Life insurance Directive 2002/83/EC Bakι, Azәrbaycan -- Çərşənbə axşamı 13 mart 2012 ACP -- Élie Sibony, François Tempé 1

Abbreviations  bp : bullet point  cont. : continued  EU : European Union  GB : guaranteed benefit  L : (depending on the context) Life, Life directive  MP: mathematical provision  MS : Member State (of the EU)  NL : (depending on the context) Non-life, Non-life directive  ph : policyholder  RM, RSM : Required (Solvency) Margin  SV : surrender value  TP : technical provision 2 Life insurance This presentation refers to the latest consolidated version of Dir. 2002/83 (ultimately modified by Dir.2008/19). Page references, where provided, refer to the pages of the pdf file of this consolidated version, available at

Summary Introduction 1. Life Prudential requirements 2. Life Market conduct requirements 3 Life insurance  Introduction  Unlike NL dir., L. Dir. 2002/83 is not limited to prudential requirements. It also includes market conduct requirements.

 Summary  Premiums  Technical provisions (TPs): valuation methods  TPs: discount rates  TPs: statistical elements of the valuation  TPs: profit at inception  Rules on assets, Available Solvency Margin: see dedicated presentation  Required solvency Margin  Insurers in difficulty, Rules on Branches: see dedicated presentation 4 Life insurance 1. Life Prudential Requirements

 Premiums  Premiums should be sufficient to enable insurers to meet their commitments (L. art.21).  MSs may require systematical notification of the technical bases used for calculating premiums (L. art.6.5, art.34). → There are no such provisions in NL. MSs may thus lay down rules for minimum life premiums. They cannot do so in NL, nor can they require systematic notification of the bases of NL tariffs. 5 Life insurance 1. Life Prudential Requirements

 Premiums → Example of implementation: French implementation. For those contracts contemplated under L. art.20.B.a (« riskier » contracts, see below slides 8-10), French rules prohibit that the guaranteed interest rate be higher than 60% of the rate on State bonds. For contracts contemplated under L. art.20.B.c., French regulation prohibits that the guaranteed interest rate be higher than 75% of the rate on State bonds. For all contracts with mortality elements, French rules provide minimum prudent tariff elements, such as prudent « female » tables for most life contracts, and prudent « male » tables for most death contracts. 6 Life insurance Life Prudential Requirements

 Technical provisions: valuation methods (L. art.20.1.A, pp.34-35)  Valuation should be prudent, including a margin over the ‘best estimate’  Prospective method is preferred. Retrospective method allowed only if results in higher TP or if prospective method is not possible  Valuation should take account of all future liabilities, including guaranteed surrender values. At any time, the TP for the contract cannot be lower than the guaranteed SV at that time. 7 Life insurance Life Prudential Requirements

 TPs: Discount rates  The supervisor should fix maximum(s) to the discount rate(s)  L. art.20.1.B differentiates two categories of contracts: → A first category regroups contracts that are regarded as « less risky ». This includes (unit-linked contracts), single premiums contract for a period of max. 8 years, without-profit contracts, annuity contracts with no SV. → For these contracts, MS freely lay down the rules, provided that the « prudent rate of interest » is no higher than the yield on assets, less an « appropriate deduction » (L. art B.c, pp.35-36). 8 Life insurance

Life Prudential Requirements  TPs: Discount rates (cont., « less risky » contracts, L. art.20.1.B.c) → Example of implementation: as a general rule, French regulation provide that the discount rate should equate, or be lower than, the tariff rate (interest guaranteed rate). For these « less risky » contracts, French regulation provide that the tariff rate should equate, or be lower than, 75% of the rate on State bond issues (see slide 7). Normally, 75% of the rate on State bond issues is substantially lower than the yield on any insurer’s assets. French regulation further provides that, if the yield on the insurer’s assets falls below 80% of the discount rate, the insurer must set aside additional TPs. 9 Life insurance

 TPs: Discount rates (« riskier » contracts) → The 2 nd category regroups all other contracts; they are regarded as « more risky » than those of the 1 st category. These « riskier contracts » would include contracts with surrender value (except those with single premium and whose term is no more than 8 years), and contracts with regular premiums (including those without surrender value and / or whose term is no more than 8 years). → Two options for these contracts: (L. art B.a, p.35) i) Discount rates should not be higher than 60% of the rate on bonds issued by the State whose currency is that of the liability of the contract ii) If the insurer’s assets are valued at market value, one or more maximums can equate the yield on assets minus a prudence margin, determined by the supervisor. 10 Life insurance Life Prudential Requirements

 TPs: Discount rates vs yield on assets (L. art.20.1.B.d, p.36)  In case the present or forseeable yield on the insurer’s assets does not cover the discount rate of TPs, the insurer should set aside supplementary TPs.  TPs: Statistical elements of the valuation (L. art.20.1.C, p.36)  They should be chosen prudently. → In particular, MSs are to establish rules for mortality / longevity tables. - MSs may either only require that these be choosen prudently —each insurer is thus responsible for choosing a « prudent » table; this is the option of the UK regulation. - MSs may also lay down « minimum » prudent tables: this is the option of Fench regulation, which provides prudent « female » tables applicable to most life contracts, and prudent « male » tables applicable to most death contracts. These tables may differ from those laid down for tarification. 11 Life insurance Life Prudential Requirements

 TPs: statistical elements (cont.) → MSs may also lay down « minimum » prudent tables: this is the option of Fench regulation, which provides prudent « female » tables applicable to most life contracts, and prudent « male » tables applicable to most death contracts. These tables may differ from those previously laid down for tarification.  TPs: Profit at inception (L. art.20.1.F, p.36)  Method of calculation of TPs should be such as it recognises the distribution of profits in an appropriate way over the duration of each contract. → Example of implementation: French regulation provides that the discount rate should equate or be lower than the tariff rate (cf. Slide 9). This prohibits than any up-front profit be recognized at the inception of the contract. 12 Life insurance Life Prudential Requirements

 Assets covering TPs, Authorized Assets, Rules for Investment Diversification, Currency Matching Rules (L. art.22, 23, 24 & 26)  By and large, rules on assets are common to L and NL. See dedicated presentation.  Available Solvency Margin (Own Funds Admitted to Cover the RSM) (L. art.27)  By and large, Own Funds that are admitted to cover the RSM are the same in L and NL. See dedicated presentation. 13 Life insurance Life Prudential Requirements

 Required Solvency Margin (L. art.27).  RSM is the sum of various elements that are calculated depending on the insurance class (as defined in Annex I, L. p.67) the contracts belong to (L. art.28.1).  For life contracts with benefits expressed in currency —that is, contracts that are not solely linked to investment funds— RSM is the sum of the two following elements: a) Required margin = 4% of MPs. Reinsurance is taken into account the following way: reduction factor to this margin requirement equates the ratio, at the end of the financial year, between the MPs ceded to reinsurers, and the MPs gross of reinsurance. Reduction is capped at 15% (vs 50% in NL) (L. art.28.2.a). → This 4% margin requirement is designed to cover longevity, asset and operational risks. 14 Life insurance Life Prudential Requirements

 Required Solvency Margin : death contracts with benefits in currency b) 0.3% of Capital at Risk; in practice, this applies to contracts whose death benefits are higher than their life benefits (« death » contracts). → This 0.3% margin requirement is designed to cover the mortality risk. → (Death) capital at risk at a given time is the difference between: - the death benefit that the insurer should pay at that time in case the insured died, and - the mathematical provision of the contract. Capital at risk thus represents the loss incurred by the insurer in case of death of the insured: that is, payment to the beneficiary less the provision already posted in the accounts. 15 Life insurance Life Prudential Requirements

 Required Solvency Margin : death contracts (cont.) Requirements are lowered for short duration death contracts: – for temporary death insurance whose term is between 3 and 5 years, margin requirement = 0.15% of capital at risk; – for death insurance with term no more than 3 years, margin requirement = 0.10% of capital at risk (L. art.28.2.b, p.46). The reinsurance reduction factor to this margin requirement equates the ratio, at the end of the financial year, between the total capital at risk ceded to reinsurers, and the total capital at risk gross of reinsurance. Reduction is capped at 50%. 16 Life insurance Life Prudential Requirements

17 Life insurance Life Prudential Requirements  Required Solvency Margin (cont.)  For contracts where the insurer bears no investment risk (and, in practice, no mortality risk), such as (many) assurances linked to investment funds, or tontines, the required margin = 1% of MPs. → This 4% margin requirement is thus mostly designed to cover operational risk.  Guarantee fund (art.29-30)  Rules on guarantee fund common to L and NL. See dedicated presentation.

18 Life insurance Life Prudential Requirements  Insurers in difficulty (L. art. 37 to 39)  Rules on branches (L. art. 40 to 57) By and large, these rules are common to L and NL. See dedicated presentation.

2. Life Market Conduct Requirements  Summary  Pre-contractual disclosure requirements  Disclosure requirements after concluding the contract  Law of the contract  Cooling-off period 19 Life insurance

2. Life Market Conduct Requirements  Pre-contractual disclosure requirements (L., art.36.1, and Annex.III.A p.69)  The following elements (among others) must be communicated to the ph before the contract is concluded: - name, address etc of the insurer, - means of calculation and distribution of bonuses - guaranteed benefits and surrender values, - for unit-linked contracts, definition of the units and indications on the underlying assets, - cooling-off period, - tax arrangements applicable to the contract 20 Life insurance

2. Life Market Conduct Requirements  Disclosure requirements after concluding the contract (L., art.36.2, and Annex III.B p.69)  Any change in guaranteed benefits, in surrender values, in premiums to be paid etc  Any change in the units linked to the contract (if unit-linked contract)  Each year, information on the state of bonuses 21 Life insurance

22 Life insurance Life Market Conduct Requirements  Law of the contract (L., art.32)  The law of the contract should be the law of the country of the commitment (ie where the insured lives); in some circumstances, the parties may choose the law of another country. → It is expected that legislation and contracts include provisions that unambiguously determine the law of the contract.  Cooling-off period (L., art.35)  Any ph who concludes an individual life-assurance contract must be granted a cancellation period of between 14 and 30 days. The legislation should provide details on the conditions and effects of the cancellation.

23 Life insurance Life Market Conduct Requirements  Cooling-off period (cont.)  Some contracts may be exempted from the cancellation obligation, such as contracts whose duration is 6 months or less, collective contracts providing benefits to employees of an undertaking, etc (cf. L., art.35.2)  → Legislation should provide details on the conditions of cancellation. For instance, it should specify - when the cancellation period starts, - when the right for the ph to cancel the contract exactly expires, - the costs, if any, that could be retained on the ph to cover the insurer’s or intermediary’s costs, - the deadline by which the insurer must refund the ph.

24 Life insurance Life Market Conduct Requirements  Cooling-off period (cont.)  → Examples of possible implementations. The following could reasonably be expected: a) the cancellation period starts at the later of - the day fo when the contract is concluded, - the day when the ph receives all the information required by the contract law. This would normally include the required information about guaranteed benefits and surrender values, and about the right to cancel. b) the cancellation is valid as long as the ph dispatches notification before the deadline, even though the insurer receives the notification after the deadline has expired.

25 Life insurance Life Market Conduct Requirements  Cooling-off period; detailed implementation (cont.) c) It is expected that cancellation is cost free for phs, even though costs were incurred by the insurer and / or the intermediary. It is for insurers and intermediaries to appropriately target their customers and explain the products, in such a way that few cancellations occur. d) Starting on the day when the insurer receives notification of cancellation, a 30 day deadline to repay the ph is espected to be reasonable. e) PH need not give any reason for cancelling.

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