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How did Luxembourg win the race to attract High Net Worth Individuals (HNWI)?

By - Associé, Insurance Industry Leader - Deloitte Tax & Consulting

The life insurance EU single market reached the regulatory climax with the transposition of the so-called 3rd generation directive.

In fact, since 1994, the unique licence regime has enabled life insurance undertakings licenced in one EU member state to operate in another EU member state under both the freedom of establishment and the freedom to provide services.

The first successes of the use of the freedom of services regime applied from the Grand-Duchy of Luxembourg, in terms of volume, resulted from the commercialisation of guaranteed rate products or external funds to retail clients and, to a lesser extent, to mass affluent clients depending on the geographical location of the mother company.

The first steps of the cross-border life activity have enabled insurance market players to build a pan-European legal, regulatory, technical and fiscal expertise. In turn, these actors have managed to extend their activities to several countries of the European Economic Area.

Historically, private banking represented one of the leading activity of the Luxembourgish financial market. Private banks have quickly understood the relevance of life insurance contracts in the wealth management framework. Consequently, such contracts have become part of the private banks’ toolbox in order to efficiently structure the assets of their clients and optimize their inheritance planning.

The proximity of the 3 industries (insurance, banking and investment funds) and the regular interactions between the insurance industry and the Luxembourgish insurance regulator (“Commissariat Aux Assurances”) have developed a real innovation dynamic that has not been denied to date.

Thereby, since 1995, the « Commissariat Aux Assurances » has introduced the concept of the dedicated internal funds in the regulation, paving the way for discretionary management and High Net Worth Individuals (HNWI).

This regulation is constantly adjusted in order to take into account the changes in the policyholders’ risk profiles, their needs, financial innovations, the risks related to financial instruments as well as those related to legal and regulatory developments.

Retrospectively, the leadership of the Luxembourgish life insurance industry at the European level comes from the following strengths:

  • A recognised political and fiscal stability despite successive financial crises

  • A regulatory requirement for real substance (central administration), making life insurance undertakings in Luxembourg a development and decision center

  • A professional association (ACA) which organizes forums dedicated to cross-border activity and in so doing, enabling its members to anticipate tax and regulatory changes

  • A true agile and entrepreneurial spirit shared by insurance undertakings in Luxembourg, despite many obstacles such as protectionist tax or regulatory measures implemented by other EU member states

  • In-house pan-European legal, regulatory, technical, tax and linguistic expertise

  • An insurance, private banking and investment fund ecosystem supporting innovation and a regulator dedicated to the insurance industry paying attention to insurance undertakings’ needs

  • A regulation designed for the HNWI in terms of diversity of eligible assets, flexibility of payments for premiums / benefits and protection of representative assets (triangle of security).

In practice, even though insurance undertakings in Luxembourg do not lose their focus on retail or mass-affluent clients, the solutions they offer mainly target (U)HNWI clients.

As a result, over the years, an ecosystem favourable to (U)HNWI has developed in the Grand-Duchy of Luxembourg, which is, to date, unequalled in Europe!

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