The 2004 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF) found a high level of observance of the Insurance Core Principles (ICPs) in the Netherlands and observed that the country meets the conditions necessary for effective insurance supervision. The FSSA recommendations chiefly pertain to clarity of supervisory regulations and expectations; supervisor transparency in areas like the stages of supervisory intervention, international cooperation, and information sharing between supervisors; on-site supervision; and disclosure by insurers. The IMF noted, however, that a number of pending legislative and supervisory initiatives hold the promise of substantially improving Dutch compliance with ICPs. It is pertinent to note that at the time of the 2004 FSSA, the insurance sector was supervised by two agencies: the Pensions and Insurance Supervisory Authority (PVK), which conducted prudential supervision, and the Financial Markets Authority (AFM), which was responsible for market conduct supervision. The FSSA focused its assessment on the supervisory role and powers of the PVK. However, the PVK merged with the Dutch central bank (DNB) in October 2004 to form an integrated financial supervisor. Since then, the DNB is the prudential supervisor, while the AFM continues to supervise the conduct of business. The FSSA, therefore, may not be entirely relevant, and there is no subsequent assessment of the DNB as the new insurance and pension sector supervisor. However, recent IMF reports describe a sound and well-supervised financial sector in the Netherlands and commend the country on implementing many of the 2004 FSSA recommendations.

General Overview

The 2004 Financial System Stability Assessment (FSSA) by the International Monetary Fund (IMF) found "a high level of observance of the ICPs [Insurance Core Principles] in the Netherlands" and observed that the country met "the conditions necessary for effective insurance supervision" (p. 38). The FSSA recommendations chiefly pertain to clarity of supervisory regulations and expectations; supervisor transparency in areas like the stages of supervisory intervention, international cooperation, and information sharing between supervisors; on-site supervision; and disclosure by insurers. The IMF noted, however, that a number of legislative and supervisory initiatives in the wings held the promise of substantially improving Dutch compliance with ICPs. It is pertinent to note that, at the time of the 2004 FSSA, the insurance sector was supervised by two agencies: the Pensions and Insurance Supervisory Authority (PVK), which conducted prudential supervision and the Financial Markets Authority (AFM), which supervised market conduct. The FSSA focused its assessment on the supervisory role and powers of the PVK. However, as the Dutch central bank (De Nederlandsche Bank, or DNB) website discloses, the PVK merged with the DNB in October 2004 to form an integrated financial supervisor. Per the 2006 DNB annual report, the DNB is the prudential supervisor of the financial sector, including insurers and pension funds, while the AFM continues to supervise the conduct of business. However, this development means that the FSSA has become outdated, and there is no subsequent assessment of DNB as the new insurance and pension sector supervisor. The Ministry of Finance (MoF) and the DNB are listed as members on the International Association of Insurance Supervisors (IAIS) website.

The 2007 Article IV Consultation report by the IMF notes that the financial sector soundness, particularly of the insurance and pension funds companies, has increased due to economic growth and high equity prices. Coverage ratios for insurance companies and pension funds have also improved. The 2006 IMF Article IV Consultation also finds a sound financial sector and an insurance sector resilient to shocks, except the most extreme ones. The situation evidenced improvement with rising interest rates, and was bulwarked by supervisory improvements through the creation of integrated financial sector supervision and efforts to strengthen risk-based supervision in the Netherlands. Further, the 2005 Article IV report gives a favorable account of the Netherlands' financial sector soundness and finds it "well-supervised" (p. 14). The report also mentions the Netherlands' intent to move to the risk-based solvency framework -- Solvency II -- for the insurance sector. All Article IV reports since the publication of the 2004 FSSA have commended the Netherlands on making considerable efforts towards implementing the FSSA recommendations.

The DNB website states that the DNB has the power to authorize any firm operating in the Dutch financial sector, on the "condition that the enterprise is financially healthy (solvent) and observes principles of sound operational management." Violation of rules may lead to sanctions, and repeated offenses may attract withdrawal of authorization. Further, the DNB exercises prudential and operational supervision of the insurers, which includes authorizing insurers, collecting and assessing information on them and guiding them to achieve soundness and compliance with supervisory requirements. The 2006 annual report of the DNB states that the DNB and the AFM cooperate closely to enable effective and efficient supervision. This cooperation was enhanced with the modification of the cooperation covenant in January 2006 due to the enforcement of the Financial Services Act. The annual report talks about the need to further modify the covenant in view of the Pensions Act that came into force in January 2007. The covenant was expected to be modified in April 2007. As regards the distinct supervisory tasks of the DNB, the annual report notes that it focuses on risk management, solvency and liquidity, and compliance with laws of the supervised entities. It also prioritizes supervision on the basis of risk profiles of institutions ascertained via the Financial Institutions Risk Analysis Method (FIRM) model of risk analysis. An essential element of the DNB's risk-oriented supervision is the development of new insurance returns in consultation with the Dutch Association of Insurers (Verbond van Verzekeraars, or VV), Association of Health Care Insurers (Zorgverzekeraars Nederland, or ZN), and the MoF, and the modification of the capital adequacy tests of insurers. The report notes that the DNB is continuing to align its supervision with the provisions of the Financial Supervision Act, and is moving from a rule-based supervisory approach to a principle-based approach. In a bid to transpose the EU Directive on the regulation of reinsurance activities to be effective December 2007, the DNB will supervise all reinsurers, enhancing financial stability and mitigating underwriting risks. Further, per the DNB annual report, with the 2006 enforcement of the Health Insurance Act in January 2006, the DNB is also authorized to supervise health care insurers. The annual report notes that as a Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) member, the DNB is closely associated in developing the risk-oriented Solvency II framework and issuing the draft framework Directive for Solvency II.

The AFM website states that the AFM supervises the market conduct in the insurance sector as well as insurers' compliance with the Financial Services Act, which contains rules on providing, mediating and advising on financial products to individuals as well as companies. Further, supervision of the financial sector has moved from sector-based to function-based supervision. Also, since December 2003, insurers are subject to securities-related market conduct supervision. The DNB website mentions that the DNB's duties are set out in the 1998 Bank Act. Its supervisory duties and authority are circumscribed in several laws including the Act on the Supervision of the Credit System of 1992, the Insurance Business Supervision Act of 1993, and the Pensions and Savings Funds Act. The website, however, reports that the various supervisory acts, excluding the Pensions and Savings Fund Act, are to be subsumed into a single Financial Supervision Act (then) expected to enter into force in January 2007. The 2004 FSSA noted that the supervision of insurers in the Netherlands was framed by the implementation of European Community (EC) Insurance Directives and had been transposed into two acts: (1) the Insurance Business Supervision Act of 1993 (WTV) for non-life and life insurance companies; and (2) the Funeral Insurance Business in Kind Supervision Act (WTN) for insurers of funeral insurance-in-kind.

The 2006 IMF Article IV report finds that as of 2005, there are 77 life insurance companies in the Netherlands, 275 general insurance companies, and 800 pension funds. The assets were approximately €2.9 billion, €46,000 million, and €6.5 billion, respectively. The year 2006 was generally favorable for life insurance as well as non-life insurance companies in the Netherlands, per the 2006 DNB annual report. Life insurers saw an increase of 8 percent in the volume of new business, though total premium income stabilized. Gross premium income also witnessed stagnation in the non-life sector, though without much impact on profitability and operating income. Health insurers also had adequate solvency during 2006, though they are expected to sustain losses in the near-term. The sector also saw a continuation of the trend towards concentration which started in 2005, with the merger of VGZ-IZA-Trias and Unive, creating the largest health insurer in the Netherlands.

The Principles

ICP 1 Conditions for effective insurance supervision

FC

The 2004 IMF FSSA found that the Netherlands met the conditions necessary for effective insurance supervision. The judicial and legal systems are well-developed; legislations are constantly updated in response to EU directives and international developments; and the EU laws override domestic laws. Accounting and auditing standards are aligned with international standards. Statistical information and data dissemination are adequate. Financial markets are also well-developed and insurers are active international financial markets' participants.

ICP 2 Supervisory objectives

II

According to the 2004 IMF FSSA, ICP 2, supervisory objectives, was largely observed. The FSSA called for greater clarity in the supervisory objectives and the division of responsibilities between the two supervisors, the PVK and the AFM, through more explicit definition in legislation. It was further noted in the FSSA that "the restructuring process currently underway presents an opportunity to clarify and formalize the objectives and responsibilities of the supervisory authorities" (p. 38). However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 3 Supervisory authority

II

According to the 2004 IMF FSSA, ICP 3, supervisory authority, was observed. The FSSA however recommended clarification on the role and responsibilities of the supervisors. The FSSA also expressed concern that with more governmental involvement and ministerial oversight of the finances of the PVK beginning 2004, the latter's autonomy and ability to fulfill its supervisory responsibilities might be compromised. The 2006 Article IV report by the IMF notes that by transposing EU Directive 2005/68/EC into Dutch law in effect from December 2007, the Netherlands has clarified that "the DNB will supervise insurers that are not supervised elsewhere in the EU/EEA" (p. 16). However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 4 Supervisory process

II

According to the 2004 IMF FSSA, ICP 4, supervisory process, was largely observed. The FSSA advised the Netherlands to provide more information about the policies and procedures, as well as "on stages of intervention, interpretations, and risk assessment criteria" (p. 39). Further, the PVK was advised to document and publish consultation with the industry in the development of policies. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 5 Supervisory cooperation and information sharing

II

According to the 2004 IMF FSSA, ICP 5, supervisory cooperation and information sharing, was partly observed. The FSSA saw that though the PVK actively engaged in information sharing with other European Union and European Economic Area (EU/EEA) supervisors, the practice could be further expanded to other regions. The 2006 Article IV report provides information on the Netherlands' progress on this recommendation, according to which, apart from EU level coordination and bilateral meetings, the Netherlands has also signed a memorandum of understanding (MoU) on crisis management with the Belgian Central Bank and the financial sector supervisor to increase supervisory cooperation in relation to cross-border financial conglomerates. However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 6 Licensing

II

According to the 2004 IMF FSSA, ICP 6, licensing, was partly observed. The FSSA advised the PVK to license reinsurers and small insurers or to require registration; to list registered and licensed insurers on the PVK's website, detailing the differences in supervision based on category; and to exchange information with relevant supervisors outside the EU/EEA area when granting license to insurers from those jurisdictions. The 2006 Article IV report also mentions the 2004 FSSA recommendation to "spell out clearly the role of the minister of finance, as applicable in those few areas where autonomy is not fully delegated to the supervisor" (p. 15). The 2006 report notes that since 2004, ministerial approval is required only if one of the five largest banks or insurers participates in another. Also, under the terms of the 2007 Financial Supervision Act, the minister determines whether the supervisory policies and practices of the home countries are in concert with the objectives of the Act before the supervisor permits branches of institutions from those countries to be opened in the Netherlands. However, the MoF has the sole authority to grant permits, licenses and exemptions for opening a firm. Nevertheless, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 7 Suitability of persons

II

According to the 2004 IMF FSSA, ICP 7, suitability of persons, was observed. The FSSA, however, recommended that the PVK "establish specific criteria to assess the fitness and propriety of auditors and actuaries, relying upon the requirements of professional organizations to the extent possible" (pp. 39-40). However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 8 Changes in control and portfolio transfers

II

According to the 2004 IMF FSSA, ICP 8, changes in control and portfolio transfers, was observed. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 9 Corporate governance

II

According to the 2004 IMF FSSA, ICP 9, corporate governance, was largely observed. In addition, the Netherlands planned to implement strengthened governance guidelines. The FSSA advised the PVK to make its governance guidelines more explicit, as also to require insurance companies to document important policies and procedures. Further, the IMF recommended provision for direct access of the actuary to the board in legislation. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 10 Internal control

II

According to the 2004 IMF FSSA, ICP 10, internal control, was largely observed. The FSSA advised the PVK to expedite further codification of its internal control guidelines, as also to require insurance companies to document important policies and procedures. The PVK was also advised to enact legislation enabling it to obtain confidential information from the actuary or the external auditor without the fear of liability and to allow easy access by the actuaries to the board. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 11 Market analysis

II

According to the 2004 IMF FSSA, ICP 11, market analysis, was partly observed. The FSSA recommended the PVK to institute a separate department or give an individual the responsibility of conducting quantitative as well as qualitative market analysis and communicating the conclusions within the PVK. This, per the FSSA, would help identify individual as well as systemic risks in the insurance sector. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 12 Reporting to supervisors and off-site monitoring

II

According to the 2004 IMF FSSA, ICP 12, reporting to supervisors and off-site monitoring, was observed. The FSSA, however, recommended the PVK to require most insurers to file basic supervisory returns quarterly, so as to keep market volatility attended to through more dynamic off-site monitoring. Further, the PVK was recommended to post on its website important financial information of the insurers' supervisory returns that are already in the public domain. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 13 On-site inspection

II

According to the 2004 IMF FSSA, ICP 13, on-site inspection, was observed. However, the FSSA found the number of staff supervising insurance entities to be inadequate, especially with respect to on-site and off-site supervision under the risk-based supervision methodology - MARS. The IMF therefore recommended that the PVK increase its staff through additional funding to successfully implement MARS. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 14 Preventive and corrective measures

II

According to the 2004 IMF FSSA, ICP 14, preventive and corrective measures, was observed. Further, the PVK is legally equipped with a wide range of preventive and corrective measures to enable it to fulfill its supervisory objectives. These objectives include moral suasion and the requirement of an insolvency plan, issuance of an administrative order, restriction of company activity, withholding of new activity approvals, license withdrawal, imposition of conservatorship, and requiring portfolio transfers. The FSSA notes that the PVK proactively uses these preventive and corrective measures to ensure compliance. The 2006 annual report of the DNB also states that as part of its routine supervision, the DNB can take formal measures for non-compliance with supervisory rules so as to nip troublesome situations in the bud and safeguard the claims and interests of third parties. These measures are published as the DNB and AFM Enforcement Memo, and include reasoning, persuasion, cease-and-desist orders, fines, etc. However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 15 Enforcement or sanctions

II

According to the 2004 IMF FSSA, ICP 15, enforcement or sanctions, was observed. The IMF further noted that though the PVK was not legally empowered to impose fines on individuals, the range of sanctions available to it was adequate to enforce corrective action. The 2006 annual report of the DNB also states that as part of its routine supervision, the DNB can take formal measures for noncompliance with supervisory rules so as to nip troublesome situations in the bud and safeguard the claims and interests of third parties. These measures are published as the DNB and AFM Enforcement Memo, and include reasoning, persuasion, cease-and-desist orders, fines, etc. However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 16 Winding-up & exit from the market

II

According to the 2004 IMF FSSA, ICP 16, winding-up and exit from the market, was observed. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 17 Group-wide supervision

II

According to the 2004 IMF FSSA, ICP 17, group-wide supervision, was partly observed. The FSSA expected that the implementation of the European Community's Financial Conglomerates Directive would strengthen the PVK's supervision of the activities of groups of which licensed insurers were members. As noted by the FSSA, such groups were not obligated by law to provide the PVK with information on their activities outside the Netherlands unless an insurer licensed in the country was involved, though they often did so voluntarily. This opened the local insurers within the group to risks, and could be remedied, per the FSSA, by the PVK keeping tabs on the activities of such groups through information sharing with relevant supervisors outside the EU/EEA area. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 18 Risk assessment and management

II

According to the 2004 IMF FSSA, ICP 18, risk assessment and management, was observed. At the time of the assessment, the PVK was issuing more detailed regulations on risk control, corporate governance, and internal organization intended to enhance risk assessment and management by insurers. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 19 Insurance activity

II

According to the 2004 IMF FSSA, ICP 19, insurance activity, was largely observed. At the time of the assessment, the PVK was in the middle of developing more detailed regulations on risk control, governance, and internal organization, and the FSSA hoped that they would enhance risk assessment and management by insurers. The FSSA recommended that the PVK include in the regulations "the requirement that insurers develop strategic underwriting, pricing and reinsurance policies, which should be subject to approval and regular review by their boards" (p. 62). However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 20 Liabilities

II

According to the 2004 IMF FSSA, ICP 20, liabilities, was partly observed. The FSSA found that the PVK had been in the middle of finalizing the Financial Assessment Framework (FTK) to tailor supervision of insurance companies and pension funds on the basis of their specific situations and risk profiles. The valuation basis under the FTK was to be linked to International Financial Reporting Standards (IFRSs) to ensure transparency and comparability. The FTK was to be implemented in 2006. The IMF recommended that the PVK "take steps to reduce the range of actuarial and accounting practices in the Netherlands and to ensure that complex actuarial issues, such as the valuation of embedded options, are being dealt with adequately" (p. 63), if the IFRSs for insurance contracts were delayed. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 21 Investments

II

According to the 2004 IMF FSSA, ICP 21, investments, was largely observed. At the time of the assessment, the PVK was in the process of issuing more detailed regulations intended to enhance risk assessment and management by insurers. The IMF recommended that these regulations include guidance pertaining to the "insurer's investment policy and the PVK's expectations regarding investment risk management systems, controls and contingency plans" (pp. 63-64). The IMF hoped that the implementation of IFRSs would "considerably improve the transparency and comparability of investment valuation methods" (p. 64). However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004

ICP 22 Derivatives and similar commitments

II

According to the 2004 IMF FSSA, ICP 22 derivatives and similar commitments was observed. The IMF noted that the Circular on the use of derivatives was fairly comprehensive, but recommended the PVK to continually review and update it, as well as make its guidance more explicit in areas such as vetting of models and the independent verification of prices . However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 23 Capital adequacy and solvency

II

According to the 2004 IMF FSSA, ICP 23, capital adequacy and solvency, was largely observed. The FSSA found that the PVK had been in the middle of finalizing the FTK to tailor supervision of insurance companies and pension funds on the basis of their specific situations and risk profiles. The FSSA recommended that the PVK implement the FTK in the timeframe decided. Further, if the FTK was delayed, the FSSA advised the PVK to provide guidance to insurers on the solvency margins, preferably in excess of the minimum solvency requirements of the Solvency I, which was implemented in December 2003. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 24 Intermediaries

II

According to the 2004 IMF FSSA, ICP 24, intermediaries, was not observed due to inadequate supervisory control over the intermediaries. The FSSA expected that the new legal regime of 2004 would provide an adequate basis for compliance, and recommended that the Netherlands enact stronger legislation backing the supervision of insurance intermediaries. A March 2005 article on the AFM website reports that the AFM intended to conduct investigations at several life insurance intermediaries as part of its supervision of compliance with the 1993 Disclosure of Unusual Transactions (Services) Act, and the 1993 Identification (Provision of Services) Act. The article notes that the target group for the investigations was decided at random as well as on the basis of risk profiles of the intermediaries. Some of the key goals of these investigations are to check customer identification and suspicious transaction reporting policies and procedures of the intermediaries, acquainting them with the acts and the supervisor, and to be a forerunner exercise to the enactment of the Financial Services Act ). However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 25 Consumer protection

II

According to the 2004 IMF FSSA, ICP 25, consumer protection was partly observed. The FSSA expected the legislative regime due to be effective in 2004 to provide a basis for compliance. The IMF, however, pressed the Netherlands to strengthen certain aspects of consumer protection, including legislative provisions for customer information of conflicts of interest and fair treatment of customers; and developing an insurance needs assessment. According to the AFM website, the AFM supervises compliance with the Regulations on the Provision of Information to Policyholders of 1998 and the Regulations on the Provision of Information Pursuant to the Act on the Supervision of the Funeral Provisions Insurance Industry. These regulations deal with timely and accurate information to the consumers by the insurers, about insurance agreements, costs, terms, termination, etc., as also about company policies, legal form, and complaints procedures. However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 26 Information, disclosure & transparency towards the market

II

According to the 2004 IMF FSSA, ICP 26, information, disclosure, and transparency towards the market, was largely observed. The FSSA expected the implementation of IFRSs to improve disclosure of information by the insurers, and further recommended the Netherlands to issue guidelines to enhance disclosure of risk exposure, risk management practices, and corporate governance of insurers. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 27 Fraud

II

According to the 2004 IMF FSSA, ICP 27, fraud, was observed. The FSSA further found that legislation, chiefly the civil and criminal law, covers fraud. Also, unauthorized insurance activities constitute a punishable economic offence. However, there is little subsequent information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

CP

According to the 2004 IMF FSSA, ICP 28, anti-money laundering/combating the financing of terrorism (AML/CFT) was largely observed. The FSSA expected that legislation due to be effective on December 2003 would provide the basis of compliance. The IMF, however, recommended that the Netherlands issue clearer guidelines emphasizing the observance of Dutch AML/CFT requirements by foreign branches and subsidiaries of Dutch insurers. The 2006 Article IV report by the IMF notes that the Netherlands strengthened its customer identification requirement with the enforcement in 2004 of the regulation on customer due diligence at credit institutions and insurance companies as well as its reporting and disclosure requirements by the enforcement of the amended Disclosure of Unusual Transactions (Services) Act in 2006. However, there is little further information publicly available to assess Netherlands compliance with this principle in light of the merger of the PVK with the DNB in October 2004.