Independentism in Europe and protection of savers; the interesting answers of life insurance under freedom of services (FOS)

Scotland and Northern Ireland (United Kingdom), Catalonia and the Basque Country (Spain), Padania and South Tyrol (Italy), Flanders (Belgium), Faeroe Islands (Denmark) (1), Corsica (France) are experiencing independence movements of varying degrees of intensity.

While Scotland has implemented a popular consultation process in a constitutional framework and with the consent of the historic member state, other movements such as those in Catalonia concentrate on initiatives of a political nature outside a constitutional framework, against national and European positions with exacerbated legal uncertainty and financial instability.

The historical context, the legal framework and the state of progress of each of its movements are very different; it is virtually impossible to predict what scenarios might apply to these politically-fictional situations. At this stage, it seems unlikely that the current independence movements can be viable outside a constitutional process endorsed by the European Union and above all a negotiated solution with the historic member state, which would involve accession to the European Union in the wake of independence.

It is nevertheless interesting to see what would be the applicable standards and what mechanisms could be enforced to reduce the instability and legal uncertainty generated by these independence phenomena.

It can be noted that while supposedly the European Union does not have a role to play in these independentism processes, all aggregate European rules will remain applicable even after the possible secession(s); moreover, some existing principles and mechanisms under the applicable European rules can help to protect savers caught up in the uncertainty of secession. This is illustrated by existing rules of life insurance under the freedom to provide services of which Luxembourg has become the undisputed specialist in the European Union.

European rules expected to continue to apply despite the possible exits

(a) Given its neutrality principle (2), if these independences were to thrive at the heart of the European Union, it is not however intended to intervene and has to:

(i) maintain complete neutrality on matters concerning the internal political relations of each Member State,

(ii) ensure respect for the Rule of Law – the cardinal value of the Union and therefore not to endorse or give no effect to initiatives contrary to the constitutional order of any Member State.

(b) Another paradox is that the effective independence of a territory would not entail the automatic accession of the new State to the European Union (all Member States must unanimously vote to integrate the new state entity into the Union). However, some European Members States (and therefore the possible secessionist regions) have almost 85% of their regulations of European origin.

Consequently, even though they have become independent, these new entities would undoubtedly continue to apply this legislation by choice or by necessity, whereas there is no guarantee that they will be part of the European Union (or the European Economic Area), especially for those who would choose secession. Joining the European Free Trade Association EFTA whose members also apply European legislation (for the four main freedoms) could be an option – again, with no guarantee.

The protective mechanisms for savers resulting from the contracts taken out under the freedom to provide services

It is interesting to note that European law contains relevant principles and mechanisms addressing the financial destabilisation and the legal uncertainty triggered by these independences, particularly with regard to the protection of investors-savers.

This is particularly true for savers who have opted for life insurance under the freedom to provide services, of which Luxembourg has become the undisputed specialist in the European Union.

While these mechanisms have been created with other objectives than addressing the instability associated with the effects of independence, they remain relevant in the configuration of independence-related instability and legal uncertainty that will undoubtedly affect not only the secessionist region but also the Historic State(s) and may be even a wider surrounding geographical area.

The risks faced by investor-savers residing in the secessionist regions are essentially twofold:

(i) the risk of financial destabilisation of banking institutions located in the independent region or in the Historic State(s) resulting in restrictive measures – more or less perennial – of access to their savings; called “corralito” in reference to the severe restrictive measures of access to liquidity enacted by the Argentine authorities in 2002, a similar set of measures was applied in Greece in 2015. This risk is accompanied by a risk of a forced conversion into a devalued currency of assets whose value would undoubtedly be greatly reduced.

In this respect, the protective answers provided by life insurance under the freedom of services are remarkable:

One of the basic assets of life insurance contracts in this respect is that these life insurance investments are less likely to be subject to restrictive access measures if compared to deposits on current or securities accounts of banking institutions.

Moreover, in the case of contracts under the freedom to provide services, these assets are not located in the country taking such measures and have become the property of insurers established outside the independent region or the historic member state. A double screen that reduces the exposure of contracts to such restrictive measures.

Additionally, the payment of partial surrenders of life insurance contracts can be envisaged on policyholder’s deposit accounts located in the European Union but outside the geographical area impacted by the secession (and preferably with banks that are not conducting business or are not licensed in the secessionist region).

In addition, the more specific assets of the Luxembourg life insurance are:

benefiting from the stability and reliability of insurers based in Luxembourg
designating a custodian bank located in a country distinct from that of the policyholder’s residence (or the country of origin or surrounding geographical area that could be destabilised) offering guarantees of stability and robustness
benefitting from the segregation/cantonment of assets that are recorded off-balance sheet of the bank
benefitting from protection of assets which cannot in principle be subject of seizures, forced pledges…

(ii) The serious legal uncertainty arising from a secession insofar as the newly applicable normative framework should either be constructed from scratch or more likely derived from a hybrid creation based on European rules and new measures put in place by the new independent entity.

Here as well the life insurance under the freedom of services offers reliable solutions:

In the case of life insurance contracts taken out under the freedom to provide services, this insecurity could be countered by the option open by European law of choosing as applicable law the law of the policyholder’s nationality; originally created to protect migrant European workers, exercising this option (at inception or in case of secession) would undoubtedly allow the nationals of the Member State remaining resident in the new independent entity to have applied a set of familiar standards (the option exercise during the life of the contract should be possible as long as third party’s rights are not challenged which should not be the case with a return to the originally applicable law or similar).

In addition, the life insurer acting under the freedom to provide services remains subject to the supervision of its local regulator and to the rules governing the eligibility of assets according to the insurer’s law. This also removes a significant part of the legal uncertainty created by independence.

It is of course possible for the independent entity to invoke the protection of its public policy (ordre public) in order to take more restrictive measures (asset freezes, seizures, etc.) that may affect the assets, contracts or accounts of savers: but because there would be no international recognition, such a public policy is unlikely to materialise; moreover it would undoubtedly result in litigation especially if measures are in the long term and contrary to the savers’ interest protection.

As noted in the introduction, the secession movements are very unlikely to succeed if they are not taking place in a constitutional process backed by the local state authorities and the European Union; however, when subscribing a life insurance policy, it’s worth thinking about the benefits that the existing European regulation and mechanisms can bring to the policyholder as a saver in terms of financial stability and legal security; the life insurance contract subscribed under freedom of services – of which Luxembourg is the undisputed leader – can address most of the risks triggered by separatist activism and more generally by local financial turmoil, political instability and related legal uncertainty.

Article by Antonio Corpas, Head of Wealth Structuring and Private Equity at OneLife

(1) The Danish Faroe Islands are not part of the European Union

(2.) Article 4 para. 2 European Union Treaty: The Union respects the equality of the Member States before the Treaties and their national identity, inherent in their fundamental political and constitutional structures, including local and regional self-government. It respects the essential functions of the State, in particular those whose purpose is to ensure its territorial integrity, to maintain public order and to safeguard national security. In particular, national security remains the sole responsibility of each Member State.

The ISF is dead – long live the IFI?

Between 17 October and 10 November, France’s National Assembly, the lower house of parliament, has been examining the country’s finance bill for 2018. The bill introduces a new final flat tax (Prélèvement Forfaitaire Unique or PFU), applicable to all savings and investment accounts, including life assurance on a retroactive basis from 27 September, 2017.

While common in the UK or the US, the flat tax is an innovation in the French tax system, applying as it does a single tax rate to a broad range of different situations and sources of income.

The French tax system normally customises tax liability according to the personal situation of the taxpayer and the type of income. This therefore represents a significant change of approach to taxation that originates from the presidential programme of Emmanuel Macron.

The underlying idea is to simplify the taxation of capital held by French residents through the application of a flat tax to a broad range of savings and investment accounts and income:

through application of a single tax rate to all financial income;
to avoid the complexity of the application of France’s income tax for different categories of income, including interests, dividends and capital gains.

The 30% rate of the PFU consists of the following:

5% in income tax and 15.5% in social security contributions up to 31 December, 2017, and
8% in income tax and 17.2% in social contributions from 1 January, 2018

The PFU is applicable to all financial and investment accounts held by French residents from 1 January 2018, and for life assurance retroactively from 27 September 2017.

Certain types of investment or account are not liable to the PFU:

Regulated savings accounts (livrets réglementés) such as the Livret A or Sustainable Development Account, or income tax-exempt savings products such as employee savings plans and pension schemes.
Investments predominantly in shares such as Equity Savings Plans, reflecting the government’s policy to encourage investment in the real economy.
Real estate income, which is, however, impacted by the conversion of France’s wealth tax into a tax in real estate assets.

Therefore, neither life insurance nor bank savings accounts such as home ownership savings plans are exempt from the PFU.

As a result of divisions within the government and poor wording of the draft legislation, taxpayers and life assurance policyholders feared they would face higher taxation on existing contracts than under existing rules. The 30% flat tax was supposed to apply to life assurance contracts with a value of more than €150,000 for an individual and €300,000 for a couple, regardless of the length of time the contract had been held.

However, the government has introduced two amendments to clarify the PFU regime.

All contracts subscribed before 27 September, 2017 will be taxed at current applicable rates, according to the length of time the contract has been held. Should the policyholder make top-ups on the contract, the PFU will apply, with the opportunity to apply the lower tax rate of 24.7% from 1 January, 2018 for the share of premiums paid below €150,000 for an individual and €300,000 for a couple. Contracts subscribed after 27 September, 2017 will be subject to the PFU whatever the length or value of the contract.

Up to now, the tax applicable to withdrawals from life assurance contracts has depended on the length of time the contract has been held and whether the policyholder opts for a one-off levy or income tax. The applicable rate of the levy decreases over time as follows:

A 50.5% tax rate where the life insurance contract has been held for less than four years (35% in income tax and 15.5% in social security contributions).
A 30.5% tax rate for life insurance contracts held for between four and eight years (15% income tax and 15.5% social security contributions).
A 23% tax rate for life insurance contracts held for more than eight years (7.5% income tax and 15.5% social security contributions).

These rates are due to increase to 52.2%, 32.2% and 24.7% as of 1 January, 2018 due to an increase of the level of social security contributions.

It should be noted that the rate of the PFU is lower than that of the one-off levy for a withdrawal within less than eight years but potentially higher after the eight year threshold.

We recommend keeping existing contracts until the eight year threshold without making any top-ups after 27 September, 2017. New contracts should be subscribed for investments after 27 September to ensure the policyholder benefits from the lowest possible rates covering all the premiums they have invested in life contracts above €150,000 euros for an individual and €300,000 for a couple.

This is a unique opportunity to take advantage of the new legislation and benefit from the lower tax rates available to policyholders. OneLife would be happy to help you take advantage of the changes.

Replacement of the ISF by the IFI

Approved on first reading by the National Assembly, the finance bill will replace the wealth solidarity tax (ISF) by a real estate wealth tax (IFI). Here’s the basic outline.

The ISF taxes assets in excess of €1.3m on a progressive scale. The IFI will replace the ISF will the same thresholds and rates.

The taxable base (the assets that are subject to tax) will change considerably, however.

Financial assets (including life assurance policies) will henceforth be excluded, along with forestry assets, works of art, real estate assets related to professional activities and rented furnished accommodation (exclusively under the furnished accommodation rental business regime). By contrast, unfortunately, shares in SCPI real estate investment companies or OPCI real estate collective funds, even when held through a life assurance policy, and all other real estate assets fall within the scope of the new tax.

Fortunately, the allowance of 30% of the value of the taxpayer’s principal residence will be maintained. The other side of the coin is that usufructuaries and reversionary owners will now be liable for their respective fiscal share, and no longer the usufructuary alone.

The bill has now passed to the Senate, which may not necessarily agree with these changes, given a report of 9 November that denounced the changes as incoherent and damaging to the economy.

Nevertheless, the proposals represent appreciable tax savings for many wealthy French households, but at the expense of a sector that accounts for 18% of national wealth and 8% of total employment. More battles may lie ahead between a National Assembly firmly behind the president’s vision and a Senate that remains resolutely opposed to it.

All this underlines even further the advantages of Luxembourg life assurance policies for French residents, and OneLife will keep its partners up to date with further developments on this issue in order to help them guide their clients through the changes.

Article by Jean-Nicolas Grandhaye

InsurTech : using technology to change the client experience

On 12 October, at the second edition of the InsurTech Summit at the Novotel Kirchberg, CEO OneLife, Marc Stevens, participated in a round table discussion in the company of his Luxembourg peers. The experts from the life insurance serctor discussed the themes of innovation and investment in the area of InsurTech.

The session was moderated by Geoffroy Gailly, Partner at KPMG, who asked about the return on investment in the area of InsurTech. “What are the amounts and how are they invested? How do you measure the ROI ?” asked M. Gailly.

For Marc Stevens, measuring the end-to-end ROI is simply not possible : “A better way of looking at it is to define a field of application and to to take processes into account”. The CEO of OneLife then shared a number of examples with participants: the use of robots for e-mail management, requiring an investment of two days, in order to gain 20 man-days per year. In addition, prospectiing using social media and notably LinkedIn. This investment, led by Christophe Regnault, Digital Marketing Manager at the life insurance company located in Capellen, is already bearing its fruit. As Marc Stevens indicates, the cost is 10 times lighter than using traditional prospection methods and the ratio is 3 times higher. Moreover, according to the CEO, certain questions remain: “How can these prospects be converted into real partner relationships ? In fact, our prospects are developing in a digital environment, so the question is, can your company evolve in the same universe as them?”

At OneLife, investment in technology goes hand-in-hand with a new way of managing projects, with an Agile type of approach advocated by Eric Lipper, COO of the life insurer. “We are now able to deliver new products and services in a much shorter timeframe. This was the case with our App developed last year. If it is difficult to evaluate the return on investment from A to Z, a number of different factors may be calculated which demonstrate that we are moving in the right direction” added Marc Stevens. He went on to say : “Spending is easy, Smart spending is way more difficult”.

The Luxembourg life insurance experts then discussed the digital transformation within their respective companies. Marc Stevens began his speech by sharing an example of a site comparing different non-life assurance propositions, launched over 20 years ago in the Netherlands. «Today, 60 % of product distribution passes through this site. However, the same concept for life insurance companies just didn’t work’. With this example, M. Stevens also emphasised the importance of the interchange between human contact and technology. «Some do not want either telephone or face to face contact, as they are used to a totally digital experience. But in our sector, some still prefer human contact. One of the challenges is therefore to be able to integrate this interchange process”.

The client – and partner – experience is key and technology can now allow an optimal level of exchange which creates new relationships. “Thirty years ago, technology wasn’t mature. Today, we are involved in a process of change with a variety of different marketing operations and HR tools etc … we have embarked on a journey without really knowing the final destination. But one thing is sure, the client experience can only benefit from it, as will, in fine, the experience of our employees, our partners and our clients” concluded Marc Stevens.

GDPR in the life insurance sector: constraints and opportunities

On 12^th October, more than 200 professionals from the Fintech world gathered at the Novotel Kirchberg for the first edition of the RegTech Summit. While local and international experts focused on the opportunities brought by the use of RegTech solutions or on the importance of securing information in a big data era, Eric Lippert, COO of OneLife gave a presentation on the upcoming General Data Protection Regulation. How will it impact the life insurance sector?

Companies are not yet compliant

The COO of OneLife started by sharing numbers about the upcoming GDPR regulation, which assesses the readiness of companies: “In October 2016, 97% of companies in Europe had no strategy to deal with GDPR. 23% expect sanctions as they won’t be ready. And more than 50% admitted they won’t be fully compliant”. Yet, Eric Lippert thinks Luxembourg is in a good place and has a strong advantage compared to other countries in Europe, mainly because of the banking and insurance privacy laws, and the presence of authorities such as the CSSF and CNPD. “We have been dealing with data privacy for years” he added.

New rules will be game-changers for life insurers

Eric Lippert then listed several differences with the current privacy policies: in case of a data breach, companies will have 72 hours to provide the CNPD with all the relevant documentation, the fine will go up to €20m or 4% of the turnover. “It will have huge consequences for the companies who do not respect these new GDPR rules” explained Mr. Lippert. Another important aspect of the new European regulation will be the consent: as a matter of fact, the formal consent of the customer will be needed in order for companies to use the data. They will also have to be able to prove and provide it at any time. Finally, the ‘right to be forgotten’ will change the game, with customers now able to ask the insurer to delete all their data, and so will the portability aspect: insurers will have to facilitate the transfer of data if the clients request it. “The major constraint will actually be administrative, with the formalisation of the new rules. This requires the appointment of a Data Protection Officer and annual audits of the processes and rules in order to make sure the company remains compliant.

Eric Lippert ended his presentation on a more positive note, highlighting that GDPR also means new opportunities for life insurance companies: they will be able to take control of their own compliance, build a stronger client relationship based on trust, work on the quality of their data, enhance their digital marketing. “There is also a huge opportunity in Europe for centralised KYC” he added.

Emmanuel Macron and taxation

Emmanuel Macron has been the new president of the French Republic since Sunday 7 May and changes to taxation of savings and assets are expected.

The new president’s intention is to direct savings towards financing the economy by offering investors less burdensome, neutral taxation, irrespective of the way in which gains are held and realised.

The changes are as follows:

Income from assets, irrespective of their characteristics (interest, dividends and capital gains) would be taxed at a flat rate of 30%, of which 15.5% are social security contributions. In other words income from assets would henceforth be taxed at a rate of 14.5%, excluding social security levies.

The beneficiaries would nevertheless keep the option of applying the progressive income tax scale to which the 15.5% social security levies would be added.

The beneficiaries will thus be entitled to decide between a flat-rate levy, excluding social security levies, and the marginal income tax rate.

As for dividends, the flat levy would exclude the 40% discount, maintained however in the event of opting for the progressive income tax scale.

Taxation on redemption of life insurance policies would be modified only for policies worth more than €150,000 which have been subject to additional payments after the entering into force of the 30% flat levy. Future redemptions of these policies would be subject to the 30% flat levy applicable to income from assets.

For the other policies the current tax regime is maintained.

No change is forecast to the favourable inheritance regime applicable to the redemption of life insurance policies following the death of the insured person.
With regard to wealth tax (ISF), the presidential programme intends to end Wealth Tax by replacing it with a tax on property wealth which would preserve the same application threshold and scale as the current Wealth Tax regime.

Liquid wealth, including life insurance, would thus escape the capital tax.

The future of these tax provisions contained in the presidential programme will obviously depend on the composition of the parliament following the legislative elections which will be held on 11 and 18 June 2017. In the absence of a clear majority in the Parliament, the presidential program may still be amended as compromises are made.

For further information or tax optimisation advice, feel free to contact our Wealth Structuring expert:

Christophe Brechignac

Coming shortly!

OneLife will soon be ready to launch its capitalisation contract product designed for Finnish legal entities. Due to the impact of Finland’s inheritance tax rules, capitalisation contracts are generally recommended only to legal entities, while life assurance products, such as Wealth Finland, are recommended to private individuals.

Capitalisation Finland complies with Finnish law while benefiting from the advantages offered by Luxembourg regarding flexibility and protection. It is a unit-linked capitalisation contract that enables underlying investments in multiple asset classes including both listed and unlisted equities and bonds. The new product permits open architecture involving multiple custodian banks and asset managers as well as self-management. However, the policyholder should not be involved in the management or business activities of the underlying investments. The policy can be pledged and its ownership transferred to a new policyholder accepted by OneLife. Premiums may be paid in cash or in kind by transferring an existing investment portfolio into the policy.

Capitalisation Finland enables legal entities to consolidate investments and postpone taxation of income from investment activities. The product may also be used in Management Incentive Schemes (MIPs). It enables passive investment in both listed and non-listed assets, for example equities, bonds and different types of funds as long as the assets are freely transferable and other legal and internal requirements are fulfilled.

The tax treatment of capitalisation contracts has been clarified in Finland thanks to written guidance from the tax authorities. There are also multiple new tax and court rulings that can make investments through Luxembourg-based assurance products attractive, for instance to private equity and real estate funds operating in the form of limited partnerships. Moreover, according to a recent decision by the Supreme Administrative Court of Finland, it is possible to obtain dividend withholding tax relief on Finnish-sourced dividends paid to the Capitalisation Finland policy.

Legal update – Changes in Finnish inheritance and gift taxation

On 1 January 2017, Finland’s inheritance and gift tax legislation was amended, involving the following main changes concerning life assurance policies:

The inheritance and gift tax rates have been lowered (for the first category of heirs/beneficiaries the top inheritance tax rate was reduced from 20% to 19% and the gift tax rate from 20% to 17%).
The standard spousal allowance was increased from €60,000 to €90,000 and the standard allowance for minor children was increased from €40,000 to €60,000.
The €35,000 tax-exempt allowance on death benefits to close relatives is abolished with effect from 1 January 2018.
The 50% tax-exempt allowance for widows on death benefits is abolished with effect from 1 January 2018.

On its own, the impending abolition of the €35,000 tax-exempt allowance for close relatives will increase the tax impact for beneficiaries. However, the overall reduction in inheritance tax rates may in many cases compensate for this and even result in a lower tax burden for beneficiaries.

The abolition of the widows’ 50% tax-exempt allowance will affect policies where spouses are named beneficiaries. For these policies in particular, it is recommended to review with a local advisor whether the existing beneficiary nominations are still viable. Please note that the existing beneficiary nomination can be changed through a written request signed by the policyholder, although changing irrevocable beneficiary nominations also requires the consent of the irrevocable beneficiary.

Belgium : new regulation in the Flemish Region (VLABEL)

Since 1 January 2015 and the transfer to VLABEL of fiscal powers regarding inheritance tax and part of the registration fees, intermediaries and insurance companies, lawyers and financial planners, and of course Flemish citizens seeking to structure their assets, have acted in line with decisions published by the Flemish tax authorities. While these opinions were able to clarify the position of the Flemish tax authorities on the matters in question, the points of view taken by VLABEL were surprising to say the least and have caused turmoil in the sector, going so far as to freeze certain solutions currently used and thus far accepted by the federal administration. Although VLABEL has published its new general code which consolidates the inheritance tax and registration codes, no amendments have been made to the law which could justify these contradictory views. In March 2016, Assuralia also entered the fray, lodging a complaint with the Council of State against the Flemish tax authority. Thus, the political world could no longer ignore this issue.

Shortly before Christmas 2016, a new decree was issued. Published on 30 December, its application as of 1 January 2017 has, on the whole, put a smile on people’s faces and enabled the new year to begin on a more optimistic footing. Two issues relating to insurance policies were on VLABEL’s radar and were therefore reviewed.

Donating an insurance policy by assigning all rights

VLABEL’s decision to tax the donation of insurance despite the payment of donation fees generated hostility in November 2015. Several amendments to the original position were published without enabling the assignee/recipient to prevent the benefits that were paid to them upon the termination of the policy being subject to inheritance tax. The decree of 23 December 2016 put an end to this practice by subjecting only the gains on a policy to inheritance tax. Gains should be understood to mean the difference between the value of the insurance policy at the time of donation and the value of the policy upon termination by the death of the donor. The arrival of this new decree therefore reduced the applicable taxation for citizens in comparison with the point of view of the Flemish administration. We must not overlook the fact that the Flemish taxation is not in line with the legal principles underlying insurance policy donation. Consistency between the legal and taxation arguments is, however, well established in other regions of the country.

Joint applications

VLABEL’s position with regard to policies taken out jointly by two policyholders, equally insured, which terminate upon the second death, has generated huge controversy which has still not eased due to cases that remain unresolved to date.

The decision intended to tax beneficiaries under the inheritance tax regime when the latter had not received any benefits and were not even certain to receive benefits at some point in future (as a reminder, the policyholder has the right to revoke the beneficiary clause at any time, provided that the beneficiary has not accepted the benefit. Pursuant to an increase clause between the policyholder in the aforementioned policy structure, this right of revocation returns to the surviving policyholder following the death of the first).

According to the decree now in force, the taxation shall come into effect upon payment of a benefit which may arise from the surrender or termination of the policy. In other words, the partial or total surrender of the policy by the surviving policyholder will generate inheritance tax, which can only occur by means of an additional succession declaration. The collection of inheritance tax upon the termination of the policy by the beneficiary remains unchanged.

This decree is not a panacea, nor a miracle cure for the much criticised decisions made by VLABEL during the last two years. While it is a relief for the recipient/assignees of existing policies, and the beneficiaries of policies taken out jointly, it offers no solution for policyholders whose aim was to optimise the fiscal impact of transferring assets between themselves. It also puts a stop to any discussion regarding policyholders married under a shared property regime. The decree raises other issues that we have chosen not to address in this article and which must, of course, be taken into consideration in finding a solution for asset structuring. We recommend that our clients contact their advisor before making any decisions on the matter and we are available to provide any information they may require.

An analysis of the varying legal positions across Europe

What happens to the rights of policyholders in cases where their death does not lead to termination of the contract?

In a life insurance policy, the policyholder and the insured can be different people. While this configuration may seem strange and even unheard of in certain jurisdictions, the structure is indeed theoretically possible and can be effective when it comes to estate services.

The early death of the insured raises no disputes. However, there is a very different discussion if the policyholder should die first. What becomes of the rights held by the policyholder, and who will be able to exercise them in future? Who will go on to manage the policy, implement surrenders or even amend the beneficiary clause?

Reflecting on the cross-border structure, we have carried out a study of our key markets.

Belgium and the Grand Duchy of Luxembourg have adopted an identical but very complex position. If the policyholder’s rights are not extinguished upon their death, the policyholder’s successors in interests will not inherit the right to revoke the beneficiary clause, the basis of the policy tied to the policyholder. Consequently, exercising other rights cannot undermine a third party stipulation sought by the deceased policyholder. This means that the action taken by the successors in interests is limited to managing the policy, that they are unable to dispose of the policy in any way until its termination. On the other hand, the policyholder has the option to make provisions for all or part of their rights to be transferred, upon their death, to a person of their choice who will be able to exercise all the assigned rights in future. Note that in Luxembourg this assignment is subject to authorisation by the insured.

In France, the legal process is uncertain, as there are no explicit legal provisions. There are two contradictory sets of legal theory. One considers the rights to the policy to be personal and non-transferrable. Consequently, when the applicant dies before the insured, the rights of the applicant die with them and the policy is blocked until the death of the insured. Others consider the applicant’s receivables as ordinary receivables that can be transferred to their heirs as part of their estate like any other estate assets. With no clear position on the subject, the application is made principally, or exclusively, for the lifetime of the applicant(s).

In Portugal, the status of the policy is somewhere between what applies in France on the one hand, and in Belgium and the Grand Duchy of Luxembourg on the other. The rights of the deceased policyholder are not transferred to their heirs and the policy is frozen, unless provisions for a post-mortem assignment were made by the policyholder.

Finland, Denmark and Sweden opted, in this configuration, for a transfer of rights to the beneficiaries who then become the new policyholders.

In the United Kingdom, it is the policyholder’s heirs who inherit the rights in the event of the policyholder’s early death, and who become the new policyholders. However, it is not possible to appoint an assignee in the event of death.

This study shows that the civil consequences of the same structure can be completely different from one jurisdiction to the next. Not to mention the fiscal impact that could affect policyholders’ heirs, assignees and beneficiaries, sometimes through no fault of their own, in such a situation.

Our aim is once again to focus on fully understanding how an insurance policy works before seeking any solution. While a policy can be adapted to bring it in line with another jurisdiction, amending a policy that was badly structured in the first place may prove to be mission impossible. The policyholder then has no choice but to surrender the policy and bear the financial consequences of this surrender.

The changing face of European distribution regulation

The European insurance industry, from providers to intermediaries, is preparing for the implementation in a year’s time of the EU’s Insurance Distribution Directive (IDD), which updates and replaces the 2002 Insurance Mediation Directive. The goal of the new legislation is a welcome one – to establish a pan-European level playing field by harmonisation of the rules governing distribution. OneLife, along with the Luxembourg life assurance sector as a whole, is already advanced in its preparation and adaptation to this important change to the distribution framework.

The directive, which took effect in February 2016 and must be transposed by member states by 23 February 2018, provides a framework of minimum standards for regulation of insurance brokers, agents and other intermediaries, but EU member states will be free to incorporate additional requirements as they adopt it into national law. However, the aim is to make further progress toward completion of a European single market in a sector that remains highly fragmented despite the existence of cross-border passporting for insurers and intermediaries.

The directive seeks to increase consumer protection through uniformity of the rules governing distribution, bringing direct distribution, bancassurance, and online comparison sites into line with independent and tied intermediaries, as well as ensuring increased transparency and reporting requirements. The legislation also includes provisions designed to ease the impact on smaller distributors.

The new regime also brings insurance distribution into line with other EU legislation, including the transparency and comparability provisions of the forthcoming regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs) as well as the professionalism and reputational requirements of the Solvency II directive. It provides for increased co-operation between national and European regulators and introduces new rules regarding sanctions applicable to distributors, as well as setting out standards in areas such as managing conflicts of interest and ensuring that products are appropriate for the client.

A major thrust of the legislation, however, is to make it easier for intermediaries to benefit from the single European market for insurance products by simplifying formalities for operating on a cross-border basis and restricting national measures that in the past have created barriers to foreign businesses, or at least ensuring that national rules for the sector are easily available.

As a leading centre of the pan-European life sector, Luxembourg is highly regulated and in advance with the implementation of IDD requirements, with the industry regulator already adopting some measures on a national basis ahead of the deadline. OneLife is up to speed with the changes taking place in the European market and is ready to help intermediaries both adapt and take advantage of the new opportunities opening up in the European marketplace.

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Preparing to welcome the KID

It’s now almost a decade since the European Commission began thinking in 2007 about a way to present the features of complex investment products to retail investors in a clear, concise and non-misleading way. That initiative led to the introduction of the Key Investor Information Document (KIID) for funds through the UCITS IV directive. However, European policy-makers wanted to extend the idea to other types of investment to enable investors to compare them.

The result is the Key Information document (KID) created by EU Regulation 1286/2014 on Packaged Retail and Insurance-Based Investment Products (PRIIPs). Although similar in its presentation to the UCITS KIID, the information contained in the PRIIPS KID is very different in approach, prompting the fund industry to obtain a ‘grandfathering’ period during which it could retain the (itself recently-introduced) KIID before having to switch to the KID.

Along with other providers of retail investment products, insurers were originally required to implement the regulation by 1 January 2017. However, in response to industry criticism, the European Parliament called on the Commission to revise details of how the regulation is to be put into effect, resulting in a decision to delay its application until the beginning of 2018.

PRIIPs distinguishes between two models, the single investment option and the multiple investment option (sometimes referred to as MOP). The MOP approach will apply to products such as those offered by OneLife, which can include a combination of external and internal funds (collective, dedicated and model portfolio).

This involves a two-level KID – one for the contract and one for each of the various investment options. Because PRIIPs requires full transparency, asset managers will be asked to provide standardised investment models that use or reference a benchmark. This approach will be followed by all Insurers in Luxembourg.

In addition, asset managers will be requested to provide information to enable the calculation of performance scenarios. Asset managers working with OneLife are already familiar with the KIID approach that we implemented more than three years ago, confirming the wisdom of our choice of strategy at the time.

We have also joined forces with Lombard International Assurance and ABN AMRO Life to share resources and avoid the need for asset managers and custodian banks to provide the same information several times, and the three companies will draw on the expertise of KNEIP Communication for KID production.

We will soon contact our asset managers and custodian banks to ensure they understand the challenges of the new regulation and what the insurance companies expect from them. OneLife is committed to assisting its partners to meet this challenge, which represents a step change in the way financial products are marketed to retail clients.

>>> For more information on PRIIPS please contact our Tax and Legal specialists here.

>>> This article is part of the November 2016 edition of our monthly newsletter Life Insights. Click here to subscribe.