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New regulatory and business challenges for Luxembourg insurance companies …

After a slow down in premiums collected in 2001 and 2002, the Luxembourg insurance sector is booming again since 2003 with record premiums reported year after year ( + 17.7 % in 2006 vs. 2005). The whole industry – and more specifically life insurance companies operating out of Luxembourg under the free provision of services (FPS) – is facing today tremendous growth opportunities – but also major regulatory challenges:

• The product challenge: Thanks to the permanent adaption of the investment rules to the changing business environment (see notably circular 1/8 of the Commissariat aux Assurances), the Luxembourg life insurance companies may offer to sophisticated investors under certain limitations, a wide range of underlying investments, including real estate, private equity and hedge funds, thus allowing to wrap-up almost any investment strategies for HNWI into a life insurance contract.

• IFRS implementation: After the 1st wave of IFRS implementation as at January 1st 2005, insurance companies will have to meet the challenge of IFRS 4 - Phase 2 including the application of the "fair value" principle to technical reserves - a "mini" revolution in a world used to cautious, long term approaches and "cushions" in accounts. Although a number of principles and practical aspects of Phase 2 are still being debated, its implementation starting 2010 or 2011 will undoubtedly require some preparation and investments in actuarial resources and IT capabilities.

• Solvency II: The risk landscape is changing rapidly for insurance companies. Volatile economic conditions combined with exposure to financial options and guarantees, longevity trends, terrorism, legal protection cases and large natural disasters have all put insurers under unprecedented strains.

  
  

  The need to manage these risks has been exacerbated by an increasingly competitive environment. Solvency II accelerates this process and fosters the implementation of sound risk management practices in the insurance industry.

  Senior insurance management, like their banking colleagues before them, are increasingly expected to be proactive in the management of risk within their organizations. Insurance companies will need to invest significantly in tools and resources to ensure compliance with Solvency II. Clarification is still needed on certain aspects of Solvency II which will take some years yet, and the level of investment to comply will vary by type and size of company. However, all insurance companies in Europe will be affected by Solvency II. The target date for implementation in European Union (EU) member states is 2010; less than four years remain for companies to reach Solvency II compliance.

  t is easy to see Solvency II as yet another regulatory burden for the insurance industry. As a result, smaller companies may opt for less complex quantitative capital assessments. However, the insurance industry, perhaps more than any other, ought to be adept at managing risk. For those with advanced risk management systems and processes, Solvency II can present significant opportunities

• EV/EEV/MCEV: How insurers can cope with growing investors appetite for more transparent financial communication?
  "embedded value", "european embedded value", "market-consistent embedded value": behind these terms hides one of the most valued information regarding the future profitability of insurance companies. Although disclosing such information is currently not mandatory, it is becoming a "best practice" on the market place.
  On which aggregate should a company better communicate? What does it take to be in position to reliably and timely disclose one of the m to the financial community?