Conclusion CPB and NMa: Room for Improvement in Competition in the Life Insurance Sector

The profit margins on the life insurance market are relatively high, efficiency is moderate and efficient production of policies only results in a larger market share to a limited extent. These are indicators that competition on the life insurance market is not optimal.

A possible cause of this is the limited incentive which insurance brokers have to find the best product for their customers. As a result, the pressure on life insurance companies to compete with each other decreases. Greater transparency with regard to the cost of life insurance and the remuneration of insurance brokers may promote competition on the life insurance market, according to the Netherlands Bureau for Economic Policy Analysis [Centraal Plan Bureau (CPB)] and the Netherlands Competition Authority (NMa) in the study which appeared today entitled 'Competition in Markets for Life Insurance'.

In this publication, CPB and NMa present the outcomes of empirical research into competition on the markets for life insurance. Life insurance includes a wide range of products, from simple lump sums and annuities to complex savings instruments linked to one's own home. In total, the annual premium revenues on the market amounted to approximately EUR 25 billion. The data for the research were derived from various sources, including a special survey held amongst consumers for this purpose and a database with the balance-sheet data of all life insurance companies active in the Netherlands.

Insurance brokers

It appears from the research by CPB and NMa that consumers who know that insurance brokers are remunerated on a commission basis often look for a suitable financial product themselves. In addition, it appears that the risk preferences of consumers who purchase lump-sum policies through an insurance broker have hardly any effect on their choice between a safe product and a product with a benefit which depends on uncertain investment results. In the case of consumers who purchase a lump-sum policy of their own accord, there is a relationship to risk preferences. Another outcome is that lump-sum policies which are sold through insurance brokers result in a benefit which is lower on average than comparable lump-sum policies which consumers purchase themselves without the intermediation of insurance brokers.

Policy options

One policy option for strengthening competition on the life insurance market is to make it obligatory for insurers and insurance brokers to provide more clarity with regard to management fees and commission. Another option is to regulate the contractual relationships between insurance companies and insurance brokers. An example of this is a prohibition on the contractual conditions which provide insurance brokers with an incentive to do business mainly with one or a view providers, for instance by means of bonuses and favourable loans. In the United Kingdom, such contractual conditions are prohibited.