One of the special features of Luxembourg life insurance, and one of the reasons it is so attractive, is its protection. And in particular its specific measures, the contours of which were clarified in 2018, to strengthen the protection of policyholders in a situation, such as that of the customers of FWU Life Insurance Lux. The company is part of the Munich-based FWU group for “Forward You,” which was also declared insolvent in mid-July due to its excessive debt.
FWU Life Insurance Lux has four branches (France, Germany, Italy and Spain), and the group’s 2023 activity report shows 35,425 policies in France, 23,778 in Germany, 115,616 in Italy and 48,522 in Spain. There were also 12,123 contracts in Germany and 830 in Luxembourg.
The safety triangle
This is a tripartite agreement between the insurance company, the custodian bank and the Supervisory Authority for the Insurance Sector (CAA), under which the three parties must meet a certain number of obligations, with a view to protecting the policyholder.
First, the insurance company must provide the CAA with a certain amount of information, such as the position of the assets representing the technical reserves. On 19 July, the that it no longer met the solvency capital requirement (SCR) and minimum capital requirement (MCR).
The SCR represents the level of capital required to cover the risks to which an insurance company is exposed over a one-year horizon, with a confidence level of 99.5%, and the MCR represents the minimum level of capital that the insurer must maintain at all times in order to continue to operate legally.
The custodian bank is also expected to carry out regular checks on the insurance company’s financial position.
Finally, the CAA must carry out ongoing checks to ensure that the company’s solvency margin is sufficient. If the company runs into difficulties or goes bankrupt, it has the power to freeze accounts with the custodian bank to protect policyholders. “The CAA’s executive board decided on 23 July 2024 to freeze the representative assets with the credit institutions in order to protect the interests of policyholders and beneficiaries,” says a recent .
It also stated that it had introduced safeguards “to ensure fair treatment of policyholders and beneficiaries” and that prevent FWU Life Insurance Lux S.A. from paying out contractual benefits.
Super-privilege and asset segregation
Super-privilege is the second specific measure designed to protect customers. This principle allows customers to benefit from a preferential claim. In other words, they can claim their debts in priority to other creditors, including institutional creditors such as the state.
However, there may be differences depending on the type of product, as detailed by the CAA in a previous communication on its website: “this privilege will be exercised differently depending on the type of risk covered,” it says. Where the investment risk is borne by the policyholder, claims will be valued on the basis of the number of units held on the day the liquidation is opened. “For other types of investment (e.g. guaranteed-rate products), the insurance receivables will be equal to the value of the corresponding technical provisions on the day the liquidation is opened,” it also states.
The third and final measure is the segregation of assets, to ensure that they are immediately accessible in the event of default. This is in fact an obligation for all Luxembourg insurers, and involves separating their technical provisions from any other assets of the company.
What happens next?
The insurance company has one month in which to submit to the CAA for approval “a realistic short-term finance scheme, to restore, within three months, the eligible basic own funds, at least to the level of the minimum capital requirement,” says the CAA, which has announced that it will decide whether to withdraw FWU Life Insurance’s authorisation if it fails to meet this obligation. An update to the Trade and Companies Register dated 8 August mentions a six-month “suspension of payment.”
This article was originally published in .