Luxembourg is considered a world leader in terms of its delivery of insurance products and services. Part of the reason for this reputation comes down to the strict manner in which the insurance sector is regulated, with all insurers required to acquire the approval of a government minister before being allowed to open for business – the purpose of which is to ensure that each new entrant is financially sound and therefore unlikely to damage the stability of the market.
Once ministerial approval is obtained, companies within the industry are overseen by the Commissariat aux Assurances to ensure that their activities within the insurance sector are in line with national and EU laws. Due in part to its rigorous regulatory framework, Luxembourg’s insurance sector has developed into one of the best in the world. As a testimonial to this, nearly 90 percent of domestic insurers’ business is derived from outside the country. Another reason people choose to purchase an insurance in the grand dukedom is because of the high quality of service.
“Highly skilled people and a top class insurance brand have helped Swiss Life provide life insurance solutions to clients for more than 150 years”, Beat Reichen, CEO Swiss Life Luxembourg told World Finance. “It provides protection, stability and security to the insured individuals and their beneficiaries.
Due in part to its rigorous regulatory framework, Luxembourg’s insurance sector has developed into one of the best in the world
“By setting up a life insurance company in Luxembourg in 1985, Swiss Life managed to identify, long before the European single market has been created, a number of great opportunities outside Switzerland. With entrepreneurship and careful risk considerations, we have built up one of the leading insurers for the UHNWI/HNWI segment by combining wealth management and life insurance.”
Swiss Life and many of its contemporaries in Luxembourg have chosen to focus their attention and energy on supplying life insurance policies that are linked to financial instruments, such as investment funds. This allows them to develop specific products and services that not only offer life cover for their clients, but also provide the ability to make a return for clients. For example, many insurance contracts in the grand duchy are tied to dedicated funds, because of the favour the instrument has garnered within the wealth management sector.
According to Reichen, due to the company’s origins, he and his team are uniquely positioned to understand and cater to the needs of their clients. “Switzerland is the hometown of private banking”, he said. “Our people do understand the needs of the private banks and their clients. Creating a value proposition for the client, as well as for the partnering private bank, creates one for Swiss Life as well.”
For wealth planning providers such as private banks, family offices and tax advisors, Swiss Life Luxembourg offers onshore compliant life insurance products for most European countries. For distributing the products, it uses the European single market on a “freedom to provide services” base and all its products successfully manage to combine active asset management with the advantage of high-end life insurance to the full benefit of European residents.
Simple solutions
The specialised high-quality services that Luxembourg’s insurers provide have helped it to dominate the European insurance sector, and in particular the life insurance market – with non-life contracts accounting for less than 13 percent of the entire market, according to a recent report by BMI Research.
“Owing to a combination of factors, including declining vehicle fleets and a stagnant property market, we anticipate that the life segment will see continued growth in its market shares, reaching 88 percent by 2019”, reads BMI’s Luxembourg Insurance Report. “This leaves life insurers as the front runners, while non-life groups face escalating competition and dwindling revenues.
“Over the longer term, we expect to see significant consolidation in the Luxembourg insurance sector, with a number of smaller non-life groups losing out to international conglomerates that will benefit from economies of scale and can undercut their smaller contemporaries.”
The expertise on offer in Luxembourg is only part of the reason the country dominates the life insurance market. The other piece of the puzzle is the straightforward manner in which insurers serve their clients. “Our product, distribution and compliance framework, combined with tax and legal knowhow in each market, is the key to success”, said Reichen.
Insurance 2.0
High-calibre staff are at the heart of Swiss Life’s success, but something that is hindering the insurer is the low interest environment and the exaggerated European regulation that the region is enveloped by. According to Reichen, the low interest rate disables local insurers of offering guaranteed products, as the level of guarantee is not attractive once the given costs are factored in.
Another factor affecting annuity products is the simple fact that more and more people are living longer than many insurers originally assumed and calculated for. A longer life is great for the individual, but the additional reserving that is required in order to compensate for the longer duration of an annuity payment is in fact reducing the insurer’s margin and profit. So, as a consequence of improved health, these guaranteed and annuity products are slowly disappearing from the offering among many insurers.
To combat the decline of guaranteed and annuity products, there is a growing trend towards unit-linked products, where the investment risk is borne by the policyholder and pure risk products can be reinsured with the industry. This ability to quickly adapt to environmental changes has played a key role in Swiss Life’s success. For Reichen, the most important thing in any business is being able to identify opportunities – something that is made possible by having a very close contact with both partners and sales directors.
“Once identified, we have a structured approach to establish a business case, which will be submitted to the management for approval”, said Reichen. “A disciplined execution and constant monitoring ensures the success.”
Overcoming obstacles
The insurance market’s simultaneous strength and weakness has to be the EU regulation, which constantly requires increasing resources that merely erode the margins and, therefore, the profitability of insurers greatly.
Combine this with increasing capital requirements and the attractiveness for investors of the life insurance industry quickly begins to dwindle. In addition, the insurance industry is facing newly established national hurdles in terms of disqualifying tax conditions and consumer protection rules. This has impacted smaller companies (those below six to eight billion in revenue) intensely, and is likely to eliminate these players from the market, as there is not enough substance to counter increasing costs.
As a consequence of rising costs of doing business, many insurers are turning to technology to increase productivity and overall efficiency in an attempt to stem the tide of shrinking profit margins.
“Without clear IT supported processes you will not remain efficient and profitable”, said Reichen. “The entire industry is not there yet, as there are too many manual interventions and too many people engaged in the administration of life insurance contracts.
“At the same time, the fierce competition has led to a very low pricing. In other words, the clients are getting a tailor-made product at a mass market price. Prices will not follow the increased costs, so the production costs must be adjusted to the pricing achieved. Standardised processes, supported by high performing IT systems will be the next development and will be key to the future of the life insurance industry.”
But that is only the beginning, as there will be new service providers in Luxembourg to offer the outsourcing of the administration based on the created PSA status, with the life insurance industry following in the footsteps of the fund administration sector, which underwent similar changes just a few short years back.
But despite all the challenges ahead of it, Swiss Life is well positioned, as is the life insurance market in Luxembourg as a whole, because as ever, it is prepared to meet the obstacles in its way head on.
“We have invested into new administration processes, we do have excellent people and our brand is recognised worldwide”, concluded Reichen. “Every day, there is more wealth created and the UHNWI community is getting bigger.
“In a globalised world, the wealthy families are having global setups for their business and their family structure. Understanding their needs and meeting their expectation with our solutions, will ensure that Swiss Life remains a leading firm for the wealthy in the world.”
