Towards New Framework For Insurance And Reinsurance In Luxembourg

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...