On 25 July 2012, two draft bills were filed with the Chamber of Deputies of Luxembourg. Both aim at locally implementing the "Solvency II" Directive of 2009, as amended, in line with the current target date of 1 January 2014:

  • Draft bill 6456 will lead to the repeal of the existing law of 6 December 1991 on the insurance sector and its replacement by a new legal instrument;
  • Draft bill 6454 will amend the law of 8 December 1994 regarding annual and consolidated accounts of insurance and reinsurance companies and the law of 27 July 1997 regarding insurance contracts.

The draft bills translate on a local level all the provisions of the Directive, notably those relating to the three pillars defined herein.

FIRST PILLAR: SOLVENCY REQUIREMENTS

Moving away from solvency and capitalization requirements applied similarly to all undertakings towards a new individual risk-based approach, the draft bills will result in the existing solvency margin and guarantee fund to be replaced by a Solvency Capital Requirement (SCR) and a Minimum Capital Requirement (MCR).

The SCR and MCR will be calculated by using formula that will either be based on a standard to be further defined in a future regulation from the Insurance Supervision Authority (Commissariat aux Assurances, CAA) or defined on a more relevant internal model of the insurance or reinsurance undertaking. The SCR and MCR will have to be covered by eligible own funds, which may be comprised of equity items and certain subordinated liabilities or off-balance sheet items.

Rules of assessment of assets and liabilities set forth in the draft bills, such as the evaluation of technical provisions by reference to arm's length conditions that would apply to a transfer of rights and obligations to another undertaking, are specific to solvency requirements and do not impact the rules applied for accounting purposes under IFRS or Luxembourg GAAP. Insurance and reinsurance undertakings shall, therefore, prepare internally to be able to handle the additional work that will result therefrom.

SECOND PILLAR: GOVERNANCE AND RISK MONITORING REQUIREMENTS

The draft bills will lead to significant changes for insurance and reinsurance undertakings by increasing the level of internal organization that is required, notably with the need of structuring separate functions and procedures for risk management, solvency internal monitoring and assessment (including by way of forecasts), and regulatory compliance.

THIRD PILLAR: PERIODIC INFORMATION TO THE CAA AND THE PUBLIC

Insurance and reinsurance undertakings will be required to periodically report to the CAA as to their compliance with solvency requirements via a prudential reporting and disclosure of the conclusions of their solvency internal monitoring and assessment. The CAA will benefit from increased powers to initiate, approve, and supervise recovery plans and perform other corrective actions in case of breach or threatened breach to solvency requirements.

In addition, the draft bills will lead to communication to the public of an annual report disclosing primary and relevant information regarding the solvency and financial standing of the insurance or reinsurance undertaking. On an individual basis, the insurance contracts to be entered into will have to include references to such annual reporting in order to enable policyholders to easily access pertinent information.

On the occurrence of material events having an impact on the financial standing of the insurance or reinsurance undertaking, a specific notice updating the last annual report and referring to such events will need to be made public.

OTHER LEGAL DEVELOPMENTS

Beyond the mere implementation of the Directive, the draft bills also cover other changes to the existing legal framework of the insurance and reinsurance sector, specifically:

  • Any exceptions to the gender equality in insurance terms and conditions will be repealed as of 21 December 2012, in accordance with the ECJ decision of 1 March 2011 (Test-Achats, C-236/09).
  • The draft bill 6456 reiterates the provisions of the pre-existing draft bill 6398 filed on 17 February 2012 that contemplates the creation of regulated Professionals of the Insurance Sector (PSA) providing support services to insurance and reinsurance companies. This new category of PSA, copied from the example of the Professionals of the Financial Sector (PSF), will notably cover reinsurance or insurance captive management companies, run-off management companies, actuarial service providers, insurance portfolio managers, governance service providers, and claim handling companies.

CONCLUSION AND FORECASTS

Through those two draft bills, together with the pre-existing draft bill on Professionals of the Insurance Sector, Luxembourg has initiated a process of reviewing in full its legal and regulatory framework in order to maintain a level playing field for operators in the sector while preserving the specificities of its market, such as the important role of life-insurance activities and reinsurance and the principles regarding equalization reserves / provision pour fluctuation de sinistralité (PFS).

Although the draft bills have been generally prepared following the "all the Directive, nothing but the Directive" principle, it is already anticipated that such framework remains largely to be further defined due to the European environment (notably, the vote of the forthcoming "Omnibus II" Directive, now rescheduled for 20 November 2012 and the implementation instruments that will follow under EU Commission regulations and EIOPA technical standards) and due to national considerations.

The draft bills indeed include important references to future grand-ducal regulations and CAA regulations as well as to the possibility for the CAA to grant specific exemptions on a case-by-case basis. It is expected that, in this process, the national authorities will adopt an approach of proportionality in order to ensure that the new requirements are adequate for undertakings of small- and medium-size firms, which represent a significant share of the industry, notably in the reinsurance market.

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