David Healy examines the life industry in Luxembourg and why it is fast acquiring a strong reputation with advisers
As the offshore investment market has grown significantly over the last decade, more and more attention has focused on the different offshore jurisdictions both in Europe and around the world. With new entrants to the market choosing different jurisdictions and existing players diversifying across multiple jurisdictional bases, it is worthwhile considering the specific benefits and advantages of each.
This article will look at some of the key considerations in terms of offshore life assurance companies, how location can impact both on the life assurance company itself and also on its policyholders. We will also consider the advantages that Luxembourg offers in this respect.
What factors prompt a life assurance company to set up business in a particular location? In terms of choosing a location purely from a business perspective, the key considerations include political stability, geographic location and the availability of a skilled pool of labour.
In all these respects, we believe Luxembourg is attractive, particularly for companies wishing to market within Europe. Its place at the heart of the European Union is important in terms of political and economic stability and freedom of goods and services.
Due to the country's geographic location, thousands of non-Luxembourg nationals (French, German and Belgian) are able to commute into Luxembourg each day. As well as being multilingual, this type of employee also enjoys an international outlook on life and a good understanding of different national cultures. This enables Luxembourg-based companies to offer a high quality of service and support to international customers which can be extremely valuable to the growth of a business.
In terms of advantages to policyholders, Luxembourg holds a strong suit. Many UK IFAs may be relatively unfamiliar with Luxembourg as a location for life assurance and it is certainly true that the nation is primarily known as an international banking and fund centre.
This is mainly due to the fact that the Luxembourg authorities were the first to take advantage of the 1988 Undertakings for Collective Investments in Transferable Securities (Ucits) directive. Funds attaining this status may be distributed across all member states. As a consequence, Luxembourg it is now the world's biggest domicile for offshore funds. In addition, it boasts over 200 banks.
There is a tendency, particularly among UK-based IFAs, to focus solely on the Isle of Man as a key life assurance centre, as for decades the island has supported a number of offshore subsidiaries of UK companies. The Isle of Man has made much of its policyholder protection legislation which provides that, in the event of the failure of an insurer, the government will recompense policyholders up to 90% of the value of their investment, without limit.
However, it is important to note that the life assurance policyholder protection in place in Luxembourg is structured in such a way that the policyholder's investment should never be exposed to this type of risk.
According to Luxembourg insurance law, 100% of assets held by a Luxembourg-based life assurer which support liabilities to policyholders must be deposited with an independent custodian bank under the supervision of the Luxembourg Insurance Authorities. As a result of this approach, investors in policies from a Luxembourg-based life assurance company enjoy an outstanding level of protection and security.
As the UK becomes more closely integrated with other EU nations, Luxembourg is fast acquiring a strong reputation with UK IFAs and investors as a centre for life assurance as well as investment with increasing recognition of its investor protection regulation.
Mainland European investors and their advisers already view Luxembourg in this way. It is a jurisdiction that is extremely popular with investors based in Germany, Belgium and Italy, for example.
One recent development that has helped support Luxembourg's standing as a location for financial services has been the publication of the OECD report into harmful tax competition.
While the Isle of Man and Channel Islands were among 47 countries originally named in this report as harmful tax havens (defined by the OECD as being centres which offered low tax rates, but failed to meet legal and administrative transparency requirements), Luxembourg and Dublin did not appear in the list.
A further attraction of Luxembourg is investor confidentiality. Many UK advisers may be surprised to learn that the gravity of Luxembourg financial secrecy laws rivals that of Switzerland. This is central to the basis of Luxembourg law in relation to banking and financial services activities. It is expressly forbidden to release any information to third parties except where such information might relate to criminal activities.
While it remains to be seen whether the EU agreement to participate in greater exchange of information between member states will impact on this in the longer term, currently UK investors holding policies with Luxembourg-based insurance companies are not subject to the same UK fiscal representation requirements as those with policies based in other offshore centres because to do so would contravene Luxembourg law.
l The Luxembourg authorities were the first to take advantage of the 1988 Ucits directive.
l Luxembourg is an extremely popular jurisdiction with investors based in Germany, Belgium and Italy.
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