What Substance Level Do Insurers Moving To Luxembourg Post-Brexit Need?

A number of major insurers have been among the first to announce that they have Brexit plans and—more interestingly—that they've decided where these plans will take them. And it's no small number: a recent survey found that over 40% of UK insurance firms intend to change their operation models following the UK's exit from the European Union.1

Moving house, however, triggers questions of substance. What's the adequate level of substance for insurance companies in a new country? This is, paradoxically, both an easy and a tricky question: easy because the answer is simply that an adequate level of economic substance is that which is suitable, proportionate and appropriate to the insurance business performed. Tricky because what does that mean, exactly?

Role of the managing director (dirigeant agréé)

In a regulated environment like the insurance sector, having an adequate level of economic substance depends largely on regulatory requirements.

Under article 273 of the Law of 7 December 2015 on the insurance sector, each Luxembourg insurance undertaking and each branch of a foreign insurance undertaking must be headed by an officer (called the managing director or dirigeant agréé) who has been approved by the Minister responsible for supervision of the insurance sector. Ensuring the worthiness and competence of applicants for this status is, in practice, the job of the authority supervising the insurance/reinsurance sector. That would be the Commissariat aux Assurances (CAA).

This provision ensures that the undertakings in question are headed by persons who fulfil the qualification and good repute requirements for the proper management of the insurance undertaking, as well as for safeguarding policyholders' interests. It also aims to facilitate communication with the supervisory authority, the authorised officer being responsible for all contact between the insurance company and the CAA.

Being true to Solvency II

Furthermore, with the introduction of the Solvency II Directive, European insurance companies have to meet many new requirements. On top of the quantitative requirements foreseen in the first pillar of the Solvency II Directive and the disclosure obligations provided in the third one, the second pillar contains requirements relating to the way insurers organise their businesses. In this context, insurance companies must have an effective system of governance in place to provide for sound and prudent management. Specifically, they must...