Implementation of the EU Insurance Distribution Directive

This is to inform you of the publication on 22 August 2018 of the Luxembourg law implementing EU directive 2016/97 on insurance distribution (IDD) and amending other aspects of the Luxembourg insurance sector legislation (the 2018 Amending Act).

In a nutshell, the 2018 Amending Act brings substantial changes to the insurance intermediation regime as currently foreseen in the Luxembourg act of 7 December 2015 on the insurance sector (the Insurance Sector Act 2015) by implementing IDD into Luxembourg law.

The 2018 Amending Act also amends one aspect of the threefold protection system for policyholders embedded in the Insurance Sector Act 2015 (the so-called "triangle of security"¹) by amending the rules governing the absolute preferential right (privilège) for insurance claims over matching assets of the insurance undertaking.

The 2018 Amending Act enters into force on 1 October 2018.

1. Implementation of IDD

IDD covers a broad range of activities which, as the use of the term "distribution" suggests, goes beyond the concept of "mediation" used by its predecessor directive². It also covers a broader range of professionals, in that it does not only apply to intermediaries but generally to persons distributing insurance products, including insurance and reinsurance companies themselves.

To implement IDD, the 2018 Amending Act makes a number of key amendments to the Insurance Sector Act 2015, including the following:

• introducing consumer protection rules for the distribution of insurance investment products, which are streamlined with those already available under MiFID II³ in the banking/investment firm sector (suitability and appropriateness test, etc.). These new rules concern insurance intermediaries and insurance companies when distributing insurance-based investment products (IBIP)⁴;
• creating product oversight and governance requirements for insurance undertakings and intermediaries which manufacture insurance products for sale to customers, including requirements similar to those seen nowadays under MiFID II (identifying target markets for each product, ensuring that all relevant risks to such identified target markets are assessed, regularly reviewing the insurance products offered or marketed to assess whether the product remains consistent with the needs of the identified target markets, etc.);
• introducing the requirement for the manufacturer of non-life insurance products to provide a standardised insurance product information document in relation to the distribution of non-life insurance products;
• requiring additional information to be provided in connection with IBIPs, in addition to the "key information document" foreseen under PRIIPs⁵;
• enhancing the provisions regarding management of conflicts of interest and transparency requirements⁶, which has become necessary in the light of the expanding range of activities that many insurance intermediaries and undertakings carry on simultaneously, to ensure such conflicts do not adversely affect the interests of the customer;
• introducing a registration requirement (immatriculation) for insurance intermediaries distributing insurance products on an ancillary basis (unless an exemption applies⁷) on a register of distributors to be held by the CAA. Note, as an aside, that persons responsible for distribution within insurers will also need to be registered on such register⁸;
• introducing the obligation to ensure continuing training and development of insurance and reinsurance intermediaries, their relevant employees, as well as those employees of insurance and reinsurance companies that directly participate in insurance or reinsurance distribution (all to be further detailed in a CAA regulation); and
• inserting the concept of "whistleblower" in the Insurance Sector Act 2015 and creating associated protection rules⁹.

2. Reorganisation of preferential right over insurance claims

The 2018 Amending Act also significantly reshapes the rules of the Insurance Sector Act 2015 organising specific protection of insurance claims.

The changes are driven by the need to adapt current Luxembourg insurance legislation to the activities nowadays carried out in the Luxembourg insurance sector and reflect in particular the growing importance of the Luxembourg life insurance market providing life insurance policies designed for investment purposes rather than risk coverage.

Under the existing regime, all insurance claims¹⁰ equally benefit from an absolute preferential right over all the matching assets held by an insurance company to cover insurance liabilities. No distinction is made as to the type of risk covered and type of insurance contract concerned and there is hence a form of "forced solidarity" among all policyholders/beneficiaries of a particular insurer.

The 2018 Amending Act now organises a ranking between specific categories of policyholders/beneficiaries, whilst still maintaining the overall absolute preferential right over matching assets which is common to all policyholders/beneficiaries.

More specifically, in the life insurance space, the new regime creates three different groups of insurance creditors benefiting from the privilege, including one for insurance claims where the investment risk is assumed by the policyholder¹¹, which category is to include the typical life insurance based investment products commonly used in Luxembourg, such as internal dedicated funds (fonds internes dédiés). Here, the 2018 Amending Act creates a prior ranking over the underlying assets held by the insurer for the benefit of this particular group of insurance creditors. Insurance claims which (in case of a payment default by the insurer) could not be satisfied by application of this first priority right over underlying assets benefit from a second ranking priority over the other matching assets (relating to the other groups of insurance claims).

This new mechanism removes what might be regarded as an "unfairness" in the existing protection mechanism suffered by insurance policy beneficiaries where the investment risk is assumed by the latter. Indeed, those policyholders/beneficiaries, which already support the financial risks under the insurance policies (in respect of the underlying assets held), also needed to "contribute" in case of impossibility of the insurer to satisfy its commitments under traditional life insurance contracts, since, in the current regime, all policyholders share the same priority right over the matching assets held by the insurer.

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