TACIS Insurance Advisory Services II
Report:
Component 2
“Regulatory Issues for Life Insurance and for Insured
Pensions”
Prepared by:
Virginia Murray
Professor Constantine Koutsopoulos
Demetrius Floudas
IKRP Rokas & Partners
This project is funded by
the European Union
A project implemented by
PricewaterhouseCoopers Risk Management (Belgium),
ZAO PricewaterhouseCoopers Audit, (Moscow)
IKRP Rokas & Partners Law Firm,
McGraw-Hill International (UK) Limited (Standard and Poor’s)
Regulatory issues for life insurers and for insured pensions
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TABLE OF CONTENTS
Executive Summary ............................................................................................ 3
Introduction ....................................................................................................... 5
A. Separation of long-term life assets and other life insurance assets ............... 7
B. Policy terms and consumer protection........................................................ 8
C. Solvency ............................................................................................... 10
1. Minimum guarantee fund .................................................................... 11
2. Solvency margin ................................................................................. 11
3. Assessment of assets and of liabilities .................................................. 12
D. Insurance provisions .............................................................................. 13
1. Technical reserves .............................................................................. 13
2. Mathematical reserves ........................................................................ 14
E. Assets and investments .......................................................................... 15
1. Investment rules ................................................................................ 15
2. Admissible assets ............................................................................... 16
3. Diversification of Assets ...................................................................... 17
4. Insurance deposits ............................................................................. 17
5. Derivatives......................................................................................... 17
6. Connected companies ......................................................................... 17
F. Distribution of surplus (bonuses) ............................................................. 18
G. Unit linked products ............................................................................... 18
H. Reinsurance .......................................................................................... 19
I.
Shareholders & managers ....................................................................... 20
J. The appointed actuary............................................................................ 21
1. The appointed actuary concept ............................................................ 21
2. Some principles regarding appointed actuaries ...................................... 22
3. Duties of the appointed actuary ........................................................... 23
K. The auditor ........................................................................................... 24
L. Benefit guarantee funds (Compensation schemes) .................................... 24
M. Relation to state pensions ....................................................................... 25
N. Relation to occupational retirement schemes ............................................ 27
O. Taxation................................................................................................ 29
P. Annuities and pension income ................................................................. 31
Q. Sex discrimination in insurance and in pensions ........................................ 31
Conclusions and recommendations ..................................................................... 33
Annex
Annex
Annex
Annex
I. Annex IV, section B of the recast Life Directive (2002/83/EC) ................. 37
II. Article 20 of the 2002 Life Directive ..................................................... 39
III. Article 23 of the 2002 Life Directive .................................................... 41
IV. Article 24(1) of the EU Directive (2002/83) .......................................... 44
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Regulatory issues for life insurers and for insured pensions
Executive Summary
The problems faced by most state social security systems make evident the supplementary
role that private insurance and occupational pension schemes are called to play and,
therefore, the great need to have thorough and effective supervision of those areas.
Furthermore, due to increased job mobility, pension portability becomes an important issue:
for occupational pension schemes to be maximally effective, provisions have to be made for a
transfer of pension funds (both within a country and across borders) when changing
employer.
Private pensions and individual life insurance involve insurance contracts often spanning forty
or more years and policy conditions (e.g., premiums) set for the entire duration of the
contract. In contrast to yearly renewable coverages, where normally annual premiums can be
changed, the long-term commitments undertaken by a life insurer demand extreme actuarial
care in setting policy conditions, in pricing policies and in the periodic valuation of the
resulting liabilities. Beyond that, it is vital to ensure that the assets backing an insurer's longterm life liabilities prove adequate in meeting those liabilities fully and in a timely fashion
(asset-liability matching).
It is equally important that assets allocated to long-term liabilities be conservatively invested
and valued and that there be controls to ensure that assets set aside for long-term risks are
not used to cover short-term risks or investment in unrelated activities (e.g., connected
companies). The widely publicized failure of one of the largest and oldest UK life insurance
companies (Equitable Life) and the current dispute over assessment of liabilities between the
UK supervisory authority (the FSA) and Europe’s largest mutual insurer, Standard Life, show
that the proper assessment of long-term liabilities of life insurance companies is of primary
importance.
Given the significance of long-term insurance or pension policies in personal financial
planning, it is also vital that policy terms be fair and that proper information be provided to
policyholders concerning the likely benefits to be expected from a policy. Other consumer
protection areas include surrender values, proper administration of bonuses, fair settlement
of claims and realistic sales illustrations.
Though quite distinct, the parts played by the actuary and by the auditor in assisting the
supervisory authority are of key importance. Within any existing legal or regulatory
constraints, the proper valuation of liabilities stemming from long-term risks is the
responsibility of the actuary. The auditor's responsibility on the other hand is to make sure
that the company accounts are in accordance with the law and conform to generally accepted
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Regulatory issues for life insurers and for insured pensions
(and appropriately conservative) accounting principles. A strong, well-organized and
technically knowledgeable national association of insurers can also have a benign influence on
market operations: besides making available helpful information, it can mediate in disputes
between companies and clients and even admonish members that misbehave.
There are a number of issues regarding the relationship between private insurance and state
pension provision. In the presence of current demographic and economic conditions, states
are facing the difficult task of safeguarding the adequacy of pensions without jeopardizing the
financial sustainability of the pensions system. A mixture of pay-as-you-go (state pensions)
and of effectively supervised pension plans based on capitalization (occupational retirement
schemes, private insurance) appears to be the solution. The success of such a blend,
however depends on careful planning on the part of the state and on tax and other incentives
that will facilitate the development of private pensions supplementing the state social security
pension.
A final point of discussion is the issue of the legitimacy of gender discrimination in insurance
premiums and in pension contributions. The European Commission has recently issued a draft
directive imposing "unisex policy pricing", but this directive has been strongly criticized by the
Comité Européen des Assurances on the ground of the difference between the life expectancy
of men and women.
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Regulatory issues for life insurers and for insured pensions
Introduction
Life insurance can play a significant role both in protecting a policyholder’s dependents in
case of untimely death and in furnishing financial security for the elderly. Private pension
insurance is of increasing importance in the light of the pressure being increasingly placed on
social security systems in the developed world as the number of taxpaying workers decreases
in relation to the increasing number of retired persons. Most European countries rely on a
pay-as-you-go state-supported pension system by which the pension bill for the retired is met
with social security contributions or with a combination of social security contributions and
state budget funds. These countries are now taking, or will soon have to take, difficult
decisions to reduce retirement benefits and/or delay the age at which such benefits become
payable and/or raise contributions. Workers currently in employment stand to lose out from
any of these decisions. Governments would therefore be wise to encourage this generation
to plan ahead for their own retirement taking into account that the state may not be as
generous to them as it has been to their parents. In order to compensate for the planned
reduction of benefits afforded under statutory schemes, massive support for the development
of private pension provision has been made available by European governments mainly in the
form of making private pension contributions tax deductible. Germany has even introduced
direct grants for pension contributions for people of lower incomes and for families unable to
take advantage of the tax deductions.
Group pension schemes offered as part of an employment package also play an important
role in ensuring adequate provision for the retired. Employers conclude a group scheme with
an insurer whereby, based on employer contributions (and sometimes employer and
employee contributions), the insured employee is guaranteed upon retirement either a lump
sum or a life pension equal to a certain percentage of final salary. In relation to such
schemes, a key issue is the portability of pensions, i.e., the ability of employees to transfer
contributions made on their behalf to the occupational scheme of their new employer.
Within the EU system of classification, life insurance includes whole life insurance (insurance
payable upon death at any time), term insurance (insurance payable upon death within a
specified time interval), pure endowment (insurance payable upon survival to a stipulated
age), endowment insurance (insurance payable either upon survival to a stipulated age or
upon earlier death) as well as more special coverages such as life insurance with return of
premiums, marriage insurance and birth insurance (art. 2 par. 1 (a) of 2002/83 Directive1,
hereinafter referred to as "the Consolidated Life Directive"). In Russian Law “On Organization
of Insurance Business in the Russian Federation”, life insurance is quite similar: it involves the
1
Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life insurance
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Regulatory issues for life insurers and for insured pensions
obligation of an insurer to pay compensation in case of death of the insured or in case the
insured reaches the age specified in the insurance contract; the 2003 Amendments to the
above Law (introduced by the Federal Law dated 10.12.2003 №172-FZ) define the risk as
‘citizens’ coming to a certain age or term; death; occurrence of other events in the life of
citizens’ (Art.4.1).
Long-term life insurance is quite different from short-term yearly renewable insurance
coverages. The form of supervision to be applied to such insurance must therefore be
carefully tailored to its specific character and particularly to ensuring that life insurance
companies have suitable and sufficient assets to be able to meet engagements often
spanning 30 to 60 years. Since life insurance is a "consumer product", there are also
important issues regarding the information that must be provided by insurance companies
before the conclusion, and during the life, of a policy.
Supervisory authorities are responsible for monitoring the financial health of life insurance
undertakings. To ensure that policyholders and beneficiaries are adequately protected, life
insurance undertakings must be licensed and supervised in accordance with special rules and
taking into account the actuarial characteristics of long-term life coverages.
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Regulatory issues for life insurers and for insured pensions
A. Separation of long-term life assets and other life insurance assets
Undertakings formed after the dates referred to in art. 18 (3) of the Consolidated Life
Directive may not be licensed to conduct both life and non-life insurance. According to articles
6 par.1 (b) and 18 of the Directive, life insurers must limit their business to life insurance and
to insurance coverages directly related thereto, to the exclusion of all other commercial
business. (Permitted coverages include the so-called supplementary coverages or "riders"
such as personal accident, short-term and long-term disability and sickness.) Undertakings
which on the dates referred to in Article 18 (3) carried on both life and non-life business are
permitted to continue to do so, provided that funds relating to the two types of business are
totally segregated. Total segregation means that, though legally we have one insurance
company, administratively there are two "companies"; there can be no cash flows of any kind
from one to the other, and the liabilities of each and assets backing those liabilities are
reckoned separately. In this way, the respective interests of life and non-life policyholders are
safeguarded and neither side is called to bear costs generated by the other branch.
In Russia, article 28 par.2 of the Federal Law No 4015-I of November 1992 on the
Organization of Insurance Business in the Russian Federation (with the amendments of 1997,
1999, 2002 and 2003) clearly requires separate accounting for life and for non-life operations.
However, even within life insurance, long-term insurance funds (mathematical reserves) must
be kept separate from short-term technical reserves (e.g., unearned premium reserves for
annually renewable supplementary benefits and outstanding claims reserves for all coverages
including basic life insurance). It must be pointed out, however, that supplementary benefits
such as permanent health insurance (UK) and long-term disability pensions are actuarially
akin to basic long-term life insurances and should ideally involve mathematical reserves.
The ISD must therefore ensure that all assets backing mathematical reserves be kept
separate from other assets of the life insurance business. These assets should be placed in a
separate "long-term insurance fund". The insurance company should maintain records
indicating the particular assets that are backing each block of long-term liabilities and
should be precluded from using such assets for other purposes. These measures are vital to
prevent insurance companies abusing these funds, which could easily lead to the company
being unable to pay its obligations in the more distant future. There may be a temptation to
allow use of long-term funds for short-term purposes if it can be proved actuarially that the
long-term funds are in excess of the corresponding liabilities, but the temptation should
probably be resisted. If such an exception is granted, it is open to abuse and it should be
very carefully controlled by the ISD.
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Regulatory issues for life insurers and for insured pensions
Allocation of funds within the long-term insurance fund should not result in unfair treatment
of any given class of policyholders. However, the practice of selecting suitable assets for
different product classes (asset-liability matching) should not be construed as unfair.
B. Policy terms and consumer protection
Under European Union legislation, insurance contracts are freely determined by the parties
(insurer and insured). According to article 6 para. 5 of the Consolidated Life Directive,
Member States cannot require the prior approval or the systematic notification of general and
special policy provisions. The supervisory authority is however entitled to make nonsystematic inspections of policy terms and to intervene if unlawful or unfair policy terms are
being used to the prejudice of policyholders and beneficiaries. In order to gain protection
against unfair terms used in insurance policies, insurance company clients may also rely on
the provisions of Directive 93/13 on the protection of the consumer against unfair contractual
terms (art.7).
The ISD should also ensure that life companies use fair and responsible sales methods in
promoting pensions and life insurance. The information provided to the policy applicant
should be accurate and, above all, realistic (it should not exaggerate the potential benefits
under the policy). The exact nature of actual guarantees and the lack of other guarantees
should be clearly explained. Bonus illustrations should be realistic and, for unit linked
products, the company should represent the past fund performance in a proper manner 2 and
the client should be explicitly warned that past fund performance is not a guarantee (or even
a predictor) of future fund performance. Full disclosure of facts is also necessary during the
life of each policy. Policyholders must be regularly informed about the value of their funds
and about all other events affecting their benefits.
The Insurance Supervisory Department of the Russian Federation continues to require preapproval of policy terms and conditions. Article 32 Law on the Organization of Insurance
Business in the Russian Federation states that, to obtain a license for conducting insurance
activity, insurance companies must present inter alia the rules of insurance (conditions)
governing different types of insurance.
A sine qua non clause of basic life insurance policies is the so-called non-forfeiture clause.
This clause specifies that, in case premiums on a life policy (or pension plan) cease to be paid
or the policy lapses otherwise, a certain sum (variously called cash value or surrender value)
is owed to the policyholder, the magnitude of the sum depending on how long the policy has
been in force. National legislation must make the payment of a surrender value mandatory
2
As an example of guidance on this issue, see the FSA newsletter “Standardizing Past Performance”, December
2003, at www.fsa.gov.uk
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even though, due to competition, no company could afford not to pay cash values to
policyholders that withdraw before the completion of their policy's term. The surrender value
provision was introduced by the 2003 Amendments (see Law №172-FZ of 10.12.2003) to
the Law on the Organization of Insurance Business in the RF, Article 10(7) of which provides
that a sum will be returned to the policyholder ‘within the limits of the insurance reserve set
up in compliance with the established procedure as of the date of cancellation of the
insurance contract’.
The calculation of the cash value depends on the magnitude of the
policy's mathematical reserve when the policy is cancelled and is normally equal to that
mathematical reserve reduced by the amount of policy acquisition expenses that are still
unamortized when the policy lapses. It is obvious that life policies with no mathematical
reserve or a "negligible" mathematical reserve (short-term or medium-term death insurance
at young or moderate ages being the classic example) will not provide surrender values.
Surrender values of traditional products are guaranteed and a table of surrender values by
policy duration should be given to the policyholder when the policy is issued. Indeed, Annex
II to the Third Life Directive specifies, as part of the information to be provided in a clear and
accurate manner and in writing to prospective policyholders before the contract is concluded,
"the indication of surrender and paid-up values and the extent to which they are
guaranteed". (It should be pointed out, however, that the so-called traditional insurance
products (as opposed to unit linked and other "variable" products) normally provide
guaranteed surrender values.) The mandatory disclosure of surrender values enables the
policyholder to know the residual value (cash value) of the policy at all times. Some EU
Member States require insurers to disclose the nature of commissions, management fees and
other charges. It is our view that this information is of relatively little value to the prospective
policyholder: the surrender value criterion is sufficient since the prospective client will be
indifferent between two (otherwise equivalent) policies with the same surrender value (how
the total policy charges break up into components is rather academic when the end result for
the policyholder is the same).
Some EU Member States (e.g., UK) that offer tax deferral for "approved" pension funds limit
the right of early surrender3. While we applaud the social aspect of this restriction (it intends
to prevent people from spending funds intended to provide old-age security), we still
deem it preferable to allow free surrenders and to handle early surrenders by appropriately
taxing the cash value in the case of premature surrenders. A related issue is the ability of the
policyholder to take a loan against the policy's cash value. While this should certainly be
allowed in the case of life insurance and "private" (i.e., not tax approved) pensions, it may
3
See the basic UK tax authority guidance on the issue at http://www.inlandrevenue.gov.uk/pdfs/ir78.htm
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Regulatory issues for life insurers and for insured pensions
have (just like the surrender of the policy) to be restricted in the case of tax approved
pension schemes.
Article 11 point 2 of the Law on the Organisation of Insurance Business in the Russian
Federation (4015-1/1992, as amended) and article 954 of the Russia’s Civil Code state, as a
general principle to which the insurance market must aspire in due course, that insurance
premium rates, even for compulsory insurance, are set independently by insurance
companies. At present, calculations of insurance tariffs with attached methodology of
actuarial calculations and reference to the source of the initial data as well as the structure of
tariff rates must be submitted for an insurer to obtain a license (subparagr.11 of p.2 Art.32 of
the Law on the Organization of Insurance Business in the RF”). Furthermore, the Order of the
Russian Supervision Service No. 02-02/18 of June 28, 1996 on the method of Calculating Life
Insurance Rates sets out a detailed procedure for the calculation of life insurance rates. The
Order’s preamble, however, states that "the present method has been devised to render
methodological aid in the calculation of life insurance rates", and thus the method adopted by
this Order is not compulsory for insurance companies.
Pursuant to the Consolidated Life Directive, life insurance contracts must give policyholders
the opportunity to withdraw from the contract if (a) the company did not comply, prior to the
conclusion of the contract, with all the mandatory disclosure requirements; or (b) the policy
as issued does not correspond to what the prospective policyholder applied for. The
policyholder may even withdraw "without cause" (without specifying the reason), in which
case the company may be allowed to keep some premium for expenses. Notice of
cancellation must be given relatively quickly (between 14 to 30 days from the moment that
the policyholder is handed the policy documents). Russian insurance law does not make such
a provision. Since entering into a long-term investment program is a very important decision,
consumers should have an opportunity to change their minds once they have all the official
documentation concerning their insurance / investment plan. This opportunity is of course
even more necessary if the company has failed to deliver, in the form of binding documents,
what it promised during the sales process. The consumer's opportunity to get out of a "bad
deal" is particularly important in new markets, where sales methods may not be all that
professional.
C. Solvency
In the European Union, the financial supervision of each life insurer includes the periodic
monitoring of the insurer's degree of solvency. This monitoring normally takes place on an
annual basis at the close of each exercise (financial year). If circumstances require it,
however, solvency may be reviewed more frequently or verified ad hoc at any time.
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1.
Minimum guarantee fund
The minimum guarantee fund is equal to one-third of the solvency margin the insurer is
required to possess. At the same time, regardless of the size of the solvency margin, the
minimum guarantee fund cannot be less than a specified monetary amount which depends on
the types of insurance conducted by the insurer. For life insurance, this minimum is 3 million
Euros. In certain circumstances, an example being insurers entering the market for the first
time, the ISD should have the right to demand a higher minimum guarantee fund.
2.
Solvency margin
The basic EU rule regarding an insurer's solvency is that the solvency margin actually held
(possessed) by the insurer may not be less than the solvency margin technically required
given the size of the insurer's business as measured by insurance premiums and by insurance
claims. The required solvency margin is a monetary amount (a "number") equal to the
maximum of two calculations, one based on premiums and one based on claims. Being a
function of business volume, the required solvency margin increases as a company grows and
acquires more business. The solvency margin actually held by an insurance company
corresponds to the company's "free funds", i.e., to the excess of total company assets over
total company liabilities (For more information, see Annex I to the present report).
Assets that may be offered towards "covering" the required solvency margin basically consist
of the company's paid-up share capital, of any statutory or free "general purpose company
reserves" (not insurance reserves!) and of profit brought forward (current exercise profit
which was not distributed (was retained)). National law permitting, profit reserves appearing
in the balance sheet and consisting of funds that have not been distributed to the
policyholders may be included provided they can be used to offset losses.
The Russian law (art. 27 of the Law No. 4015-1 on the Organization of Insurance Business in
the Russian Federation and the Order of the Ministry of Finance of the Russian Federation No
90N, 2001) deals with solvency through the notions of "rated solvency margin" and “actual
solvency margin”. Rated solvency margin is an amount calculated on the basis of business
volume (i.e., premiums and claims) and thus corresponds to the EU required solvency
margin. Actual solvency margin is the insurer's free capital (consisting mainly of the
authorized capital, the reserve capital, the supplementary capital less the sum of intangible
assets, any overdue amounts receivable and the uncovered losses of the accounting year and
of past years). The Order of 2001 stipulates that the actual solvency margin may not be less
than the rated solvency margin, which itself cannot be less than the minimum paid-up share
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capital an insurance company must have in cash (as this is provided for by Law 4015-1, art.
25).
If the solvency margin actually held by an insurer falls below the required solvency margin,
the insurer must submit to the supervisory authority (for approval) a financial rehabilitation
plan. This plan must include detailed estimates of income and expenditure and balance
sheets for the next three years and indicate the financial (e.g., an increase in share capital)
and other resources by means of which the results forecast will be realized and return to
solvency achieved. The projected figures in the plan must be well documented and all
assertions made by the insurer have to be substantiated.
If the financial position of an insurer is seriously deteriorating and the interests of
policyholders are at great risk, the supervisory authority shall have the power to oblige the
insurer to hold a solvency margin higher than that technically required (art. 38 of the
Directive 2002/83). If the supervisory authority is of the opinion that the insurer’s financial
situation will deteriorate further, it may also restrict or prohibit the free disposal of the
insurer's assets. The license granted to a life company may be revoked by the supervisory
authority if the company fails seriously to fulfil its obligations concerning solvency margin
requirements (art.37, 39 of the Directive 2002/83).
In Russia, if the actual solvency margin falls below the rated solvency margin by more than
30%, the insurance company must file with the Ministry of Finance (for approval) a financial
rehabilitation plan together with the financial statements. In the event that an insurance
company defaults on the financial rehabilitation plan, it is liable to sanctions (suspension or
restriction of its license) in accordance with art. 32.6 of the Law on the Organisation of the
Insurance Business.
3.
Assessment of assets and of liabilities
Since the actual solvency margin is total assets less total liabilities, determining the actual
solvency margin presupposes proper assessment of both assets and liabilities. A life insurer's
non insurance liabilities are normally a small percentage of total liabilities, and thus the
crucial factor on the liability side is the proper valuation of mathematical and of technical
reserves (topic D below). In checking the assessment of liabilities, the ISD must carefully take
into account, not only the technical basis of reserves (mortality and interest), but also the
precise nature of all policy guarantees and other obligations of the insurer. These obligations
include bonus payments if such payments are guaranteed (a practice to be discouraged, not
only because it has led several large UK life insurers into serious financial difficulties, but
because it introduces yet another risk factor that a new life market is better off without). On
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the asset side, it is equally important to promulgate prudent asset valuation rules (topic E
below). Even if liabilities have been properly estimated, if assets are not valued
conservatively, the resulting solvency margin will convey a possibly unjustified sense of
financial robustness.
D. Insurance provisions
Insurers are required to establish adequate "insurance provisions" to cover their underwriting
liabilities. The European Court of Justice (Case No. 205/84) has ruled that technical reserves
do not form part of an insurer's own capital resources.
These provisions are actuarial estimates of the funds that must be set aside ("reserved") to
ensure that all insurance obligations undertaken by the insurer will be met in full and in a
timely fashion. Insurance provisions can be distinguished into short-term technical reserves
and into long-term mathematical reserves. In addition to properly valuing their liabilities (i.e.,
ensuring the adequacy of the necessary reserves), insurers must also make sure that they
hold appropriate assets whose value corresponds exactly to the size of the calculated
reserves.
1.
Technical reserves
(Please see Annex II to the present report for the information on the basic principles for the
establishment of technical reserves).
If we leave aside special purpose reserves such as equalization reserves and catastrophe
reserves, the principal categories of basic statutory technical reserves are the outstanding
claims reserve, which must be held for every type of insurance (non-life and life, short-term
and long-term), and the unearned premium reserve/unexpired risks reserve, which is
appropriate for annually renewable insurance coverages (both life and non-life).
When a company closes its accounts at the end of a financial year, there are usually
insurance claims which (for whatever reason) have not been settled (or have been only partly
settled). (The same is true in life, where there may be benefits due before the "financial year
end" that have not been paid when the accounts are closed.) All such "outstanding claims"
are added and a monetary amount equal to the sum of all outstanding claims is set aside as
"outstanding claims reserve" in order to make sure that the necessary funds will be available
when the outstanding claims are eventually settled (in the next or any other future financial
year). The outstanding claims reserve must make provision, not only for claims known to the
company, but even for claims that have occurred during the year being closed but have not
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been notified to the company (such claims are known as “incurred but not reported” or
IBNR).
In annually renewable coverages (both life and non-life), the unearned premium reserve
consists of all premium amounts paid to the company prior to the end of the accounting year
but relating to periods after the account closing date. It is worth noting that, while the
outstanding claims reserve concerns insured events that have occurred, the unearned
premium reserve concerns events that may occur in the future or, as we say, "unexpired
risks". The unearned premium reserve is usually calculated on a pro rata time basis.
However, if there are seasonal variations in the degree of risk or there is otherwise reason to
believe that the risk is not uniformly distributed over time, the unearned premium reserve
must be appropriately adjusted and we then speak of the unexpired risks reserve.
It is important to have national rules (actuarial principles) governing the calculation of shortterm technical reserves.
2.
Mathematical reserves
The preceding remarks leave out long-term life coverages that require mathematical reserves.
Mathematical reserves are unexpired risk reserves also, but in contrast to unearned premium
reserves, mathematical reserves are intended to cover risks extending over lengthy time
periods. A mathematical reserve is required whenever a long-term risk that increases with the
passage of time is covered by means of an annual premium that remains constant over time.
Mathematical reserves shall be calculated by a sufficiently prudent prospective actuarial
method taking into account all future insurance premiums and all future insurer liabilities as
determined by the policy conditions of each contract. The reserve valuation is conducted
separately for each type of contract and must be conservative in the sense of including
appropriate margins for adverse deviations from the actuarial assumptions (parameter
values) used (art. 20 of the Directive 2002/83).
In particular, this Directive (art. 20) provides that the Member States may set a maximum
technical interest rate for the calculation of mathematical reserves 4. This is a restriction we
wholeheartedly recommend since, in long-term contracts, adverse deviations in the insured
risk (e.g., mortality) play a lesser role than adverse deviations in the interest rates (most
4
Commission’s Interpretative Communication, 2000/C-43/03. In relation to establishment of branches and free
provision of services between Member States, the Commission takes the view that the branches of insurance
undertakings and the insurers operating under the freedom to provide services are not bound by the provisions of
the host Member State on maximum technical interest rates. Since the host Member State has no competence as
regards financial supervision of an insurance undertaking duly authorized in its home Member State, it follows that it
cannot impose compliance with its own prudential principles or check such compliance through substantive control of
premium scales.
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actuarial tables of mortality, disability, etc. are conservative anyway whereas a company has
no control over the evolution of market interest rates). With traditional products, a prudent
approach (particularly recommended to a fledgling market) is premiums based on a
conservative (i.e., low) technical interest rate combined with (non-guaranteed) premium
returns at the end of each year. (If desired, these returns can of course take the "non-cash
form" of paid-up bonuses.)
To ensure that national regulations regarding insurance provisions are respected, Directive
2002/83 (art. 6 par. 5) stipulates that "the home Member State may require systematic
notification of the technical bases used for calculating scales of premiums and technical
provisions".
According to Russian law (art. 26 of the Law No. 4015-1 on the Organization of the Insurance
Business), insurance companies have to form insurance reserves (defined as "insurance
provisions to meet underwriting liabilities") that include the unearned premium reserve, the
reserve for claims reported but still outstanding, the reserve for incurred but not reported
claims, the stabilization reserve, and mathematical reserves.
An important issue regarding technical bases is whether the technical basis for life premiums
should be the same as the technical basis for life reserves. We feel that, in the initial stages
of market development, companies should not be burdened with the added complexity of two
different technical bases. Furthermore, if a sufficiently conservative technical interest rate is
legislated for reserves, it may be financially difficult for the company to use a higher interest
rate for premiums.
E. Assets and investments
Proper assessment of liabilities (correct valuation of reserves) is not enough to ensure that an
insurer's obligations will be met: the insurer must have funds equal to the result of the
reserve calculation. Except for a small part (intended to serve the company's liquidity needs),
these funds must be invested in carefully selected assets and the assets must be
conservatively valued.
1.
Investment rules
All the assets covering mathematical and technical reserves are invested in accordance with
certain rules. The supervisory authorities may lay down detailed rules specifying admissible
assets and the administration of such assets (art. 24 par. 2 of Directive 2002/83). Rules for
insurance investments are predicated, among other things, on the following principles:
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(a) Assets must be conservatively selected with regard to security of the capital invested. As
a result, national rules limit admissible assets to investments with low default risk.
(b) While high investment return is a legitimate target, it should be judiciously weighed
against the security of capital.
(c) Investment in assets exhibiting a high degree of risk must be restricted to prudent levels.
(National legislation often specifies the percentage of total assets that can be invested in
certain types of riskier assets.)
(d) Assets must be diversified by category of asset, investment market, economy sector, type
of industry, company within each industry, geographical area, and so forth. In connection
with this principle, many jurisdictions impose limits on the percentage of total assets that can
be invested in any particular investment class (see Section 3 below).
(e) The investment portfolio's composition must take account of the company's liquidity
needs. National rules limiting, e.g., real estate investments have liquidity in mind.
(f) Investments are best selected with regard to the characteristics of the liabilities the
investments are intended to cover (this is an actuarial criterion).
2.
Admissible assets
(For information on the assets used for insurance deposits, see Annex IV).
Loans may be accepted as cover of reserves only if they are adequately secured by mortgage
or a bank guarantee or otherwise (e.g., a policyholder loan is secured by the cash value of
the policy).
All real property must be valued at a conservative market value; in Greece,
where all property values in urban areas are assigned an ‘objective value’ by the tax
authorities for transfer tax purposes, the maximum market value which may be given to real
property held by insurance companies is the objective value + 30%. Real property in rural
areas is not accepted as part of technical reserves due to the difficulties of reaching a reliable
valuation. All buildings forming part of the reserves must be insurance against fire (by a
separate insurance company).
The main classes of admissible assets in the Russian Federation are state securities,
municipal securities, stock shares, mutual fund shares, and bank deposits. The law
stipulates further that all assets must be located in Russia, cannot be pledged or
otherwise encumbered and may not be used for any purpose other than to meet the
insurance obligations to which the assets relate.
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3.
Diversification of Assets
(For more information on this issue please see Annex IV to the present report).
4.
Insurance deposits
The insurer must submit to the supervisory authority the details of the bank(s) or other credit
institution(s) where assets covering reserves are held and administered. The insurance
company is obliged to inform the supervisory authority of any changes in the size and/or the
composition of the insurance deposits within a short time, often three days. The supervisory
authority may communicate with the banks or credit institutions to verify statements made by
the insurer. If reserves are not held as declared, the authority may revoke the insurer's
license.
In the event that the insurance deposit is reduced for any reason, the insurer is obliged to
come up (within 10 days) with other admissible assets sufficient to restore the insurance
deposit to its proper level.
The list of assets constituting the insurance deposit must be submitted to the supervisory
authority three or six months following the approval of the insurer's balance sheet by the
general meeting of the company's shareholders (art. 24 of the Directive 2002/83).
5.
Derivatives
Derivative instruments (options, swaps) may be used in so far as they contribute to the
reduction of investment risk or facilitate efficient portfolio management (art. 23 of the
Directive 2002/83). Several EU supervisory authorities therefore include as admissible assets
certain derivative products. The use of such products, however, can be very risky and
requires great investment expertise. As a result, we feel that admitting such products in
Russia at present would be premature.
6.
Connected companies
In large groups of companies (and particularly those that include unrelated businesses), there
may be a temptation to invest long-term insurance funds in group companies. If this practice
is not altogether prohibited, restrictions should be placed on the level of such investments. In
the UK, e.g., investment in connected companies and loans and guarantees to connected
persons may not exceed 5% of total long-term life funds.
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F. Distribution of surplus (bonuses)
Some life policies, known as with-profits policies (UK) or participating policies (USA), pay
bonuses (UK) or dividends (USA). These policies normally operate with a premium involving
ample margins so that each financial year produces a surplus. This surplus consists of the
"actuarial gains" generated by the difference between the actuarial assumptions (mortality,
interest rate, expenses) made in setting the premium and the actual annual result of the
insurance portfolio.
Insurance policy dividends (bonuses) may be paid in cash (premium return) or used to
reduce the next premium due or be used as a single premium to buy a paid-up addition to
the basic sum insured or even be left with the insurer in an account earning interest. The
2002 Life Directive requires that the insurance company publishes its bases and methods for
calculating its bonus provisions (Art.20(2)).
If bonuses are not guaranteed (the case in USA), bonuses do not constitute an additional
insurer liability. If bonuses are guaranteed, additional reserves should be set up. In any case,
as the Equitable Life incident in the UK has shown, guaranteed bonuses are not a very good
idea. It might be added that such a policy is contrary to the initial philosophy of life dividends,
which was, on the one hand, that premiums are so ample that company solvency is secured
and, on the other hand that, after the results are in, through the operation of dividends the
policyholder does not ultimately pay an excessive premium! We obviously advise against
guaranteed dividends and advocate the method of conservative premiums with return of
premium only whenever actual portfolio experience warrants it.
G. Unit linked products
Unit linked contracts are one kind of a broader class of life insurance plans known as
"variable products". The word "variable" is due to the fact that the benefits under such
products are not fixed but depend, totally or partly, on investment performance. In unit
linked products in particular, the benefits are linked to the value of the shares (called units)
of a given mutual fund or to the value of a given security index. A block of unit linked
contracts can also be linked to the value of the units of an "internal variable fund" set up
within the insurance company.
In the case of unit linked policies, the investment risk (borne by the insurer in traditional
products) is transferred to the policyholder (though there may be some guarantees regarding
the sum insured). Nevertheless, these contracts can be very attractive as long-term
investments since over long time periods market fluctuations are smoothed out. Other
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advantages of unit linked plans are flexibility and transparency as to the components of total
cost (insurance protection, company expenses, investment). A final advantage of unit linked
products is that return on equity investments has historically exceeded the return on fixed
interest instruments. This long-term excess interest is generally of the order of 1/2% to 1%
and, while this difference may appear small, it proves to be quite significant when it comes to
long time periods. As a result, unit linked products play a very important part in many
European insurance markets, exceeding in some cases 50% of total life insurance business.
Within the European Union, special and detailed provisions apply to unit linked contracts (art.
25 of the 2002/83 Directive).
(a) Before the conclusion of a unit linked life contract, the insurer must communicate to the
policyholder information regarding the mutual fund to whose units the benefits are linked. In
the case of an internal variable fund, a description must be given of the assets constituting
the fund. Life insurance policies linked to units must explicitly mention the unit and explain
how the value of the unit is calculated. Finally, the regulations of an internal fund form an
integral part of the conditions of the insurance policy.
(b) The assets backing a company's unit linked liabilities must themselves be linked to (the
same) units (a strong form of asset-liability matching).
(c) The insurance company is obliged to keep a separate register of assets covering
obligations relating to investment linked contracts (in the case of several variable funds, a
separate register for each fund).
(d) The bank (or other trustee) where variable fund assets are deposited is obliged to inform
the supervisory authority at least once a month about the assets disposed by the insurer for
the variable fund.
In Russia, there are no specific rules regarding unit linked products and the investment of the
assets of such products (or indeed the investment generally of mathematical and of technical
reserves).
H. Reinsurance
Reinsurance is a mechanism whereby an insurance company transfers a part of the risks it
has assumed to another insurer or, more commonly, to a "professional reinsurer" (i.e., an
undertaking that transacts only reinsurance). While sometimes reinsurance is necessary
merely because of the sheer size of a given risk, reinsurance is a wide practice with risks of
more ordinary size. Besides improving an insurer's chances of remaining solvent through risk
sharing, reinsurance can be used to smooth out an insurer's annual results. In the case of life
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insurance, reinsurance can also be used to lighten a new life company's capital strain caused
by the need to subsidize the acquisition of business. Finally, besides providing financial
security, professional reinsurers can provide technical information and valuable knowhow in
risk underwriting and in claims handling.
While primary insurers are extensively supervised, most jurisdictions have little, if any,
legislation regulating professional reinsurers (possibly due to a feeling that primary insurers
are "professionals" that can look after themselves, in contrast to a primary insurer's
policyholders who know nothing about insurance). On the other hand, it is taken for granted
that a primary insurer will reinsure and EU law (art. 7 of Directive 2002/83) provides that the
business plan a company is obliged to submit when seeking a license must describe the
reinsurance strategy that the company intends to pursue.
I.
Shareholders & managers
The moral and the professional qualifications of an insurance company's shareholders and top
managers are an important issue. Within the EU, when a company applies for a license, it
must disclose to the supervisory authority the identity and the particulars of any shareholder
who has a "qualified holding" in the company and the extent of that holding (art. 8 of
Directive 2002/83). A qualified holding is the direct or indirect control of a significant fraction
(10% in the EU) of the company's share capital or voting rights or, in general, the ability to
exercise a significant influence on the management of the company (art. 1j of the 2002/83
Directive).
National authorities may also promulgate criteria that the company's directors (board
members) and top managers (such as managing director, general manager) must satisfy (art.
13 of Directive 2002/83). It is obviously important that they be individuals that have not been
convicted of criminal offenses "of an economic character", that they be individuals of "good
character" likely to comply with legal restrictions and to respect generally accepted business
ethics. In the case of company executives (top managers with "power of decision"), it is also
highly desirable that they have adequate professional / technical qualifications. The 2003
Amendments have provided for a basic requirement that chief executives and chief
accountants must have degrees in economics or finance and at least two years’ experience in
insurance or other closely-related sphere (Art.32.1 point 1 and 2).
The fact that a chief
executive or chief accountant has a conviction which has not yet been removed from the
record is a reason for denying a licence (Art.32.3 point 1(6)), but there are no provisions by
which the ISD could take into account other aspects of a proposed chief executive’s previous
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history which might give cause for concern, such as previous involvement in badly-managed
or insolvent companies.
The 2003 Amendments provide for professional qualifications for actuaries. The law should
also specify similar moral qualifications for the company actuary (in addition to the
professional qualifications required).
Any legal or natural person desiring to acquire a qualified holding in a licensed company must
declare this to the supervisory authority (indicating the size of the intended holding). The
supervisory authority is given three months to oppose the request and must do so if it is not
satisfied as to the qualifications of the person seeking the holding.
The supervisory authority may also take measures to put an end to any influence exercised
on a company to the detriment of sound management and may impose sanctions against any
directors, managers or shareholders involved (art. 15 of the Directive 2002/83). These
include the suspension of a shareholder's voting rights, fines and other administrative
penalties. (Such penalties do not preclude penal prosecution in the case of particularly
flagrant violations.)
J.
1.
The appointed actuary
The appointed actuary concept
An important question for any supervisory authority is the relative degree of direct
supervision and control of company activities and of reliance on the actuarial profession. (It is
worth noting, incidentally, that the way the control is split between supervisors and company
actuaries in no way lessens the need for truly qualified actuaries. In order to do its job
effectively, a supervisory authority has absolute need of properly trained actuaries. Thus, the
lack of adequately trained specialists remains a big problem whether the supervisory
authority retains most of the control or delegates a great deal of it to appointed actuaries.)
"Actuarially mature" countries leave a great deal to an actuary designated by the company
and approved by the supervisory authority and called variously "appointed actuary" (United
Kingdom, Canada, others), "responsible actuary" (Greece), "authorized actuary", and so on.
The statutory duties and responsibilities of these actuaries are specified in the law together
with the penalties, both administrative and criminal, imposed in the case of dereliction of duty
or malfeasance. The extent of an appointed actuary's authority varies from country to country
and from time to time. There is, however, a common core of duties to which we will come
later following some comments about the advisability of having an appointed actuary system.
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Incidentally, there is currently considerable interest on the part of the International
Association of Insurance Supervisors (IAIS) concerning the role of actuaries in insurance and
the specific institution of appointed actuaries.
2.
Some principles regarding appointed actuaries
(a) Actuarial expertise is a very important component of the operation of insurance
companies, of insurance markets and of insurance supervisors. Thus, the use or non-use of
appointed actuaries does not affect, one way or another, a market's total need for well
qualified actuaries.
(b) Individuals proposed as appointed actuaries should satisfy a set of well defined criteria
(e.g., full membership in an accredited actuarial association, long work experience, special
expertise, etc.).
(c) The appointed actuary must be endowed with sufficient independence in order to be able
to fulfil his "watchdog activities" without hindrance. Indeed, some jurisdictions require the
appointed actuary to advise the supervisory authority when the company's management fails
to take account of the appointed actuary's admonitions. Recently, there has been a growing
movement to introduce certification by an "external actuary" who is not a company employee
(a situation that reminds one of external auditors auditing company accounts). This system
has been tentatively introduced and is being tested in Ireland and being discussed in a
number of other jurisdictions.
(d) If appointed actuaries are employed, the law must clearly delineate their duties and their
obligations as well as their relations with the supervisory authority and with (external)
company auditors.
(e) The use of appointed actuaries neither precludes control by the supervisory authority nor
indeed relieves the supervisory authority from the obligation to conduct its own scrutiny of
company operations (through, e.g., on-site inspections, independent valuations, etc.).
(f) The decision to delegate a certain degree of control to appointed actuaries depends on the
"maturity" of the profession in the particular country. When the national association is
established, well organized, and has in place a strict code of conduct supplemented by a strict
disciplinary process, one may leave a good deal to the appointed actuaries. In markets less
mature actuarially, one will perforce be more circumspect in assigning duties to appointed
actuaries. (We reiterate that assigning less to appointed actuaries merely shifts the need for
qualified actuaries to the supervisory authority)
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(g) Besides his strictly technical duties, an appointed actuary acts in practice as a "liaison
officer" or "contact person" with the supervisory authority, responds to supervisory authority’s
inquiries and provides explanations and clarifications. Indeed, in some ways, the appointed
actuary is the "supervisory authority's eye" within the company.
(h) The appointed actuary's job is more than technically demanding. The appointed actuary is
called upon to play a variety of parts from "the state's watchdog" to "the consumer's
advocate", and this while balancing the interests of the shareholders, the policyholders, the
general public and the state and looking after the company's financial health.
3.
Duties of the appointed actuary
Very specific suggestions for the duties of the appointed actuary to be included in any new
law can be made later. At this point, we merely summarize some areas of responsibility within
the appointed actuary's purview. These include:
(a)
the calculation of all types of insurance provisions and the certification thereof to the
supervisory authority;
(b)
the calculation of the company's statutory solvency margin;
(c)
the design of products, drafting of policy terms and provisions, and pricing of
benefits;
(d)
the formulation of the company's reinsurance policy;
(e)
the drawing up of the business plan of a new company applying for an insurer's
license as well as the required refinancing plan for any company not meeting the
statutory solvency requirements;
(f)
the (non-statutory) tests of company financial strength;
(g)
the co-signing (together with company general management and with the
and joint responsibility for the company's investments.
4.
Recent Developments
In the last several years, there has been criticism of the appointed actuary concept. Doubts
have been expressed as to the degree of independence of the appointed actuary, who, in the
normal course of events, is an employee of the insurance company. There is some opinion
that actuarial certifications should be given by an "external actuary" just as accounting
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certifications are given by an "external auditor". Most actuaries are opposed to this view,
feeling that it casts aspersions on their professional independence (guaranteed, they argue,
by strict codes of professional conduct). Nevertheless, the external actuary movement has
been gaining some ground. E.g., the Society of Actuaries in Ireland has introduced this
system on a pilot basis, and it will be interesting to see how things proceed there. On a
totally a priori basis, and assuming that supervisors are adequately staffed and exercising
effective control, it is rather difficult to see what could be gained by switching from a two-tier
system (appointed actuary and supervisor) to a three-tier system (appointed actuary,
external actuary and supervisor).
K. The auditor
A life insurer's (as indeed any enterprise's) books and accounts and annual balance sheet
must be audited by an independent "external auditor". This auditor supplies an auditing
certificate that the company has complied with the law and with the prevailing accounting
standards, points out those instances where the company has not done so, and gives an
estimate of the effect each such violation has on the company's annual result and on its
overall financial standing.
In the European Union, it is further stipulated that the independent auditor has a duty to
report promptly to the supervisory authority any finding liable to constitute a material breach
of the law or of regulatory acts or to have a serious effect on the financial situation or on the
administrative and accounting organization of the company. Such a finding must also be
reported if it is detrimental to another company having close links with the insurer being
audited.
L. Benefit guarantee funds (Compensation schemes)
Many jurisdictions have set up benefit guarantee funds (similar to the funds covering bank
deposits in case a bank becomes insolvent). The required funds may be supplied by the
market itself (through a levy on all life premiums) or, partly or totally, by the state.
In the EU, the Directive 2001/17/EC refers to the rules applicable in case of winding-up of an
insurance undertaking. Winding-up procedures may open either voluntarily (e.g., end of a
company's duration) or compulsorily (e.g., insolvency). According to art. 10 of the Directive,
Member States shall ensure that insurance claims take precedence over any other claim on
the insurance undertaking. Member States may provide for some exceptions concerning taxes
or claims by public bodies, claims by social security systems or claims by employees arising
from employment contracts. While we appreciate the social policy aspect of giving
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precedence to the wages of employees, we have serious reservations about giving
precedence to state claims (taxes, etc.). Such precedence could be legislated if there exists a
state benefit guarantee fund to compensate the policyholders.
While the precedence of policyholder claims affords some protection, an insolvent insurer's
assets may still not be sufficient to satisfy all policyholder claims. To deal with this problem,
some Member States (e.g., UK) have provided that policyholders of insurance companies
authorized by any Member State may obtain redress through a State Compensation Scheme.
Such schemes act as a "safety net" for consumers but do not always offer total restitution of
loss. A usual restriction is to stipulate a maximum compensation (regardless of the actual loss
if the loss exceeds the maximum). Another common restriction provides, for losses exceeding
a fixed sum, the payment of that fixed sum and only a percentage of the loss exceeding that
sum.
The Russian law does not provide a compensation scheme in case of an insurance company's
insolvency. At present, the Russian life market faces too many "birth pains" to devote
attention to such a scheme. It is, however, something that should be looked into in due time
since such a scheme encourages the growth of life insurance by providing important benefit
security to policyholders.
M. Relation to state pensions
Over the coming decades, the EU will face a significant acceleration of demographic ageing
due mainly to continuing longevity increases, to decreased fertility since the 1970's and to the
post World War II "baby boom generation" reaching retirement age. All three factors combine
to produce a major financial challenge for state pension systems as the number of pensioners
rapidly increases and the size of the economically active population diminishes. There is a risk
that the resulting old age dependency ratio will, in the not too distant future, place an
unsustainable financial burden on the active population and will adversely affect Europe’s
economic growth potential.
Several European Councils5 have reviewed the implications of ageing populations for
maintaining adequate and sustainable pensions. A joint report by the Social Protection
Committee addressed to the European Council in Laaken (December 2001) suggested
5
The European Council consists of the Heads of State or Government of all Member States of the European Union,
plus the President of the Commission. The European Council defines the general political guidelines it deems
necessary for the development of the Union. No developments of genuine importance for the Union's internal
structure or for its external relations occur without approval at a "summit meeting" (meeting of the European
Council).
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measures designed "to help Member States progressively develop their own policies so as to
safeguard the adequacy of pensions while maintaining their financial sustainability and facing
the challenges of changing social needs". The Barcelona Council (2002) called "for the reform
of pension systems to be accelerated to ensure that they are financially sustainable and meet
their social objectives".
To ensure the financial adequacy of pension systems, European governments are pursuing a
number of objectives:
(a)
Reduce public debt;
(b)
Achieve high rates of economic growth;
(c)
Achieve high levels of employment, thereby increasing state pension contributions,
with emphasis on increasing covered employment by making sure that contributions are paid
for all women and all immigrants;
(d)
Increase retirement ages;
(e)
Promote, through tax and other incentives, private pensions and occupational
pension schemes (topic N below).
In most Member States, statutory pension schemes provide earnings-related pensions, thus
contributing to the maintenance of citizens' living standards after retirement. Benefits under
these pension schemes are based either on the earnings received during a specific number of
years towards the end of the career or (increasingly) on earnings received throughout the
entire career. The usual retirement age is 60 or 65 years.
In contrast to pay-as-you-go social security pensions, the amount of a private pension and/or
occupational scheme pension is based on capitalization methods. This means that the amount
of pension a given person will get is the exact actuarial equivalent of the contributions made
by that person and/or on behalf of that person. The age at which the pension begins is
contractually determined by the parties involved. Since a private pension is predicated on the
actuarial equivalence between contributions and pension payments, it must be paid
independently of the size of any state pension. On the other hand, it is quite acceptable to
have a so-called "integrated pension plan", which is intended to supplement the state pension
(such a plan involves actuarially determined contributions which are of course lower than
they would be if the private pension were paid disregarding the state pension).
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N. Relation to occupational retirement schemes
Occupational retirement schemes are group pensions, the members of the group sharing the
same profession or the same trade or working in the same sector of industry or of services.
Such groups may set up an institution for the exclusive purpose of handling their pension
scheme or, more commonly, address themselves to an existing financial institution (e.g.,
insurer or bank). In most Member States, such institutions make collective agreements with
trade groups or direct agreements with self-employed and employed persons. State social
security schemes are excluded from the rules applicable to occupational schemes.
In the EU, Directive 2003/41, recently adopted, provides the necessary framework for the
operation of occupational retirement schemes and sets rules concerning the supervision of
institutions offering occupational retirement pensions. The main provisions of this Directive
are:
(a)
Every institution must draw up annual accounts and reports for each pension scheme
it administers;
(b)
Every institution must draw up a statement of investment principles and review it at
least every three years. The supervisory authority shall have the power to examine this
statement and to assess its validity;
(c)
Supervisory authorities must be provided with adequate rights of information and
powers of intervention with respect to the institutions and to the persons managing them;
(d)
Mathematical provisions must be calculated on a prudent basis and, in particular, the
maximum interest rates must be chosen in accordance with the relevant national rules.
Furthermore, sufficient assets must be held to cover the mathematical reserves.
Two competition law issues may arise in connection with occupational schemes:
(a)
Membership in these schemes is usually mandatory: The European Court of Justice
regards such schemes as undertakings and hence requires a case by case assessment of
whether mandatory membership is justified by social goals. In the Albany 6 case, the ECJ ruled
that "If articles 3 (g) of the Treaty, article 85 (1) thereof and 118, 118b thereof are construed
as an effective and consistent body of provisions, it follows that agreements concluded in the
context of collective negotiations between management and labour, in pursuit of social policy
objectives such as the improvement of conditions of work and employment, must, by virtue
6
Judgment of the Court of 21 September 1999
(Albany International BV v. Stichting Bedrijfspensioenfonds Textielindustrie (C-67/96))
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of their nature and purpose, be regarded as falling outside the scope of Article 85(1) of the
Treaty."
"An understanding in the form of a collective agreement which sets up in a particular sector a
supplementary pension scheme to be managed by a pension fund to which affiliation may be
made compulsory by the public authorities does not, by virtue of its nature and purpose, fall
within the scope of Article 85(1) of the Treaty. Such a scheme seeks generally to guarantee a
certain level of pension for all workers in that sector and therefore contributes directly to
improving one of their working conditions, namely their remuneration. "
(b)
Financial institutions (e.g., insurers) regulated by other Directives are excluded from
the scope of Directive 2003/41. As these institutions may also offer occupational pension
services, it is important to guard against distortions of competition. Such distortions may be
avoided by applying, to the occupational pension business of life insurance companies, the
prudential requirements of the Consolidated Life Directive.
In Russia, Federal Law 14-FZ of 10.01.2003 on "Introduction of Amendments and Additions
to the Federal Law on Non-state Pension Funds" constitutes the legal framework for
occupational retirement schemes in Russia. To obtain a license for exercising pension
insurance, the fund has to comply with the following requirements:
(a)
The head of the fund’s executive body must have occupied executive positions in
funds, insurance companies or other financial institutions for at least three years, higher legal
or financial-and-economic education (a special professional training, if he has other
education), he must not have previous convictions for committing economic crimes, as well as
medium gravity crimes, grave crimes and especially grave crimes;
(b)
The fund’s chief accountant must have a professional working record of at least three
years, higher education, he must not have previous convictions for committing economic
crimes, as well as medium gravity crimes, grave and especially grave crimes.
Other license requirements, including procedures for suspending, revoking, and renewing the
license, shall be established by the Russian Government. To ensure its solvency, a fund shall
form adequate pension reserves (art. 18). A fund’s activities shall be subject to annual
actuarial assessment by an actuary, and the actuarial opinion shall be submitted by the fund
to the authorized federal body not later than July 30.
The manner of investing pension funds must ensure the security, profitability and
diversification of the investments as well as the transparency of the process of placing
pension reserves.
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Whereas life insurance companies may offer both private pensions and occupational
retirement pensions, financial institutions that manage occupational schemes may not offer
private pensions. In EU law, obligatory pension insurance is only effected through state
agencies and funds. On the contrary, in Russia non-state funds are allowed to offer obligatory
pension insurance as well as non-state pension insurance and professional insurance (art. 2).
There is also excessive control on the investment policy of the non-state funds as they can
only place their reserves in state securities and other investments determined by the Russian
Government.
O. Taxation
Tax incentives are the principal policy instruments for promoting the growth of private
pensions. As a minimum, both employee and employer contributions should be fully tax
deductible. Ideally, investment results should also be exempt and benefits (pensions in
payment) taxed as income. The main reason for Member States to have such a tax deferral
policy is to encourage their citizens to save for their old age. A side benefit is that it will help
Member States to deal with the “demographic time-bomb”, as a State will receive tax
revenues at a time when the old age dependency ratio will be much worse than today. Direct
financial support in the form of subsidies (as introduced by the latest German pension
reform) or rules that make membership in such schemes mandatory are other means to deal
with ageing populations and promote private or occupational insurance.
Many Member States do not allow tax deduction for pension contributions paid to a pension
fund in another Member State. This effectively seals off the national markets from
competition from other Member States and constitutes a major obstacle to the free
movement of workers. To deal with this problem, the Commission issued a Communication on
the elimination of tax obstacles to the cross-border provision of occupational pensions. In the
Danner case7, the European Court of Justice also ruled that article 49 of the EC Treaty
precluded Finland from disallowing the tax deductibility if it did not at the same time preclude
the taxation of the benefits paid by foreign pension providers.
On the contrary, Russian taxation rules grant less incentive for the growth of private and
occupational pensions, although recent amendments have improved the basis for healthy
growth of this sector.
Contributions by Russian employers to pension funds for their employees are taxed as
follows:
7
C-136/2000, judgment on 3 October 2002, the Danner case was about a German doctor who moved to Finland and
continued to pay contributions to a German pension scheme. Finland refused the tax deduction.
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(1)
long-term life insurance agreements, pension insurance and (or) non-state pension
fund scheme contributions are profits tax deductible up to a maximum of 12% of the
employer’s total payroll expenses (excluding insurance/pension fund contributions).
Life insurance agreements should be for not less than 5 years during which no insurance
payments should be effected (except on the death of the insured). Pensions under pension
insurance and pension fund agreements should be paid only provided the insured meets the
criteria established by the Russian legislation for payment of state pensions. Life and pension
insurance, non-state pension fund agreements should not be changed with respect to
essential conditions or terminated (other than due to force majeure circumstances);
otherwise the employer would need to pay profits tax with respect to premiums/contributions
made at the moment of such change/termination.
(2)
However, contributions that employers make in favour of their employees under long-
term life insurance agreements, pension insurance and (or) non-state pension fund schemes
are subject to unified social tax (UST). Exclusion applies to contributions that are not profits
tax deductible (e.g. if the above 12% threshold is exceeded or certain deductibility criteria
are not met).
It should be noted that the regime of so-called joint pension accounts (as opposed to
individual pension accounts) used under some agreements with non-state pension funds
allows to postpone or even avoid UST payments. Until the end of 2003, contributions made
by employers in favour of their employees to non-state pension funds and to insurance
companies for pension insurance above 2,000 roubles per year constituted a taxable benefit
for employees (the threshold is increased to 5,000 roubles from 1 January 2004). Pension
payments on retirement are not taxable. The regime of “joint” pension accounts with nonstate pension funds may help defer the tax payment.
Insurance payments under long-term insurance agreements (more than five years with no
insurance payments during this period) are not taxable for policyholders.
The effect of the previous system was that, although the pension itself is tax free when the
person has entered retirement, employees in Russia had less tax incentive to invest in
pension funds while they are working and employers have less tax incentive to make pension
contributions for their staff, as employees were taxed and employers continues to be liable to
UST on pension contributions. The expectation is that with the removal of the first of these
tax obstacles, the system will be likely to attract much more premium. It remains to be seen
what the effect of the amendments coming into force in 2005 will be, which will further
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encourage employers and employees to enter into life insurance arrangements, subject to
taxation of the pension paid.
P. Annuities and pension income
In connection with private or occupational pensions (particularly if these are tax deferred
plans), rules have to be established regarding the disbursement of the pension funds. We
summarize some of the important concepts involved.
(a)
Because of the tax deferral benefit, a pensioner who reaches retirement age may not
postpone indefinitely the disbursement of the pension. The pensioner is usually required to
buy (with his pension funds) a life annuity or other type of annuity (life and survivor, life with
a guaranteed payment period, etc.) not later than some age (e.g., 72 or 75);
(b)
In years before the purchase of the annuity, a pensioner who has reached retirement
age may be obliged to make an annual "minimum withdrawal" from the pension fund (these
withdrawals are subject to income tax);
(c)
A pensioner who reaches retirement age may have the right to withdraw some
portion of the pension fund as a lump sum. This lump sum is often tax free and is also a
limited fraction of total funds, both for tax reasons and because withdrawing the entire
pension fund at once defeats the purpose of the fund (which is old age security).
Once the occupational schemes market gets going, the Russian Federation will have to
address these questions and others and come up with appropriate rules. Such rules, however,
will have to await revamping of the current tax arrangements regarding private and
occupational pensions.
Q. Sex discrimination in insurance and in pensions
The European Commission has recently proposed the adoption of a directive that would
prohibit the gender-specific calculation of life insurance premiums. The Commission considers
that taking into account the gender of the insured in calculating premiums constitutes
unequal treatment of men and women. However, the Comité Européen des Assurances
considers this interpretation faulty for the following reasons:
(a) When interpreting the principle of equal treatment between men and women, the
European Court of Justice finds that discrimination exists if different provisions are applied to
the same states of affairs or if the same provision is applied to different states of affairs. The
equality principle is therefore violated only if unequal treatment cannot be justified through
different underlying states of affairs.
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Life expectancy differences are objective criteria observed for a long period and statistically
proven and therefore constitute different states of affairs.
(b) Women live considerably longer than men. If insurers were to use unisex rates, there
would in fact be unjust (unfair) treatment of both men and women, because women would
be obliged to pay for term life products a premium higher than actuarially justified by their
life expectancy and men would be obliged to pay for annuities and pensions a premium
higher than actuarially justified by their life expectancy. Furthermore, since it is inconceivable
that this subsidy of women's pensions by men and of men's insurance by women could ever
exactly balance out, it can be argued that one or the other side is discriminated against.
(c) The prohibition of a premium calculation based on risk characteristics abrogates the
fundamental right of private autonomy, interferes in the freedom of contract and represents a
serious intervention in the free price mechanism and a distortion of free competition.
We feel that the Russian Supervisory Authority should at present permit insurance companies
to calculate life insurance premiums and pension premiums by sex. However, we cannot
guarantee that unisex rates will not be imposed in the future, as the European Commission is
not alone in pushing for unisex rates. There are several non-EU jurisdictions where, to the
consternation of actuaries, there is mounting political pressure for unisex rates, technical
issues notwithstanding! Furthermore, there is considerable feeling that defending genderspecific rates will, in the long run, be a losing battle.
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Conclusions and recommendations
Life insurance plays a significant role in the effective protection of an insured's dependents in
case of death and in providing retirement income to the elderly. To protect life insurance
policyholders, the European Union and its Member States have adopted laws and directives
strengthening the prudential supervision of life undertakings. To bring the Russian system of
life insurance and of pensions in line with EU practice, the Russian Supervisory Authority
would be advised to adopt the following measures:
1.
The Insurance Supervisory Department should adopt rules regulating the formation of
reserves by insurance companies that underwrite life assurance contracts.
2.
The policyholder should be given the opportunity to cancel the contract not later than
30 days from the day of receipt of the contractual documents (policy).
3.
New insurance undertakings should not be licensed to conduct both life and non-life
business. Existing "mixed" undertakings could be permitted to continue as before provided
that they adopt separate administration / accounting for life and for non-life.
4.
Within life insurance companies (or the life insurance division of a mixed insurance
company), the assets backing long-term insurance liabilities should be accounted for
separately from assets for short-term business.
5.
Under certain exceptional circumstances, the Russian Supervisory Authority should
have the right to demand a guarantee fund higher than that provided in law and/or a higher
solvency margin than technically required. This right should be invoked if, e.g., there is
evidence that policyholders' rights are seriously threatened or if there are serious infractions
of the provisions governing reserves and investments. A somewhat higher guarantee fund
might also be required of new companies.
6.
Tariffs must be deregulated and insurance products priced freely by each insurer.
Supervision should be limited to (a) monitoring company financial health (solvency, adequacy
of reserves, suitability and adequacy of assets) and (b) ensuring consumer and policyholder
protection and fair competitive practices.
7.
Mathematical reserves must be calculated by a sufficiently prudent prospective actuarial
valuation taking into account all future liabilities and all future premiums as determined by
the policy conditions of each existing contract. Rules must also be promulgated regarding the
calculation of short-term technical reserves such as unearned premium reserve, unexpired
risks reserve and outstanding claims reserve (including IBNR). In the case of with-profits
policies that provide guaranteed bonuses (a practice we advise against), appropriate
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additional reserves must be held. If bonuses are not guaranteed, such reserves are not
necessary.
8.
Investment rules for life insurance funds must be enacted specifying the classes of
admissible assets and the administration of the investments.
9.
Non-compliance with provisions referring to mathematical reserves and investment
rules must lead to the imposition of a fine and, in the case of particularly serious infractions,
to revocation of the insurer's license.
10.
The list of assets constituting the company's "insurance deposit" (i.e., assets backing
the mathematical and the technical reserves) must be submitted to the Supervisory Authority
not later than three months after the approval of the company's balance sheet by the general
meeting of the shareholders.
11.
In the case of unit-linked policies, the insurer must disclose to the policyholder the fund
to whose units the benefits are linked. If the fund is an "internal variable fund", the insurer
must communicate the statutes (regulations) governing the fund. Asset-liability matching is
particularly important in the case of a unit linked product, and the insurer must cover the
relevant liabilities with units of the fund to which the product is linked. The bank where the
covering assets are kept must notify the ISD at least once a month about the assets allocated
by the insurance undertaking to the variable fund.
12.
Taking into account the sex of the insured in calculating premiums does not constitute
unequal treatment of men and women. Using "unisex rates" obliges women to pay a death
insurance premium higher than the "actuarially correct" premium resulting from women's
mortality and obliges men to pay survival insurance premiums and pension premiums higher
than the "actuarially correct" premium resulting from men's mortality. We recommend that
life insurers be permitted to price their products by sex.
13.
The law must delineate the company actuary's statutory responsibilities and even
provide penalties in case of dereliction of duty or malfeasance. In the context of a life
company's balance sheet (annual statement), the actuary should sign a certificate affirming
the adequacy of the company's insurance provisions. (Some jurisdictions even require the
actuary to co-sign the entire annual statement.)
14.
The person auditing the company's accounts should attach to the company's annual
statement an auditor's certificate listing any observations which may include key findings on
issues relating to compliance with the relevant regulatory and accounting provisions. This
certificate should be published together with the company's annual statement, thereby
informing the shareholders, the general public and ISD of any violations. In the case of very
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serious violations, the auditor must have a duty, quite apart from the annual certificate, to
report his findings to the supervisory authority directly and promptly.
15.
The law must specify the moral and professional qualifications of a company's top
management and of any shareholder in possession of a "qualifying holding" (shareholder
owning, e.g., 10% or more of the company's shares). If the qualifying holding belongs to a
legal person, the inquiry should extend to the natural persons controlling that legal person.
Any legal or natural person who proposes to acquire a qualifying holding in an insurance
undertaking must first inform the supervisory authority indicating the size of such intended
holding. The ISD should have a reasonable length of time, say 3 months, to oppose the
proposal.
16.
In contrast to pay-as-you-go social security pensions, the amount of a private pension
and/or occupational scheme pension is based on capitalization methods. This means that the
amount of pension a given person will get is the exact actuarial equivalent of the
contributions made by that person and/or on behalf of that person. The age at which the
pension begins is contractually determined by the parties involved. Since a private pension is
predicated on the actuarial equivalence between contributions and pension payments, it must
be paid independently of the size of any state pension. On the other hand, it is quite
acceptable to have a so-called "integrated pension plan", which is intended to supplement the
state pension (such a plan involves actuarially determined contributions which are of course
lower than they would be if the private pension were paid disregarding the state pension).
17.
While many occupational pensions may be offered by organizations founded for that
express purpose, existing financial institutions (such as life insurers) will very likely wish to
offer occupational pension services. To avoid competition distortions, the Russian prudential
requirements regarding occupational retirement schemes should apply equally to all types of
institutions administering occupational pension plans. In deciding whether participation in an
occupational pension scheme should be made mandatory, one has to weigh social policy
objectives vs. the risk of collective agreements with anticompetitive aspects. Finally, excessive
control on the investments of occupational schemes (placement of reserves only in state
securities) must be abolished (though prudent general investment rules must obviously
apply).
18.
To give the Russian state pension system some relief, one should promote private and
occupational retirement schemes. This will require generous tax incentives. Compared to
other European countries, contributions are heavily taxed in Russia and these tax obstacles
must be removed. Early surrender of tax-benefited pension funds for purposes unrelated to
retirement should be discouraged by taxing the funds withdrawn.
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19.
Russia might consider the setting up of a Benefit Guarantee Fund (or State
Compensation Scheme) intended to indemnify life policyholders if their life insurer becomes
insolvent.
20.
Finally, a decision must be made as to whether there will be a single supervisory
authority for insurance and for pension funds or two separate ones (this varies by country).
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Annex I. Annex IV, section B of the recast Life Directive (2002/83/EC)
Annex IV, section B of the recast Life Directive (2002/83/EC) sets out the minimum solvency
margin for life insurance companies’ solvency margins:
The minimum solvency margin shall be determined as shown below according to the classes
of assurance underwritten.
(a) For the kinds of assurance referred to in Article 2(1)(a) and (b) (Life and pension
insurance, annuities) of this Directive other than assurance linked to investment
funds and for the operations referred to in Article 2(3) of this Directive (social
security insurance when managed by private companies), it must be equal to the
sum of the following two results:
-
first result:
a 4% fraction of the mathematical provisions relating to direct business gross of reinsurance
cessions and to reinsurance acceptances shall be multiplied by the ratio, for the last financial
year, of the total mathematical provisions net of reinsurance cessions to the gross total
mathematical provisions as specified above; that ratio may in no case be less than 85%,
- second result:
for policies on which the capital at risk is not a negative figure, a 0,3% fraction of such
capital underwritten by the assurance undertaking shall be multiplied by the ratio, for the last
financial year, of the total capital at risk retained as the undertaking's liability after
reinsurance cessions and retro cessions to the total capital at risk gross of reinsurance; that
ratio may in no case be less than 50%.
For temporary assurance on death of a maximum term of three years the above fraction shall
be 0,1%; for such assurance of a term of more than three years but not more than five years
the above fraction shall be 0,15%.
b)
For the supplementary insurance referred to in Article 2(1)(c) of this Directive
[accident and sickness insurance], it shall be equal to the result of the
following calculation:
-
the premiums or contributions (inclusive of charges ancillary to premiums or
contributions) due in respect of direct business in the last financial year in
respect of all financial years shall be aggregated,
-
to this aggregate there shall be added the amount of premiums accepted for
all reinsurance in the last financial year,
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-
from this sum shall then be deducted the total amount of premiums or
contributions cancelled in the last financial year as well as the total amount
of taxes and levies pertaining to the premiums or contributions entering into
the aggregate.
The amount so obtained shall be divided into two portions, the first extending up to EUR 10
million and the second comprising the excess; 18% and 16% of these portions respectively
shall be calculated and added together.
The result shall be obtained by multiplying the sum so calculated by the ratio existing in
respect of the last financial year between the amount of claims remaining to be borne by the
assurance undertaking after deduction of transfers for reinsurance and the gross amount of
claims; this ratio may in no case be less than 50%.
c)
For permanent health insurance not subject to cancellation referred to in Article
2(1)(d) of this Directive, and for capital redemption operations referred to in
Article 2(2)(b) thereof, it shall be equal to a 4% fraction of the mathematical
provisions calculated in compliance with the conditions set out in the first
result in (a) of this section.
d)
For assurance covered by Article 2(1)(a) and (b) [Life and pensions insurance] of
this Directive linked to investment funds and for the operations referred to in
Article 2(2)(c), (d) and (e) [pension insurance] of this Directive it shall be
equal to:
-
a 4% fraction of the mathematical provisions, calculated in compliance with the
conditions set out in the first result in (a) of this section in so far as the assurance
undertaking bears an investment risk, and a 1% fraction of the provisions calculated in the
same way, in so far as the undertaking bears no investment risk provided that the term of the
contract exceeds five years and the allocation to cover management expenses set out in the
contract is fixed for a period exceeding five years, plus
-
a 0,3% fraction of the capital at risk calculated in compliance with the conditions set
out in the first subparagraph of the second result of (a) of this section in so far as the
assurance undertaking covers a death risk.
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Annex II. Article 20 of the 2002 Life Directive
Article 20 of the 2002 Life Directive sets out the basic principles for the establishment of
technical provisions:
1. The home Member State shall require every assurance undertaking to establish
sufficient technical provisions, including mathematical provisions, in respect of its
entire business.
The amount of such technical provisions shall be determined according to the following
principles.
A. (i) the amount of the technical life-assurance provisions shall be calculated by a sufficiently
prudent prospective actuarial valuation, taking account of all future liabilities as determined
by the policy conditions for each existing contract, including:
- all guaranteed benefits, including guaranteed surrender values,
- bonuses to which policy holders are already either collectively or individually entitled,
however those bonuses are described - vested, declared or allotted,
- all options available to the policy holder under the terms of the contract,
- expenses, including commissions, taking credit for future premiums due.
(ii) the use of a retrospective method is allowed, if it can be shown that the resulting
technical provisions are not lower than would be required under a sufficiently prudent
prospective calculation or if a prospective method cannot be used for the type of contract
involved;
(iii) a prudent valuation is not a "best estimate" valuation, but shall include an appropriate
margin for adverse deviation of the relevant factors;
(iv) the method of valuation for the technical provisions must not only be prudent in itself,
but must also be so having regard to the method of valuation for the assets covering those
provisions;
(v) technical provisions shall be calculated separately for each contract. The use of
appropriate approximations or generalisations is allowed, however, where they are likely to
give approximately the same result as individual calculations. The principle of separate
calculation shall in no way prevent the establishment of additional provisions for general risks,
which are not individualised;
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(vi) where the surrender value of a contract is guaranteed, the amount of the mathematical
provisions for the contract at any time shall be at least as great as the value guaranteed at
that time.
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Annex III. Article 23 of the 2002 Life Directive
In the EU, Article 23 of the 2002 Life Directive provides that assets that may be used as an
"insurance deposit" (i.e., to cover reserves) are as follows:
A. Investments
(a) debt securities, bonds and other money- and capital-market instruments;
(b) loans;
(c) shares and other variable-yield participations;
(d) units in undertakings for collective investment in transferable securities (UCITS) and
other investment funds;
(e) land, buildings and immovable-property rights;
B. Debts and Claims
(f) debts owed by reassurers, including reassurers' shares of technical provisions;
(g) deposits with and debts owed by ceding undertakings;
(h) debts owed by policy holders and intermediaries arising out of direct and reassurance
operations;
(i) advances against policies;
(j) tax recoveries;
(k) claims against guarantee funds;
C. Others
(l) tangible fixed assets, other than land and buildings, valued on the basis of prudent
amortisation;
(m) cash at bank and in hand, deposits with credit institutions and any other body
authorised to receive deposits;
(n) deferred acquisition costs;
(o) accrued interest and rent, other accrued income and prepayments;
(p) reversionary interests.
3. The inclusion of any asset or category of assets listed in paragraph 1 shall not mean that
all these assets should automatically be accepted as cover for technical provisions. The home
Member State shall lay down more detailed rules fixing the conditions for the use of
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acceptable assets; in this connection, it may require valuable security or guarantees,
particularly
in
the
case
of
debts
owed
by
reassurers.
In determining and applying the rules which it lays down, the home Member State shall, in
particular, ensure that the following principles are complied with:
(i)
assets covering technical provisions shall be valued net of any debts
arising out of their acquisition;
(ii)
all assets must be valued on a prudent basis, allowing for the risk of
any amounts not being realisable. In particular, tangible fixed assets
other than land and buildings may be accepted as cover for technical
provisions only if they are valued on the basis of prudent
amortisation;
(iii)
loans, whether to undertakings, to a State or international
organisation, to local or regional authorities or to natural persons,
may be accepted as cover for technical provisions only if there are
sufficient guarantees as to their security, whether these are based on
the status of the borrower, mortgages, bank guarantees or
guarantees granted by assurance undertakings or other forms of
security;
(iv)
derivative instruments such as options, futures and swaps in
connection with assets covering technical provisions may be used in
so far as they contribute to a reduction of investment risks or
facilitate efficient portfolio management. They must be valued on a
prudent basis and may be taken into account in the valuation of the
underlying assets;
(v)
transferable securities which are not dealt in on a regulated market
may be accepted as cover for technical provisions only if they can be
realised in the short term or if they are holdings in credit institutions,
in assurance undertakings, within the limits permitted by Article 6, or
in investment undertakings established in a Member State;
(vi)
debts owed by and claims against a third party may be accepted as
cover for the technical provisions only after deduction of all amounts
owed to the same third party;
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(vii)
the value of any debts and claims accepted as cover for technical
provisions must be calculated on a prudent basis, with due allowance
for the risk of any amounts not being realisable. In particular, debts
owed by policy holders and intermediaries arising out of assurance
and reassurance operations may be accepted only in so far as they
have been outstanding for not more than three months;
(viii)
where the assets held include an investment in a subsidiary
undertaking which manages all or part of the assurance undertaking's
investments on its behalf, the home Member State must, when
applying the rules and principles laid down in this Article, take into
account the underlying assets held by the subsidiary undertaking; the
home Member State may treat the assets of other subsidiaries in the
same way;
(ix)
deferred acquisition costs may be accepted as cover for technical
provisions only to the extent that this is consistent with the
calculation of the mathematical provisions.
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Annex IV. Article 24(1) of the EU Directive (2002/83)
The EU Directive (2002/83) at Article 24(1) makes clear provision for the
diversification of assets, to prevent assets being over-concentrated:
1. As regards the assets covering technical provisions, the home Member State shall require
every assurance undertaking to invest no more than:
(a) 10 % of its total gross technical provisions in any one piece of land or building, or a
number of pieces of land or buildings close enough to each other to be considered effectively
as one investment;
(b) 5 % of its total gross technical provisions in shares and other negotiable securities treated
as shares, bonds, debt securities and other money- and capital-market instruments from the
same undertaking, or in loans granted to the same borrower, taken together, the loans being
loans other than those granted to a State, regional or local authority or to an international
organisation of which one or more Member States are members. This limit may be raised to
10 % if an undertaking invests not more than 40 % of its gross technical provisions in the
loans or securities of issuing bodies and borrowers in each of which it invests more than 5 %
of its assets;
(c) 5 % of its total gross technical provisions in unsecured loans, including 1 % for any single
unsecured loan, other than loans granted to credit institutions, assurance undertakings - in so
far as Article 6 allows it - and investment undertakings established in a Member State. The
limits may be raised to 8 % and 2 % respectively by a decision taken on a case-by-case basis
by
the
competent
authority
of
the
home
Member
State;
(d) 3 % of its total gross technical provisions in the form of cash in hand;
(e) 10 % of its total gross technical provisions in shares, other securities treated as shares
and
debt
securities,
which
are
not
dealt
in
on
a
regulated
market.
2. The absence of a limit in paragraph 1 on investment in any particular category does not
imply that assets in that category should be accepted as cover for technical provisions
without limit. The home Member State shall lay down more detailed rules fixing the
conditions for the use of acceptable assets. In particular it shall ensure, in the determination
and the application of those rules that the following principles are complied with:
(i) assets covering technical provisions must be diversified and spread in such a way as to
ensure that there is no excessive reliance on any particular category of asset, investment
market or investment;
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(ii) investment in particular types of asset which show high levels of risk, whether because of
the nature of the asset or the quality of the issuer, must be restricted to prudent levels;
(iii) limitations on particular categories of asset must take account of the treatment of
reassurance in the calculation of technical provisions;
(iv) where the assets held include an investment in a subsidiary undertaking which manages
all or part of the assurance undertaking's investments on its behalf, the home Member State
must, when applying the rules and principles laid down in this Article, take into account the
underlying assets held by the subsidiary undertaking; the home Member State may treat the
assets of other subsidiaries in the same way;
(v) the percentage of assets covering technical provisions which are the subject of non-liquid
investments must be kept to a prudent level;
(vi) where the assets held include loans to or debt securities issued by certain credit
institutions, the home Member State may, when applying the rules and principles contained in
this Article, take into account the underlying assets held by such credit institutions. This
treatment may be applied only where the credit institution has its head office in a Member
State, is entirely owned by that Member State and/or that State's local authorities and its
business, according to its memorandum and articles of association, consists of extending,
through its intermediaries, loans to, or guaranteed by, States or local authorities or of loans
to bodies closely linked to the State or to local authorities.
IKRP Rokas & Partners
This project is funded by the EU.
DISCLAIMER:
The following document reflects only the opinion of the consortium comprised of:
PricewaterhouseCoopers Risk Management (Belgium),
ZAO PricewaterhouseCoopers Audit, (Moscow)
IKRP Rokas & Partners Law Firm,
McGraw-Hill International (UK) Limited (Standard and Poor’s).
It does not in any way reflect the opinion of or prejudice the position of the European Union,
the European Commission or the TACIS programme.