Insurance and Reinsurance: Trends and Developments in the Netherlands

This article highlights the following trends and developments that have emerged in the Dutch insurance and reinsurance market during the last year: consumer protection, cybersecurity, class actions, climate risks and ESG compliance.

Consumer protection

Non-disclosure

Since 1 July 2023, Article 7:930 (4) of the Dutch Civil Code (DCC) includes a mandatory rule for consumer insurance, on the basis of which the policyholder is entitled to a premium refund if the policyholder did not comply with the pre-contractual duty of disclosure in good faith. This legal provision only applies to situations where the insurer takes the position that, had it known the true state of affairs, it would not have concluded the insurance at all. In business insurance policies, one could deviate from this article by excluding the right to a premium refund in the policy wording.

Dutch law includes another strict legal regulation regarding non-disclosure. A two-month limitation period applies, within which the insurer must notify the policyholder of a (suspected) breach of the pre-contractual duty to disclose. This limitation period is set out in Article 7:929 (1) of the DCC and starts when the insurer becomes aware of the violation. The two-month period may start earlier, at the moment the insurer ought to have discovered the violation. This requires claims managers to be constantly alert to possible violations of the requirement to send a notification to the policyholder in time. The Supreme Court recently confirmed that this limitation period is strictly applied (ECLI:NL:HR:2023:1050). The notification must be given to the policyholder in a timely manner and in writing. If these requirements are not met, the insurer can no longer invoke the consequences of non-disclosure, even if the policyholder committed fraud. Article 7:929 (1) of the DCC is only mandatory law for consumer insurance. In business insurance policies, one could deviate from this article by extending the limitation period to, for example, six months.

Risk of unfairness

Following the Ocidental judgment of the European Court of Justice (HvJEU 20 April 2023, ECLI:EU:C:2023:311), in which preliminary questions of the Portuguese Supreme Court were answered, the Financial Services Complaints Tribunal (Kifid) issued a press release on 25 July 2023, stating that it will now assess the following in each case:

• whether the consumer had been able to take note of all relevant policy conditions before entering into the insurance contract; and
• whether the consumer had been able to assess the consequences thereof.

If the answer to these questions would be negative, then one might consider the disputed clause in question to be unfair, as referred to in EU Directive 93/13.

Policy terms and conditions can be provided either on paper or electronically on a durable medium (duurzame drager). With regard to the latter, however, Kifid has the following requirements:

• the consumer is able to digitally store the terms and conditions;
• the content should be non-modifiable; and
• the conditions should be accessible for an appropriate period of time.

The burden of proof lies with the insurer. In practice, insurers are facing difficulty in this respect.

A method that will be accepted is when the insurer has sent the applicable policy terms and conditions to the consumer as a PDF file by e-mail before entering into the insurance contract. However, according to Dutch law, the prior consent of the consumer is required for electronic communications. It is also up to the insurer to prove such consent.

In practice, policy conditions are often not provided to the consumer as a PDF file via email. Instead, in the policy or in an email, reference is made to the insurer's website or a hyperlink leading to a page on the insurer's website where all (current) policy conditions of this insurer can be found. Case law from Kifid indicates that such an approach does not meet the requirements set by Kifid. Insurers and managing agents are advised to adjust their practice according to the requirements set by Kifid.

Cybersecurity

According to the cybersecurity monitor of the Central Bureau of Statistics (Centraal Bureau voor de Statistiek), each year about one in five organisations in the Netherlands is confronted with a cyber-incident. It can lead to business interruption as well as financial and reputational damage for the organisation, its customers and its employees. The rapid developments on artificial intelligence also increase the cyber-risk. The financial sector is most exposed, compared to other sectors.

Cybersecurity is on the agenda of boards of Dutch companies as it is regarded as the largest business risk, according to research carried out by Aon. In 2023, the Federation of European Risk Management Associations (FERMA) also highlighted cyber-risk as one of the areas to prioritise, and the Dutch Insurance Association (Verbond van Verzekeraars) started several initiatives to raise awareness of the risk.

The Dutch cyber-insurance market is relatively small. However, due to (upcoming) European legislation aiming to prevent cyber-incidents and limit consequential damage (DORA, Cyber resilience Act, NIS2), the associated risk is becoming more manageable, and entities are becoming more resilient to cyberthreats. As a result, cyber-insurance premiums have shown a downward trend in 2023.

The new legislation requires board members to actively maintain sufficient knowledge and skills to understand and assess ICT risks and potential impacts on the organisation. These requirements emphasise, however, that the D&O insurance can be triggered in case of a cyber-incident. No such case law has yet been seen in the Netherlands.

Class actions

The Class Action Mass Claims Settlement Act (Wet afwikkeling massaschade in collectieve actie: WAMCA) entered into force on 1 January 2020. It allows claim vehicles to seek actual damages, and has been immensely popular since its implementation. Currently, 69 collective actions are pending before court; 14 are finished (www.rechtspraak.nl). According to recent research carried out by Mrs. mr. C.J.M van Doorn, actual damages are claimed in 24% of all cases.

For lawyers, the WAMCA seems to be an attractive business model. Nowadays, several US law firms have established Dutch offices and issued such proceedings on behalf of claim vehicles. Although all 27 European jurisdictions should have a class action mechanism in place as of 25 June 2023 (based on the European Directive on representative actions for consumers (EU) 2020/1828), the Netherlands is likely to remain a leading forum for class actions, at least for the next couple of years. The class action framework is well established, the court is geared up, extensive expertise is available, and the duration of the litigation process is attractive compared to other European countries.

A significant number of class actions in the Netherlands are still about data breaches, competition law and diesel emission, but two product liability matters were initiated against manufacturers of medical devices on 13 December 2022 and 3 April 2023. It is anticipated that the exposure to product liability class actions will increase in the Netherlands due to the upcoming revised European Product Liability Directive. On 14 December 2023, a provisional agreement was reached on the text for the proposed revision. Based on the text to date, the revised Directive will substantially improve the position of consumers, with the following changes:

• the definition of a product is expanded to include software;
• damages now include medically recognised damage to psychological health and the destruction or irreversible corruption of data;
• the threshold for property damage is deleted;
• a disclosure obligation is introduced;
• the burden of proof has been eased for consumers; and
• the whole supply chain is exposed to strict liability.

As a result, consumers are more likely to issue a (collective) product liability claim, and their chances of success are higher.

Dutch collective actions gained significance even under the old regime, due to ground-breaking climate change litigation; see the Urgenda decision of December 2019 (ECLI:NL:HR:2019:2006), whereby the Dutch State was ordered to lower the emission of greenhouse gasses by 25%. In 2021, there was another victory, this time against a company in the commercial sector: Royal Dutch Shell. The District Court in The Hague ordered Shell to severely limit its greenhouse gas emissions (ECLI:NL:RBDHA:2021:5339). The appeal initiated by Shell is still pending. Some Dutch class action experts believe there will be an increase in climate change litigation in the Netherlands now that the WAMCA has entered into force.

Big Oil is obviously subject to climate change litigation, but other commercial sectors are also becoming increasingly exposed. That brings us to PFAS (Per- and polyfluoroalkyl substances), which some call the new asbestos and which is regarded as being harmful to health and the environment, and does not or hardly break down. On 7 February 2023, the proposal for a European ban on PFAS was published by the European Chemicals Agency (ECHA). Around 6,500 PFAS-related lawsuits have been filed in the United States.

Chemours (a Dutch company previously known as DuPont) used PFAS in its manufacture of products such as raincoats and frying pans that are water- and grease-resistant. Several US lawsuits on PFAS were related to DuPont's Washington Works facility in Parkersburg, West Virginia. In the Netherlands, in its interim civil judgment of 27 September 2023, the Rotterdam District Court held Chemours liable towards four Dutch municipalities for environmental damage caused by PFAS from 1984 to 1998 (ECLI:NL:RBROT:2023:8987). This Dutch judgment follows the global trend in which corporates are held responsible for a negative impact on the environment. It also opens the door for a class action initiated by local residents, who claim to face the detrimental health effects of PFAS on a day-to-day basis.

On 4 September 2023, around 3,600 people collectively filed a criminal complaint against Chemours. Meanwhile, the Public Prosecutor's Office started a criminal investigation, also with regard to the potential culpability of directors. This Dutch case will add to the expanding PFAS litigation landscape.

Thus, the appetite for class actions in the Netherlands – whether related to the climate or otherwise – seems endless, looking at the developments in the Netherlands and, the EU, as well as the inspiration from overseas. It is not surprising to see that, due to this growing market, the Association for Class Action Lawyers (Vereniging voor Massaschade Advocaten) was established in 2023.

From an insurance perspective, these developments mean that the industry should carefully assess the potential (increased) exposure of its insured, set against the calculated premium, the desired sum insured and the terms and conditions on which one would like to conclude an insurance contract. On the other hand, it creates potential for the development of litigation risk insurance, with which the UK insurance market is more familiar. Class actions in the Netherlands might give this development a push for the Dutch market.

Climate risks

Flooding

The Netherlands is a country of water: major European rivers flow through the Netherlands into the North Sea, and a significant part of the country is below sea level. A system of primary and secondary water barriers is used (primaire en secundaire waterkeringen) to protect the country from flooding. A primary water barrier is intended to hold back water from the sea and major rivers, such as dikes, dunes and seawalls. Secondary water barriers are designed to prevent the flooding of local rivers, puddles and locks.

Although the Netherlands is known for its excellent water infrastructure, in principle it is currently not possible to insure the risk of flooding of primary water barriers. Insurers generally consider it too great a risk that cannot be insured.

This has caused a severe problem for the corporates and consumers that were hit by the immense flooding in Limburg in July 2021. According to a recent report prepared by order of the Ministry of Infrastructure and Water Management, the total amount of damages was estimated at EUR455 million. Fortunately, the Dutch government has initiated a one-off compensation scheme for uninsured damage based on the Disaster Damage Compensation Act (Wet tegemoetkoming schade bij rampen). However, for those affected, the scheme was not sufficient compared to their actual loss and the cover that normally applies for property, inventory and business insurance.

Meanwhile, the insurance possibilities for the risk of flooding from secondary water barriers have improved for residents and regular commercial buildings. After the July 2021 flooding in Limburg, the coverage for most property and inventory insurance has been extended to cover the flooding of secondary water barriers. This does not apply to the larger commercial risks that are mostly taken out on the insurance exchange (assurantiebeurs).

The Dutch Insurance Association proposed the option for all Dutch citizens to take out insurance against the risk of flooding, irrespective of a primary or secondary water barrier. In order to have sufficient funds available for this initiative, insurers would like to set up a vehicle together with the government. In that way, the burden can be borne by all Dutch citizens (through the government or otherwise), even by those who live in an area where this risk is not likely to materialise. It is obvious that policyholders will be expected to take preventative measures themselves, to the extent possible and reasonable.

One of the affected parties in Limburg was a healthcare institution that had taken out property insurance on the insurance exchange with a commonly broad exclusion of damages as a result of flooding of all kinds of primary and secondary water barriers. In its judgment of 19 April 2023, the Court of Amsterdam unsurprisingly interpreted this exclusion broadly (ECLI:NL:RBAMS:2023:2480). However, at the same time, the Court ruled that, to the extent the damage to the property was caused by an event that was covered under the policy (such as precipitation entering the property unexpectedly), insurers should compensate that part of the damage. It is up to the insured now to prove to what extent the damage was caused by the covered event.

Groundwater levels

The Dutch Insurance Association Climate Damage Monitor shows that damage caused by extreme weather is increasing. For example, groundwater levels are increasingly rising and falling due to an increase of extreme draught or precipitation in the Netherlands, creating new emerging risks. This is particularly an issue for structures built on shallow foundations and foundations of wood, affecting around 1 million buildings in the Netherlands. The estimated costs for replacement could reach EUR50 billion by 2050. Damage due to fluctuating ground water levels is usually not covered, and many are not aware of the risk nor the fact that there is no (adequate) insurance coverage. It is up to insurers and government to create more awareness.

ESG compliance

As a result of the 2015 Paris Climate Agreement, the EU published the Sustainable Finance Action Plan in 2018 (SFAP). The SFAP contains recommendations in order to establish a strategy for sustainable investments. The financial sector, including insurers, plays a key role in implementing this strategy, as the sector is perceived to act as an intermediary for many of the cash flows in the Dutch economy. The most important EU legislation and developments relevant for the Netherlands are outlined below.

Regulation (EU) 2020/852 (the “Taxonomy Regulation”) is the centrepiece of the SFAP and establishes a classification system for environmentally sustainable economic activities, with the aim of scaling up sustainable investments and combatting greenwashing of “sustainable” financial products. The scope of this regulation is limited to insurers offering insurance‐based investment products. However, the classification is relevant for the entire insurance industry in the context of growing sustainability risks.

Activities must contribute substantially to one or more of the six formulated environmental objectives in order to qualify as environmentally sustainable economic activities; they must also not seriously impair these objectives. The first two targets (climate mitigation and adaptation) came into force in January 2022, and the last four environmental objectives came into force on 1 January 2024 (regarding water, circular economy, pollution control and biodiversity). The criteria for determining whether an activity falls under one of these four environmental objectives are set out in the Taxonomy Environmental Delegated Act (C/2023/3851 final). From 2024, this will potentially allow more investment products offered by insurers to be classified as environmentally sustainable.

As of 10 March 2021, the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR) regulates the extent to which the financial sector must be transparent about sustainability regarding financial products. Insurance undertakings offering insurance‐based investment products must be transparent about sustainability risks, sustainability promotions and the principal adverse impacts of investments on sustainability factors.

In 2023, the content of the SFDR was further developed through regulations (EU) 2022/1288 and (EU) 2023/363. The new provisions and templates comprehensively describe the information to be included by the parties addressed by the SFDR. The Dutch financial markets supervisor (AFM) acknowledges that, since the Taxonomy Regulation and the SFDR came into force, it is not always clear to insurers how to implement the requirements. Nevertheless, the AFM expects insurers to continue their efforts and take steps to comply with all the requirements of the SFDR and the Taxonomy Regulation. In October 2023, the AFM published a Sustainability Claims Guideline with further explanations, practical examples and good practices for proper implementation of the open standards for sustainability information disclosure.

The Netherlands is required to have implemented the Corporate Sustainability Reporting Directive (EU) 2022/2464 (CSRD) into local law ultimately by 6 July 2024. The draft implementing decree of the Dutch legislator does not contain stricter provisions than those laid down in the CSRD. Insurers that are limited liability companies (naamloze vennootschappen) are already subject to the Non-Financial Reporting Directive, and will have to comply with the transparency requirements of the CSRD from 2025. Insurers that are not subject to the directive as well as mutual insurance companies will have to comply with the CSRD from 2026 or 2027, depending on the size of the company. The next few years will therefore be a period of transition towards CSRD compliance.

On 14 December 2023, the European Council and the European Parliament reached a provisional agreement on the Corporate Sustainability Due Diligence Directive (CSDDD). The directive sets out obligations for large companies to conduct research on the actual and potential adverse impacts on the environment and human rights in their business chain of activities. Companies with more than 500 employees and a net worldwide turnover higher than EUR150 million will be affected by the directive. The financial sector is partially excluded from its scope – for instance, insurers are merely required to carry out due diligence on upstream elements in the business chain and therefore not on downstream elements. However, a review clause included in the final text may still lead to further applicability in the future.

From the selection described, it follows that sustainability regulations present severe challenges to insurers. In March 2023, the AFM found that half of 27 listed companies surveyed are still insufficiently transparent about the impact of climate change on the company. At the same time, European regulators and the EU legislature continue to draft new and amended rules and frameworks.

The legislation is meant to promote sustainable investments. The uninsurability of sustainable initiatives is a development that thwarts these sustainable investments. In the Netherlands, for example, it is difficult to insure recycling companies, given the risk of fire. Insurers are also struggling with insurability and the insurance requirements to be met for other sustainable initiatives, such as solar panels and electric vehicles. A solution still needs to be found.

While insurers are in transition to establish full ESG compliance, they need to be cautious about greenwashing – ie, misleading claims that state or imply that an entity or product benefits the environment or people. The European Insurance and Occupational Pensions Authority (EIOPA) published a report on greenwashing in June 2023; a final report is expected in May 2024. Greenwashing could lead to a class action. In the Netherlands, airline KLM was the first company to be confronted with such action under the WAMCA; the claim was declared admissible on 7 June 2023 by the District Court of Amsterdam (ECLI:NL:RBAMS:2023:3499). A decision on the merits is expected in 2024.