insurance and re-insurance.

Solvency II benchmark non-life insurance2

AEGON NL Schade159%

Delta Lloyd Schade137%

NN NL Schade127%

a.s.r. Schade180%

Achmea Schade137%

Bovemij188%

Univ324%

NH1816183%

HDI-Gerling146%

Reaal Schade152%

0

100

200

300

400

500

600

700

800

900

0 200 400 600 800 1,000 1,200 1,400

SC

R (

m

ln)

Own funds (mln)

Own Funds versus SCR

Challenging profitability for multiple companiesCombined Ratio vs. Gross Premium Non-Life

With an average combined ratio of 103%, the non-life insurance sector was not a profitable business during FY2016.

The pie charts indicate the portfolio composition per insurer. The non-life market is to a large extend driven by

Motor insurance (liability + other),

Income protection insurance, and

Fire and other damage to property insurance.

Looking at the product portfolios there is no clear portfolio composition that yields the lowest combined ratio. Smaller insurers with a large share in Motor tend to perform better than the market average. Larger insurers with a large share in Motor and Fire tend to perform worse than the market average, in exception of a.s.r. Schade.

Solvency II benchmark non-life insurance3

AEGON NL Schade

Delta Lloyd Schade

NN NL Schade

a.s.r. Schade

Achmea Schade

Bovemij

Univ

NH1816

HDI-Gerling

Reaal Schade

90%

95%

100%

105%

110%

115%

0 500 1,000 1,500 2,000 2,500 3,000

Co

mb

ined

Ra

tio

Gross Premium Non-Life (mln)

Combined Ratio vs. Gross Premium Non-Life

Bovemij

Motor Property

Income protection General liability

Legal expenses Marine, aviation and transport

Other Non-proportional reinsurance

Underwriting Risk versus Provision and Net PremiumNon-life and health capital requirements

4

The left graph shows that larger insurance companies with a wider range of products (e.g. Delta Lloyd, a.s.r., Achmea) profit from their portfolio diversification with a relative low non-life SCR compared to the smaller competitors. Under Solvency I, the required capital amounted approximately 20% of the net premium whilst under Solvency II an average of approximately 35% is reported.

The outcome SCR Health risk is to a large extend driven by income protection products, which are valuated according to similar to life techniques (SLT). The relative size of SCR Health is mainly driven by the contract boundaries and to a less extend by the size and diversification of the portfolio. Due to this there is no clear trend among insurers with a larger or smaller Health portfolio.

Note 1: NN NL Schade has not been taken into account here since NN does not disclose the required capital for sub-insurance risksNote 2: NH1816 has a negative health provision (probably due to future premium income), thus causing a negative SCR-provision ratio of -826%Note 3: Health within non-life is mainly income protection and does not contain medical expenses (zorg)

44%

32%

44%

23%

33%

42%

56%

12%

30%

25%

33%37%

23%

33%

41% 39%

52%

45%

0%

10%

20%

30%

40%

50%

60%

Non-Life: Risk vs. Provision and Premium

Non-Life SCR as % of provision Non-Life SCR as % of net premium

Solvency II benchmark non-life insurance

34%17% 22%

9%

54%68%

44%

104%117%

59%

90%

43% 43%

146%

47%

91%

224%

-50%

0%

50%

100%

150%

200%

250%

Health Risk vs. Provision and Premium

Health SCR as % of provision Health SCR as % of net premium

SCR ComponentsUnderwriting risk exceeds market risk

* The market risk of NN NL Schade contains counterparty default risk** SCR components expressed as percentage of SCR

*** diversification benefit is benefit of diversification between insurance

risk, market risk and default risk, not within these modules.

The profile of solvency capital requirements (SCRs) of the non-life insurance companies show that on average insurance risk is the main component, followed by market risk. For NH1816, the SCR for market risk is even larger than insurance risk SCR.

Zooming in on the components, one sees that AEGON NL Schade and Reaal Schade have the least market risk. NN NL Schade reports their market risks on an internal model and is therefore obliged to cover sovereign bond investments as well, of which the risk offset by a dynamic Volatility Adjustment.

5

17% 27%43% 41%

65%35%

58%101%

31%9%

8%12%

6%

13%

18%0%

3%

15%4%

125%125% 105%

124%

110%125%

95%

57%

63% 135%

10% 10%11%

8%15%

12%

7%

5%

16%

6%

-38% -50%-29%

-57% -60% -57% -49%-32% -26% -46%

-22%-24%

-30%

-22% -33% -33%-21%

-33% -8%

-9%

10%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

AEGON NLSchade

Delta LloydSchade

NN NL Schade* a.s.r. Schade Achmea Schade Bovemij Univ NH1816 HDI-Gerling Reaal Schade

SCR Composition

Market Risk Default Risk Insurance risk Operational Risk Diversification LAC DT Other

Solvency II benchmark non-life insurance

6% cost of capital

rate hurdle

AEGON NL Schade

Delta Lloyd Schade

NN NL Schade

a.s.r. Schade

Achmea Schade

Bovemij

Univ

NH1816

HDI-Gerling

Reaal Schade

0%

10%

20%

30%

40%

50%

60%

0.0% 0.3% 0.6% 0.9% 1.2% 1.5% 1.8% 2.1% 2.4% 2.7%

Own investments: SCR as % versus expected investment yield

The challenge of making a sound return on capitalExpected investment income versus SCR

The SCR is quite a hurdle for insurance companies: it is roughly between 10% and 50% of their investments for general account.

This indicates that the non-life sector requires profitable new business (i.e. CoR < 100%) to finance its capital costs.

Based on the reported investment mix, an expected yield has been estimated (see yields below). This rate has been compared against the total SCR, expressed as a percentage of the investments for general account.

It is remarkable that the large insurance companies seem to make more than the cost of capital assumed by Solvency II (6%). Shareholders however, would expect more return on capital.

Expected yieldsFixed income sovereign: -0.1%, credit: 1%, equities: 3%,

real estate: 2%, loans & mortgages: 1.5%, other (alternatives, derivatives, cash positions): 1.5%

6

Vivat

Fixed Income Sovereign Fixed Income Credit

Equities Real Estate

Mortgages/Loans Other

high returns, low SCR

low returns, high SCR

SCR as percentage of own investments (general account)

Expected investment yield

Solvency II benchmark non-life insurance

LAC DT: moving target with large potential offsetting impact on SCR

LAC DT factor represents the percentage of tax recoverability (25% flat tax rate) which is used to offset the capital requirement. A full LAC DT factor of 100% represents a 25% deduction of the gross SCR (i.e. sum of basic SCR, SCR for operational risk and SCR adjustment for loss absorbing capacity of technical provisions).

LAC DT can be managed by identifying management actions that help recovering future profitability.

Guidance of DNB in February focused on: Ability to get to required solvency ratio after stress within reasonable time frame Ability to maintain expected taxable profits after a shock emerges Recoverability of DTA on the balance sheet

This has lead to several adjustments to the LAC DT methodologies.

7

73%78%

92%

72%

94%100%

74%

100%

0%

30%

0%

20%

40%

60%

80%

100%

120%

LAC DT Factor

Solvency II benchmark non-life insurance

Diversification: measuring and managingAnother offsetting element on the SCR

Diversification effects emerge, at several levels in the Solvency II framework:1. Diversification between market risk individual capital requirements (e.g. between credit risk and equity risk)2. Diversification between insurance risks individual capital requirements (e.g. between lapse risk and mortality risk)3. Diversification between combined market risk capital requirement, insu