Armour plated protection for life assurance holders
It is near impossible to make predictions about the property & casualty (non-life) insurance sector: the beginning of the year was excellent until storms ravaged Western Europe. As for Luxembourg’s life assurance sector, much depends on political decisions that will be taken in the near future. The Solvency 2 Directive is another topic on the agenda: we must not create a system that is too expensive for companies and policyholders. LFF spoke to Victor Rod, director general of the Commissariat aux Assurances, the supervisory authority for the Luxembourg insurance industry, about the challenges in the industry
What are the complaints you face as Commissariat aux Assurances?
Each year we receive about a 100 complaints. Most of these are queries, but we also receive formal complaints. If the CAA has to take action, the insurance company or the broker generally cooperates in order to settle the case amicably. However, there are cases where companies or intermediaries tell us that there is litigation. If so, it is up to the courts to come to a decision.
The Constitution forbids us to play this role and reserves the right to settle disputes between parties in court. Before reaching that point though, we refer those involved to a mediation committee, an institution that was created by the Association of Insurance Companies (ACA) and the Luxembourg Union of Consumers (ULC), which tries to arbitrate in order to avoid a court case.
At the CAA we follow the principle of writing a "Dear CEO" letter. That is, following a claim by a policyholder we send a personal letter to the leader of the company. In this letter, we request the chief executive’s view of matter. We have noticed that claims often result from a malfunction in a particular service at the company, which the chief executive often doesn’t know about. Clearly senior managers don’t like this kind of letter, so in most cases they try to solve the problem.
What are your expectations for the industry in 2010?
Let me quote a smart insurer who once said that it was so difficult to make predictions because they are all in the future. He certainly has a point! We can make certain predictions with regard to life insurance. However, this is not possible for the property & casualty (P&C) market. The beginning of the year was excellent until storms ravaged Western Europe in February. At this stage it is difficult to estimate the cost for Luxembourg insurance companies. But the situation was far less dramatic in Luxembourg than in France, for instance.
The development of the life assurance sector largely depends on political decisions that will be taken in the near future. A key question is the future of banking and insurance confidentiality. What will be decided on the issue of withholding tax versus the automatic exchange of information? Right now it is impossible to predict.
What I can say is that non-residents doing business in international life assurance have more or less the same profile as the private banking customers. This means that our industry’s exposure is the same as that of the banks.
The financial crisis is a crisis of confidence. What about the protection of policyholders in Luxembourg?
We are one of the only countries in Europe, if not the only one, to have a super "super-privilege" for policyholders and victims. For the last 40 years it has been written in our legislation that if an insurance company is declared bankrupt, the holders of an insurance contract (the policyholder, an insured person or a victim) are ranked above all other super-privileged creditors including the State, the Social Security office and the employees.
This also means that they do not compete with other super-privileges (such as taxes and unpaid social contributions). This is different from most other countries. We believe that this privilege is a very important factor in protecting policyholders in the case of bankruptcy.
Obviously we do everything we can to avoid bankruptcy, following to the motto "failure is not an option." We monitor the assets, liabilities and solvency margins, among other things, of the companies under our prudential supervision.
But there is no guarantee that a bankruptcy can be avoided. The draft Solvency 2 Directive says that an insurance company must have a probability rate of 99.5% that it will not to go bankrupt over the next 12 months; so, on average, a company will go bust every 200 years.
Another important point being discussed is the idea of establishing a guarantee fund as is the case for the banking sector. Within the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) we noticed that in Europe there are currently fifteen countries that have created such a fund for insurance contracts that are not mandatory.
A dozen countries including Luxembourg do not have such a fund (although Luxembourg has a guarantee fund for mandatory insurance, like car insurance). However, it is important to realise that this guarantee cannot be compared to that of the banking sector.
In the banking sector, we can statistically say that 95% of customer deposits are covered by this guarantee. The situation is different for our industry. Let me give you two examples: a person who has a car accident and becomes quadriplegic and is entitled to, let’s say, five million Euros in compensation from his insurance company, is certainly not happy with 100 000 Euros from a guarantee fund.
The same thing applies to a person whose house has been ravaged by fire. This unfortunate individual will hardly cover his losses with 50,000 or 100,000 Euros if his house is worth half a million or more.
Apart from the fact that we believe our super-super privilege is at least as effective as a guarantee fund, we are opposed to establishing such a European rule for two reasons:
We fear a domino-effect. Let’s suppose that a major insurance company in Luxembourg is declared bankrupt, the others which must stand in for it could also develop major problems.
The other aspect is that of "moral hazard". If a company is taking unjustified risk and argues that the other companies are there to come to its rescue anyway, we say no.
What is your role as chairman of the CEIOPS’s Committee for Consumer Protection?
First of all, it is a great honour for me and for Luxembourg as a whole to chair this committee which has become more important lately for two reasons. Firstly we have to work out what pre-contractual and contractual product information insurers and intermediaries should provide their customers with in the future. Then the European Commission has asked our Committee for the protection of consumers to review the Directive on insurance intermediaries (agents, brokers) because the text of 2002 was very poorly drafted.
The Solvency 2 Directive is another important topic on your agenda. What issues have to be clarified before the text can be voted?
We now have a text that defines the framework of Solvency 2, which is largely a repetition of earlier texts. What is new is how the new capital requirements should be calculated. The Commission is currently preparing measures to implement the directive which - let’s not forget - is a framework directive.
We are collaborating very closely in this work which is essential for the proper functioning of the Directive when it comes into force early in 2013. The Commission's goal is to submit its regulatory proposals before summer 2010. This will not be an easy task given that the Commission is seized up with some 1,500 pages of regulatory suggestions by CEIOPS which then resulted in some 20,000 pages of commentaries from interested parties.
Are there any issues that are specific to Luxembourg?
I hope that the coming regulation will take into account the key demands made by Luxembourg. These are the proportionate application of the Solvency 2 rules based on the size and complexity of a businesses and recognition of the exceptional case of some Luxembourg based companies, such as mutual shipping insurance and captive reinsurance companies.
Since the new system is likely to be very heavy and expensive, we have to see how the new measures take into account the characteristics of our companies. Some companies are certainly working with the full range of products and services; others have probably implemented the system already.
But we must not forget all the small and medium-sized insurance companies working in niche markets. The Commissariat aux Assurances cannot insist that they devote half a dozen employees exclusively to controlling and reporting. These companies undoubtedly have good governance, but not one as heavy as that foreseen in "Solvency II".
Where captives are concerned, it is important to point out that they operate differently to traditional insurance companies, both at the level of risk acceptance and portfolio management. Also, let’s not forget the unit-linked life assurance business and shipping insurance.
Our goal is to prevent the system from becoming too expensive for our companies, which would lead to an increase in insurance premiums for the client. Yet it is reassuring to see that Luxembourg is not the only country to worry about such things. In all European countries there are many small and medium-sized companies that are in the same situation, even in the larger states.
Among the five to six thousand insurance companies in Europe there are only about 17 large insurance groups represented in all countries. All the others are small or medium-sized companies operating on a national or regional base.
Will the trend towards concentration in the insurance sector continue?
It is difficult to say whether one can truly speak of a movement towards consolidation or only of company mergers. A few companies have already indicated that they are looking for a new buyer. But if they do not find one they cannot simply give up, as a company in another sector of the economy would do. An insurance company must deliver on long and very long term commitments.
We also note that over the last five or six years the number of insurance companies has remained unchanged. The same is true for the captive insurance industry. Even if their number is decreasing due to mergers of their parent companies, their business volume remains the same or even increases.