| Insurance Regulatory Comparison - Ireland
vs. Luxembourg
Over the last ten years Ireland has emerged as the European
centre of excellence for the domicile of cross-border insurance companies. This
position is evidenced by Boal & Co’s annual survey of cross-border
premium income in which Ireland has overtaken Luxembourg and held the
number one position for the last three years.
There are a number of factors contributing to this success, of which
one of the most important is the regulatory environment. This note majors
on the regulatory driven business advantages for Irish based insurance
companies, although there are other important factors. In particular
it considers the advantages for an Irish company versus a Luxembourg
company, both of whom wish to write Pan European business.
Overview of regulatory advantages
The Irish Regulator adopts a “Principles” based approach
to regulation. This contrasts with a more rules based
approach adopted by Luxembourg’s regulator, the Commissariat
aux Assurances (CAA). The “principles” based approach
provides insurance companies with much more flexibility
on how they run their business. For example:-
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Greater Investment Choice
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Freedom from product approval
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Lighter regulation backed with Appointed Actuary
regime
These advantages stem basically from a difference of approach
and perspective, rather than whether or not the two jurisdictions have fully
implemented EU regulations and norms. These items are considered in more
detail below.
Other Advantages of Ireland
In addition to the regulatory advantages considered
within this note, the following factors contribute significantly
to Ireland’s success:-
-
Corporation tax rate of only
12.5% vs. Luxembourg’s effective rate of approximately
30%
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Access to outsourced administration
expertise vs. virtually no outsource options in Luxembourg
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Lower staff costs in Ireland
(although the gap has reduced in recent years)
Against this Luxembourg has banking secrecy, extensive
language abilities and geographical proximity to many
central European markets. However, generally these issues
are less significant than, for example, the corporate
tax rates.
The importance of each of the above issues varies from
company to company, and between the different target
markets. The presence of a wide range of advantages
has ensured that Ireland has been able to attract, and
meet the needs of, a well diversified group of European
insurance companies.
Regulatory
Comparison
Provided below are comparisons of the key different
regulatory approaches in Ireland and Luxembourg. The
following areas are examined:-
Information is also provided on the capital requirements
required in each domicile, although you will see that
this is an area where there is much similarity.
Investment Choice
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Irish Insurer
Insurance companies are allowed to invest in
a very wide range of assets to back policyholder
liabilities. This has allowed insurance companies
to offer the following types of product:-
· Unit linked
products linked to hedge funds
· Portfolio bond
products which create individual investment portfolios
for HNW
· US style variable
annuity products with guarantees which utilise
sophisticated hedging strategies
· Index-linked
products backed by issuers of structured notes
· UK/Irish styled
with-profits
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Luxembourg Insurer
Regulations place more restrictions on the
assets which insurance companies can purchase
to back policyholder liabilities.
There are detailed rules on the types of assets
that can be purchased, e.g. unregulated funds
such as hedge funds are excluded. There are also
complex and restrictive rules prescribing the
minimum/maximum spread of assets that must be
purchased. These rules are relaxed for larger
contracts but the limits are set very high (i.e. € 250,000, € 500,000
and € 2.5m). In theory these rules protect the
policyholder by diversifying the asset base,
but they tend to stifle investment choice and
innovation.
The close supervision of assets underlying policyholder
liabilities remains a main supervisory tool,
and assets attributable to insurance contracts
must be segregated from other assets (i.e. with
separate custodianship) and have special rules
applying to them.
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Style
of Regulation
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Irish Insurer
The Irish regulator has adopted a light style
of regulation backed by the Appointed Actuary
regime. A long-established and independent actuarial
profession allows the regulations to rely more
on expertise and judgement than prescriptive
rules – by way of the Appointed Actuary regime.
The Appointed Actuary provides the Irish regulator
with independent comfort that a company is operating
in a manner which is not endangering the solvency
position of the company. This “arms length” style
of regulation provides for a more business
friendly environment. The Appointed Actuary
regime also allows the regulations to be implemented
appropriately for each individual company without
the need for over-prescriptive rules.
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Luxembourg Insurer
Luxembourg has adopted a more traditional style
of regulation.
The tight regulation which existed prior to
the Third Life Directive resulted in a more technical
role played by actuaries. This has changed but
actuaries still generally have less influence
on insurance company management than in Anglo-Saxon
markets. There is no distinct Appointed Actuary
role (a person familiar with the Companies operations,
but independent and with a “public good” role).
This requires the regulator, the CAA, to supervise
the activities of insurance companies in more
detail ands leads to a less business friendly
environment. It also requires CAA to have very
prudent prescriptive rules to ensure that
all companies following the rules will have sufficient
and appropriate reserves to cover liabilities.
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Constraints on Product Approval
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Irish Insurer
The Appointed Actuary must certify that products
are being written on a profitable basis. Products
will also be designed to comply with local tax
rules. There are no other product approval constraints.
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Luxembourg Insurer
The CAA moved from the traditional an “a
priori” style to an “a posteriori” position
on conditions and tariffs, following implementation
of the Third Life Directive in 1994.
Whilst not a legal requirement, experience indicates
that it is wise for insurance companies to enter
into discussions with the CAA, prior to the issue
of products which could be regarded as “innovative”.
The CAA must be supplied with a technical note
of the product in advance of its sale and in
theory the CAA could demand changes if it considers
the financial stability of the company could
be threatened by a poorly designed product. In
addition the CAA require to be notified in advance
of the proposed use of any new internal fund.
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Capital Requirements
This is included for completeness, however overall,
as can been seen from the table below, the differences
in capital requirements are generally not particularly
significant.
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Irish Insurer
As indicated above the Irish regime allows a
more flexible approach to calculating
reserves. For example, in products with guarantees
the Irish regulator has been more open to allowing
credit to be taken for dynamic hedging techniques.
Solvency margin requirements in Ireland and
Luxembourg are very similar, with both following
EU requirements.
Unit linked products normally require only a
very small solvency margin, 25% of maintenance
expenses and generally significantly less than
1% of reserves, unless the insurance company
is underwriting an investment guarantee or where
product rules do not allow future levels of charges
to be increased. Products with investment guarantees
carry a 4% solvency margin. There is an additional
solvency margin requirement of 0.3% of the risk
capital (life cover).
The regulator requires companies to target solvency
margins of at least 150% of the required calculated
margin. Irish insurers must follow the EU regulations
on a minimum solvency margin requirement, currently €3m.
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Luxembourg Insurer
The Luxembourg reserving regime is more prescriptive (and
hence generally more prudent).
In accordance with European norms, Unit linked
products require a solvency margin of 25% of
annual long term expenses if charges are flexible,
or 1% of reserves if they are not. Whilst the
regulator checks the expense position and this
may be affected by local market rules, most UL
products would require reserves below the former
limit of 1%. The solvency requirement is 4% for
other life and annuity products. There is an
additional solvency margin requirement of 0.3%
of the risk capital (life cover).
Luxembourg insurers must also follow EU regulations
on minimum solvency margin requirements. The
regulator will require solvency to be adequate
according to the rules but there is no imposition
of 150%.
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Irish Companies Currently Writing Business in Europe
The following companies are examples of Irish companies
writing significant volumes of business in Europe:-
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