## 1luxea2024007

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---

### Executive summary — sector overview and main findings
- Sector assets: EUR 289bn in June 2023.
- Assets relative to GDP: 372 percent of GDP.
- Domestic business share: 6 percent of the sector’s total technical provisions underwritten for domestic risks.
- Cross-border orientation: More than 90 percent of gross written premiums stem from cross-border business.
- Post-Brexit developments: Several U.K. insurers resettled to Luxembourg to continue cross-border business in the EEA; the CAA licensed twelve U.K. insurers in close cooperation with U.K. authorities.
- Product mix:
  - Life insurance dominated by index- and unit-linked (UL) products for (ultra) high net-worth individuals.
  - Unit-linked and index-linked: EUR 17,906 million gross premiums in 2022 (68 percent of total life premiums).
  - Single premiums: 93 percent of life premiums in 2022.
- Non-life and reinsurance:
  - Total gross written premiums EUR 26,8bn in 2022.
  - Proportional reinsurance accepted EUR 8,143 million (30 percent of gross written premiums).
  - Non-proportional reinsurance accepted EUR 3,557 million (13 percent).
  - Net written premiums: EUR 12,594 million.
- Concentration:
  - Reinsurance: largest three entities account for 76 percent market share in terms of assets.
  - Life and non-life largest-three shares: 42 percent and 62 percent, respectively.
- Corporate structure: Only 23 out of 126 insurers (excluding captives) have a domestic parent.

### Policy and supervisory assessment — key conclusions and main recommendations
- Solvency II implementation: Fully implemented in Luxembourg; national LUX-GAAP rules continue, adding prudence for liability valuation.
- Supervisory approach:
  - CAA adopts a risk-based approach with defined early warning signals.
  - Off-site review of reporting files is comprehensive; on-site inspections scheduled according to a minimum engagement plan.
  - For internal model users, CAA monitors model appropriateness on an ongoing basis and participates in around 40 supervisory colleges.
- Governance, independence, and resourcing:
  - CAA staff increased from 38 in mid-2016 to 81 in mid-2023.
  - Recommendations to strengthen CAA independence, narrow dismissal grounds for the Directorate, set up an internal audit function, and strengthen IT governance.
  - Ensure commensurate resources for expanding tasks, especially regarding upcoming EU legislation.
  - Review maximum limits to monetary sanctions in the Insurance Act; consider relative limits based on revenues.
- Conduct, consumer protection, and market risk:
  - Since 2022, rising interest rates increased lapse rates, especially for products with interest rate guarantees.
  - Liquidity risks largely contained due to redemption-in-kind options in many unit-linked contracts.
  - Recommendation to develop business conduct indicators and expand supervisory disclosure by publishing key figures at company level.
  - Recommendation to coordinate with the insurance sector on insurance’s role in managing climate risk and potential protection gaps.

Main supervisory recommendations (selected, with addressees, timing, priority)
- Safeguard the independence of CAA board members — Addressee: MoF — Timing: MT — Priority: M.
- Narrow down and spell out reasons for dismissal of the CAA’s Directorate — Addressee: MoF — Timing: MT — Priority: M.
- Set up an internal audit framework — Addressee: CAA — Timing: ST — Priority: H.
- Strengthen IT governance — Addressee: CAA — Timing: ST — Priority: M.
- Ensure commensurate resources with expanding tasks — Addressee: CAA — Timing: C — Priority: M.
- Review maximum limit of monetary sanctions in the Insurance Act — Addressee: MoF — Timing: ST — Priority: M.
- Transition the on-site inspection tool to a more robust IT platform — Addressee: CAA — Timing: MT — Priority: M.
- Coordinate on insurance role in climate risk and natural disasters — Addressees: Ministry of State, MoF, CAA — Timing: C — Priority: M.
- Expand supervisory disclosure by publishing company-level key figures — Addressee: CAA — Timing: ST — Priority: M.
- Develop business conduct indicators for risk-based supervision — Addressee: CAA — Timing: ST — Priority: M.

### Liability structure, asset allocation, and unit-linked dominance
- Technical provisions composition:
  - Unit-linked life insurance: 63 percent of aggregated insurance liabilities.
  - Traditional life insurance: 15 percent of aggregated insurance liabilities.
  - Non-life insurance technical provisions: 15 percent of aggregated insurance liabilities.
- Market position:
  - Luxembourg is the sixth largest market for unit-linked business in the EU with around EUR 164bn.
  - Only Swedish and Irish life insurers hold a higher share of unit-linked business on their balance sheets.
- Asset allocation:
  - Assets backing unit-linked insurance account for 75 percent of life insurers total assets (up from 67 percent in 2017).
  - 59 percent of assets backing unit-linked insurance are investment funds.
  - In non-life sector, sovereign and corporate bonds comprise 34 percent of total assets.
  - Insurers’ real estate exposures amount to around EUR 2bn with composition: direct exposure 19 percent, indirect exposure mostly through investment funds 42 percent, mortgage loans 29 percent, collateralized securities 11 percent.
- Liquidity features of unit-linked business:
  - Many unit-linked contracts allow redemption in kind.
  - External funds must be liquid; internal funds must invest in liquid assets unless dedicated internal funds explicitly allow illiquid assets returned in kind.
  - Insurers use credit lines, repo, and securities lending to cope with potential mass lapses.
  - Mortgage loans largely held by a single life insurer tied to a product distributed in the Netherlands; credit risk remains with the issuing bank.

### Policyholder behavior, lapses, liquidity and COVID-19 impact
- Lapse rates (selected):
  - Lapse rate for life insurance products with interest rate guarantees in 2022: 19 percent.
  - Lapse rate for unit-linked business in 2022: 6 percent.
  - Lapse rate, based on contracts - life: 2018 19.9; 2019 20.4; 2020 19.3; 2021 15.4; 2022 8.6.
  - Lapse rate, based on volume - life: 2018 7.7; 2019 7.4; 2020 8.2; 2021 7.2; 2022 9.3.
- COVID-19 effects:
  - Life premiums declined by -22 percent in 2020 compared to 2019.
  - 2020 life lapse rate: 8.2 percent (2019: 7.4 percent).
  - Non-life sector resilient; motor insurance benefited from lower mobility in H1 2020.
  - Pandemic prompted CAA to intensify monitoring and restrict dividend payouts; annual reporting deadlines were delayed for year-end 2019 reporting.

### Profitability, capital adequacy, and Solvency II implementation
- Profitability:
  - Combined ratio (non-life) in 2022: 91.5 percent.
  - Investment yields for life insurers averaged 1.6 percent in 2022.
  - Return on equity (median): life 5 percent in 2022; non-life 1.2 percent in 2022.
- Solvency and capital:
  - Median SCR coverage for life insurers at end-2022: 180 percent.
  - Median SCR coverage for non-life insurers at end-2022: 193 percent.
  - Total capital requirements of the sector: EUR 14bn at end-2022.
  - Solvency ratios mostly well above 100 percent but below European average.
  - Reinsurers maintain higher capital levels with larger dispersion.
- Solvency II and national rules:
  - Solvency II transposed via the Law of December 7, 2015 on the Insurance Sector (“Insurance Act”), effective January 1, 2016.
  - Technical liabilities must also be valued under LUX-GAAP which is more conservative (examples: maximum technical interest rate set by CAA; mortality tables without deductions; no lapse rates).
  - Insurance Act requires coverage of insurance liabilities by representative eligible assets at market value equal to or exceeding the maximum of Solvency II and local-GAAP liabilities.
  - Long-Term Guarantee Measures: Volatility Adjustment (VA) used by 39 solo entities; for VA users, technical provisions reduced by 0.2 percent and eligible own funds are 0.3 percent higher.
- Internal models:
  - Five (re)insurers use internal models: three full internal models and two partial internal models for non-life underwriting risks.
  - Internal model users account for around 11 percent of total insurance sector assets.
  - CAA monitors internal models and has requested model changes on calibration, methodology, dependencies, and governance.

### Reporting, supervisory review, on-site inspections, and IT tools
- Reporting:
  - CAA requires Solvency II quantitative reporting templates and continued national LUX-GAAP templates.
  - Reported items include balance sheet, detailed asset lists, SCR calculations, technical provisions, ORSA, and ad-hoc reporting for thematic reviews and stress tests.
  - CAA performs extensive quality checks and requires corrections when data appear inaccurate.
- Supervisory review:
  - Insurers allocated to one of four risk categories determined by a risk score combining almost 30 quantitative and qualitative indicators.
  - Early-warning signals include SCR ratio variation or below 110 percent, coverage of liabilities by tied assets, and stress test results in actuarial reports.
- On-site inspections:
  - Life inspections frequency generally every five years.
  - CAA uses a self-developed IT tool linking twelve modules to around 500 control points.
  - Recommendation to transition the on-site inspection tool to a more robust and audit-proof IT platform.
  - Post-inspection process: findings communicated, remediation plans required, final report issued (historically finalized more than one year after inspection); external reviews or follow-ups ordered for significant weaknesses.

### Governance, internal controls, IT governance, and staffing
- CAA structure and governance:
  - CAA is the prudential supervisor under the amended Insurance Act (Law of December 7, 2015).
  - Board composed of five members appointed by Government in Council; Board determines budget and issues opinions but has no power on prudential and day-to-day management.
  - Directorate (Director and up to two members) is principal executive body; appointments by Grand Duke on Government proposal for six-year renewable terms; Government may propose dismissal in defined circumstances after consulting Board.
- Governance concerns:
  - Legal setup of the Board (government majority and presence of industry representatives) raises independence questions.
  - Recommendations: safeguard Board independence, define clear roles for Board and Directorate, specify dismissal criteria, ensure transparency and right to be heard.
- Internal audit and IT:
  - CAA currently lacks an internal audit function; external auditor limited to financial accounts.
  - IT solutions predominantly developed in-house, raising key person risk.
  - Recommendation: set up internal audit framework and strengthen IT governance (formalization of processes, clear ownership, IT security).
- Staffing and resources:
  - Staff increased from 38 in mid-2016 to 81 in mid-2023.
  - New tasks (insolvency scheme support, DORA, IRRD) require reflection in medium-term budgeting.

### Enforcement, sanctions, and macroprudential stance
- Enforcement framework:
  - CAA issues formal orders and injunctions; remediation plans required.
  - Monetary sanctions used with fixed caps; administrative procedure can take months; right to be heard preserved.
  - Recommendation to review maximum sanction limits in the Insurance Act and consider relative limits based on revenues.
- Macroprudential supervision:
  - CAA has an explicit financial stability mandate (Article 3 of the Insurance Act) and participates in the Systemic Risk Committee (CdRS).
  - CAA primarily assesses microprudential risks; macroprudential mandate limited to CdRS participation.
  - Main macroprudential risks: inflation (mostly non-life) and rising interest rates (mostly life).
  - Current approach: risk-based on an undertaking-by-undertaking basis supplemented by macro indicators (stress tests, liability coverage statements, control of pledged assets, solvency monitoring).
  - Recommendation to expand supervisory disclosure by publishing key figures at company level.

### Reinsurance, collateral, cross-border supervision, and information exchange
- Collateral for reinsurance:
  - CAA follows a prudent approach and in practice requires 100 percent collateral for reinsurance of life insurance products including a savings element.
  - For pure risk life products, no collateral required if reinsurer domiciled in EEA, equivalent country, or the United States and respects conditions of the EU-US bilateral agreement.
- Cross-border supervision:
  - CAA participates in 40 supervisory colleges for 65 (re)insurance companies; organizes one college as home supervisor and participates as host supervisor for others.
  - CAA is European lead supervisor for one of the globally largest reinsurers and plans to resume lead-supervisor meetings from 2024 onwards.
- Information exchange and professional secrecy:
  - Article 300 of the Insurance Act limits revealing confidential information to defined circumstances; European information exchange channeled through the CAA.
  - The insurance sector seeks further liberalization of professional secrecy rules (e.g., cloud computing use).
- Reinsurance market:
  - Luxembourg is a hub for reinsurers and captive insurers; CAA supervises five largest reinsurers via dedicated account managers; remaining reinsurers and captives receive account manager attention mainly for annual reporting review.
  - Alternative risk transfer instruments like catastrophe bonds are uncommon.

### Conduct of business, dispute resolution, insolvency scheme, AML/CFT
- Conduct of business:
  - CAA supervises product governance, agent registration, disclosures, broker reporting, complaints analysis, and on-site inspections.
  - Recent focus on product oversight and governance (POG) and target market definition; CAA issued a POG questionnaire to life insurers and followed up with outliers.
  - CAA found actual fees of major insurance-based investment products generally lower than in key information documents and required reviews for consistency.
- Dispute resolution:
  - Insurance Ombudsman available to consumers in Luxembourg or another EU Member State.
  - CAA out-of-court dispute resolution under CAA Regulation 19/03: free of charge, reasoned conclusions not binding, opening conditions include prior complaint handling and no satisfactory answer within 90 days, CAA issues reasoned conclusion within 90 days.
- Insolvency scheme and protection of creditors:
  - Luxembourg transposing latest EU Motor Insurance Directive; motor insolvency scheme to be in place within the first quarter of 2024, operationally managed with CAA support.
  - Preferential rights: matching assets constitute segregated assets with privilege and “super-privilege”; insurers must maintain permanent inventory of matching assets and report quarterly to the CAA; CAA involved in insurer liquidation steps.
- AML/CFT supervision:
  - Solid AML/CFT framework; FATF Mutual Evaluation Report of September 2023 notes expanded supervisory and sanctioning powers and increased resources.
  - Life insurers must implement internal control systems and two required functions: a senior manager responsible for AML/CFT compliance and an AML/CFT compliance officer.
  - CAA applies a risk-based AML/CFT supervisory approach, conducts on-site inspections, and regularly requests AML/CFT statutory auditor and Compliance Officer reports.
  - FATF recommendation: CAA should use sanctions available for non-compliance including sanctions on individuals where appropriate.

### Key financial soundness indicators (selected figures)
- Assets / liabilities: 2018 108.0; 2019 107.9; 2020 108.1; 2021 107.9; 2022 108.4; 2023-Q3 109.0
- SCR coverage ratio (Solvency II) – life, median: 2018 180; 2019 171; 2020 158; 2021 148; 2022 180; 2023-Q3 ...
- SCR coverage ratio (Solvency II) – non-life, median: 2018 201; 2019 212; 2020 225; 2021 198; 2022 193; 2023-Q3 ...
- SCR coverage ratio (Solvency II) – reinsurance, median: 2018 270; 2019 249; 2020 255; 2021 234; 2022 240; 2023-Q3 ...
- MCR coverage ratio (Solvency II) – life, median: 2018 422; 2019 579; 2020 537; 2021 490; 2022 541; 2023-Q3 ...
- MCR coverage ratio (Solvency II) – non-life, median: 2018 600; 2019 543; 2020 646; 2021 653; 2022 619; 2023-Q3 ...
- MCR coverage ratio (Solvency II) – reinsurance, median: 2018 696; 2019 670; 2020 700; 2021 620; 2022 724; 2023-Q3 ...
- Unrestricted Tier 1 capital / eligible own funds: 2018 94.7; 2019 93.0; 2020 91.7; 2021 90.8; 2022 91.0; 2023-Q3 91.3
- Tier 3 capital / eligible own funds: 2018 0.2; 2019 0.8; 2020 0.7; 2021 1.0; 2022 0.4; 2023-Q3 0.6
- Growth in gross written premiums - life: 2019 7.8; 2020 -13.9; 2021 23.4; 2022 -13.3; 2023-Q3 ...
- Growth in gross written premiums - non-life: 2019 76.7; 2020 1.0; 2021 10.3; 2022 13.8; 2023-Q3 ...
- Loss ratio (net paid claims / net premiums) - non-life: 2018 57.8; 2019 59.2; 2020 55.4; 2021 52.2; 2022 52.7; 2023-Q3 ...
- Combined ratio - non-life, median: 2018 93.4; 2019 102.8; 2020 94.5; 2021 92.1; 2022 91.5; 2023-Q3 ...
- Investment yield – life: 2018 2.4; 2019 2.2; 2020 1.8; 2021 1.9; 2022 1.6; 2023-Q3 ...
- Return on equity – life, median: 2018 5.9; 2019 6.3; 2020 6.8; 2021 7.1; 2022 5.1; 2023-Q3 ...
- Return on equity – non-life, median: 2018 -0.4; 2019 0.1; 2020 1.8; 2021 3.9; 2022 1.2; 2023-Q3 ...
- Stocks / total investments excl. unit-linked: 2018 2.6; 2019 2.2; 2020 2.1; 2021 2.7; 2022 1.4; 2023-Q3 1.3
- Bonds / total investments excl. unit-linked: 2018 67.7; 2019 72.6; 2020 72.7; 2021 72.2; 2022 69.8; 2023-Q3 70.8
- Liquid assets / technical provisions excl. unit-linked 1/: 2018 56.3; 2019 59.7; 2020 59.1; 2021 60.2; 2022 62.0; 2023-Q3 67.4
- Risk retention ratio (net technical provisions / gross technical provisions) - life: 2018 82.3; 2019 81.5; 2020 82.1; 2021 83.2; 2022 82.1; 2023-Q3 ...
- Risk retention ratio (net premium / gross premium) - non-life: 2018 35.4; 2019 42.2; 2020 48.0; 2021 45.0; 2022 42.3; 2023-Q3 ...
- Note 1/: Liquid assets include government bonds, corporate bonds, listed equity, cash and deposits, and investment funds.

*Source — EXECUTIVE SUMMARY and related chapters (1luxea2024007) from the provided IMF document.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### 1luxea2024007 - EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### Executive summary — sector overview and main findings
- Sector assets: EUR 289bn in June 2023.
- Assets relative to GDP: 372 percent of GDP.
- Domestic business share: 6 percent of the sector’s total technical provisions underwritten for domestic risks.
- Cross-border orientation: More than 90 percent of gross written premiums stem from cross-border business (Figure 1 summary).
- Post-Brexit developments: Several U.K. insurers resettled to Luxembourg to continue cross-border business in the EEA through the passporting system; the CAA licensed twelve U.K. insurers in close cooperation with the U.K. authorities.
- Product mix:
  - Life insurance dominated by index- and unit-linked (UL) products for (ultra) high net-worth individuals.
  - Unit-linked and index-linked: EUR 17,906 million gross premiums in 2022 (68 percent of total life premiums).
  - Single premiums: 93 percent of life premiums in 2022.
- Non-life and reinsurance: Total gross written premiums EUR 26,8bn in 2022 (Table 2 summary).
  - Significant reinsurance: proportional reinsurance EUR 8,143 million (30 percent of gross written premiums) and non-proportional reinsurance accepted EUR 3,557 million (13 percent).
  - Net written premiums: EUR 12,594 million.
- Concentration:
  - Reinsurance: largest three entities account for 76 percent market share in terms of assets.
  - Life and non-life largest-three shares: 42 percent and 62 percent, respectively.
- Corporate structure: Most insurers domiciled in Luxembourg are subsidiaries of foreign groups; only 23 out of 126 insurers (excluding captives) have a domestic parent.

### Policy and supervisory assessment — key conclusions
- Solvency II implementation: Fully implemented in Luxembourg without significant frictions; certain national rules continue under LUX-GAAP adding prudence for liability valuation.
- Supervisory approach:
  - CAA adopts a risk-based approach with defined early warning signals.
  - Off-site review of reporting files is comprehensive.
  - On-site inspections scheduled according to a minimum engagement plan; on-site inspection tool recommended to be transitioned to a more robust and audit-proof IT platform.
  - For internal model users, CAA monitors model appropriateness on an ongoing basis.
  - As host supervisor, CAA participates in around 40 supervisory colleges and serves as European lead supervisor for one of the largest reinsurers.
- Governance, independence, and resourcing:
  - CAA staff has roughly doubled since the last FSAP.
  - Recommendations call to further strengthen CAA independence and internal governance, including safeguarding independence of Board members and narrowing reasons for dismissal of the CAA’s Directorate in the Insurance Act.
  - Recommended to set up an internal audit function and strengthen IT governance as projects are currently conducted largely in-house.
  - Ensure commensurate resources with expanding tasks, especially regarding upcoming EU legislation.
  - Review maximum limits to monetary sanctions in the Insurance Act; consider aligning with other financial sector regulation, e.g., by using relative limits based on revenues.
- Conduct, consumer protection, and market risk:
  - Since 2022, rising interest rates increased lapse rates, especially for life products with interest rate guarantees.
  - Liquidity risks appear largely contained, aided by possibility in many unit-linked contracts to redeem in kind.
  - Many products sold to high-net-worth individuals do not have significant redemption penalties.
  - Recommendation to develop business conduct indicators and use them as part of a risk-based supervisory methodology.
  - Recommendation to expand supervisory disclosure by publishing key figures at company level.
  - Recommendation to coordinate closely, together with the insurance sector, on the role of insurance in the management of climate risk and natural disasters (assess climate risk and potential protection gaps with relevant stakeholders).

### Institutional and regulatory context — background and prior FSAP recommendations
- Scope of review: Focused review of a subset of IAIS Insurance Core Principles (ICP 2, 3, 8, 9, 13, 14, 16, 17, 19, 24, 25, 24) with macrofinancial relevance and where material regulatory changes occurred since the last FSAP.
- 2017 FSAP follow-up:
  - Previously recommended enhancing CAA resources and governance, implementing a revised early warning system calibrated to Solvency II, subjecting board members to a code of conduct, independent review of board activities, and limiting government power to dismiss the Executive Committee.
  - Since 2017: governance strengthened via a code of conduct; Insurance Act amendment (2021) ended practice of Minister of Finance signing off licenses of new insurers; staff numbers doubled; early-warning system based on Solvency II implemented.

### Insurance market developments — detailed statistics and structure
- Insurance penetration and density (excluding cross-border business):
  - Penetration: 1.9 percent in life and 1.9 percent in non-life (premiums for domestic business as a share of GDP).
  - Density: US$4,762 (annual premiums per capita).
- Life insurance (2022, in EUR million):
  - Gross written premiums: EUR 26,348 million (total life business).
  - Index-linked and unit-linked insurance: EUR 17,906 million gross written premiums; reinsurers' share EUR 130 million; net written premiums EUR 17,777 million.
  - Insurance with profit participation: gross written premiums EUR 4,545 million; reinsurers' share EUR 2,707 million; net written premiums EUR 1,838 million.
  - Life reinsurance: gross written premiums EUR 2,416 million; reinsurers' share EUR 1,661 million; net written premiums EUR 756 million.
  - Health reinsurance: gross written premiums EUR 953 million; reinsurers' share EUR 595 million; net written premiums EUR 358 million.
  - Other life insurance: gross written premiums EUR 476 million; reinsurers' share EUR 223 million; net written premiums EUR 253 million.
  - Health insurance: gross written premiums EUR 513 million; reinsurers' share EUR 48 million; net written premiums EUR 465 million.
  - Total life premiums: gross written premiums EUR 26,348 million; reinsurers' share EUR 5,319 million; net written premiums EUR 21,029 million.
  - Single premiums: EUR 24,531 million.
  - Regular premiums: EUR 1,817 million.
- Non-life business (2022, in EUR million):
  - General liability insurance: gross written premiums - direct business EUR 4,459 million; proportional reinsurance accepted EUR 1,484 million; reinsurers' share EUR 3,033 million; net written premiums EUR 2,910 million.
  - Fire and other damage to property insurance: gross written premiums - direct business EUR 3,992 million; proportional reinsurance accepted EUR 2,710 million; reinsurers' share EUR 3,987 million; net written premiums EUR 2,715 million.
  - Marine, aviation and transport insurance: gross written premiums - direct business EUR 2,191 million; proportional reinsurance accepted EUR 518 million; reinsurers' share EUR 1,686 million; net written premiums EUR 1,023 million.
  - Credit and suretyship insurance: gross written premiums - direct business EUR 1,233 million; proportional reinsurance accepted EUR 843 million; reinsurers' share EUR 1,284 million; net written premiums EUR 793 million.
  - Motor vehicle liability insurance: gross written premiums - direct business EUR 880 million; proportional reinsurance accepted EUR 1,324 million; reinsurers' share EUR 939 million; net written premiums EUR 1,266 million.
  - Miscellaneous financial loss: gross written premiums - direct business EUR 839 million; proportional reinsurance accepted EUR 498 million; reinsurers' share EUR 740 million; net written premiums EUR 597 million.
  - Other motor insurance: gross written premiums - direct business EUR 714 million; proportional reinsurance accepted EUR 218 million; reinsurers' share EUR 244 million; net written premiums EUR 687 million.
  - Income protection insurance: gross written premiums - direct business EUR 453 million; proportional reinsurance accepted EUR 154 million; reinsurers' share EUR 118 million; net written premiums EUR 490 million.
  - Other direct insurance: gross written premiums - direct business EUR 362 million; proportional reinsurance accepted EUR 393 million; reinsurers' share EUR 133 million; net written premiums EUR 621 million.
  - Non-proportional reinsurance accepted (separate): EUR 3,557 million gross written premiums; reinsurers' share EUR 2,065 million; net written premiums EUR 1,492 million.
  - Total non-life: gross written premiums - direct business EUR 15,122 million; proportional reinsurance accepted EUR 8,143 million; non-proportional reinsurance accepted EUR 3,557 million; reinsurers' share EUR 14,228 million; net written premiums EUR 12,594 million.
- Distribution channels:
  - Life distribution: brokers 47 percent, banks 39 percent.
  - Non-life distribution: brokers 72 percent.

### Main supervisory recommendations (Table 1)
- 1: Safeguard the independence of CAA board members through proposing changes to the law, or through subsidiary legislation within the constraints provided under the law (¶21) — Addressee: MoF — Timing: MT — Priority: M.
- 2: Narrow down and spell out more explicitly the reasons on which the CAA’s Directorate could be dismissed (¶22) — Addressee: MoF — Timing: MT — Priority: M.
- 3: Set up an internal audit framework to evaluate and improve the effectiveness of risk management, control and governance processes (¶26) — Addressee: CAA — Timing: ST — Priority: H.
- 4: Strengthen IT governance in order to improve internal controls and mitigate key person risks (¶27) — Addressee: CAA — Timing: ST — Priority: M.
- 5: Ensure commensurate resources with expanding tasks going forward, especially with regard to upcoming EU legislation (¶28) — Addressee: CAA — Timing: C — Priority: M.
- 6: Review the maximum limit of monetary sanctions in the Insurance Act, potentially aligning them more with other financial sector regulation, e.g., by using relative limits based on revenues (¶31) — Addressee: MoF — Timing: ST — Priority: M.
- 7: Transition the on-site inspection tool to a more robust and audit-proof IT platform (¶49) — Addressee: CAA — Timing: MT — Priority: M.
- 8: Coordinate closely, together with the insurance sector, on the role of insurance in the management of climate risk and natural disasters (¶56) — Addressees: Ministry of State, MoF, CAA — Timing: C — Priority: M.
- 9: Expand supervisory disclosure by publishing key figures at company level (¶66) — Addressee: CAA — Timing: ST — Priority: M.
- 10: Develop business conduct indicators and use them as part of a risk-based supervisory methodology (¶71) — Addressee: CAA — Timing: ST — Priority: M.

*Timing legend from the source: C = Continuous; I = Immediate (within one year); ST = Short Term (within 1-3 years); MT = Medium Term (within 3-5 years).  
*Priority legend from the source: H = High; M = Medium; L = Low.

_Italic: Source — EXECUTIVE SUMMARY (1luxea2024007) from the provided IMF document._

### 11.      Insurance liabilities are dominated by technical provisions for unit-linked business

### 11.      Insurance liabilities are dominated by technical provisions for unit-linked business

### Liability structure and market size
- Technical provisions for unit-linked life insurance account for 63 percent of aggregated insurance liabilities.
- Technical provisions for traditional life insurance account for 15 percent of aggregated insurance liabilities.
- Technical provisions for non-life insurance account for 15 percent of aggregated insurance liabilities.
- Luxembourg is the sixth largest market for unit-linked business in the European Union (EU) with around EUR 164bn.
- Only Swedish and Irish life insurers hold a higher share of unit-linked business on their balance sheets.

### Asset allocation and composition
- Assets backing unit-linked insurance account for 75 percent of life insurers total assets (up from 67 percent in 2017).
  - 59 percent of assets backing unit-linked insurance are investment funds.
- Other life insurers’ investments have been partially shifted from bonds towards investment funds over the last few years.
- In the non-life sector, sovereign and corporate bonds are the most important asset class (34 percent of total assets).
- Insurers’ real estate exposures amount to around EUR 2bn and, as a share of total investment assets, comprise:
  - direct exposure: 19 percent,
  - indirect exposure mostly through investment funds: 42 percent,
  - mortgage loans: 29 percent,
  - collateralized securities mainly exposed to real estate risk: 11 percent.
- Geographic concentration:
  - Unit-linked assets (before applying a look-through) are concentrated in markets with large investment fund sectors: LUX, FRA, IRL.
  - Assets backing traditional business are more diversified.

### Unit-linked asset composition and liquidity features
- Split of unit-linked assets includes equity funds, debt funds, asset allocation funds, alternative funds, money market funds, private equity funds, other funds, equities, sovereign bonds, corporate bonds, and other assets (visual splits shown in source figures).
- In many unit-linked contracts, redemption in kind is possible:
  - External funds must be liquid and internal funds must invest in liquid assets.
  - Certain dedicated internal funds can invest in illiquid assets if terms and conditions allow illiquid assets to be returned in kind, thereby reducing liquidity risks.
- Mortgage loans shown are to the largest extent held by only one single life insurer, related to a specific product distributed in the Netherlands and secured by real estate located there—credit risks remain with the issuing bank.
- To cope with potential mass lapses, insurers have put in place credit lines; some insurers also use repo and securities lending mechanisms.

### Policyholder behavior, lapses, and liquidity impact
- Since 2022, rising interest rates increased lapse rates, particularly for products with interest rate guarantees:
  - Lapse rate for life insurance products with interest rate guarantees in 2022: 19 percent.
  - Lapse rate for unit-linked business in 2022: 6 percent.
- Policyholders (often high-net-worth and financially literate) faced incentives to redeem to repay variable interest rate loans or invest in other higher-yielding products.
- Lapse rates differ significantly across different host markets.
- Despite higher lapse rates, liquidity risks appear largely contained due to redemption-in-kind options and contractual liquidity requirements for funds.

### Profitability and capital adequacy
- Non-life underwriting profitability:
  - The combined ratio (the sum of claims and expenses, divided by premiums) stood at 91.5 percent in 2022.
- Life insurers’ investment yields:
  - Investment yields have steadily decreased since 2018, reaching 1.6 percent on average in 2022.
- Return on equity (RoE):
  - Median life insurer RoE in 2022: 5 percent (slightly below the five-year average).
  - Median non-life insurer RoE in 2022: 1.2 percent.
- Solvency and SCR coverage:
  - Median SCR coverage for life insurers at end-2022: 180 percent (an improvement compared to the previous year).
  - Median SCR coverage for non-life insurers at end-2022: 193 percent.
  - Solvency ratios are mostly well above the regulatory threshold of 100 percent but remain below the European average.
  - Reinsurers maintain traditionally higher capital levels than primary insurers, with larger dispersion across the sector.

### COVID-19 impact (Box 1)
- Life sector:
  - Premiums declined by -22 percent in 2020 compared to the previous year.
  - Lapse rate in 2020: 8.2 percent (compared to 7.4 percent in 2019).
  - Profitability declined after a very profitable year 2019; one life insurer had to increase its capital following the abrupt decline in asset values in March 2020.
- Non-life sector:
  - Resilient in terms of premiums, claims, provisioning, and profitability.
  - Motor insurance benefited from lower mobility during the first lockdown in the first half of 2020.
  - Insurers active in credit and surety business increased provisions in 2020 and released them in 2021.
  - Supply chain disruptions and higher inflation affected property lines starting in 2021 and were further accentuated in 2022 by the war in Ukraine.
- Supervisory response:
  - The CAA intensified monitoring during the pandemic and restricted the payout of dividends.
  - Annual reporting deadlines (for year-end 2019 reporting) were delayed; quarterly reporting deadlines were maintained.
  - The CAA followed recommendations by the ESRB and EIOPA on restrictions of dividend distributions in 2020.

### Institutional and regulatory setting — CAA structure and governance
- The Commissariat aux Assurances (CAA) is the prudential supervisor under the amended Law of December 7, 2015 on the Insurance Sector (“Insurance Act”).
- The CAA supervises insurers, reinsurers, certain occupational pension funds, intermediaries, and insurance sector professionals; supervises the market of insurance products marketed, distributed or sold within or from Luxembourg; and oversees AML/CFT professional obligations for supervised entities.
- Internal bodies:
  - The Board:
    - Determines the CAA’s budget and annual accounts before presentation to the Government for approval.
    - Issues opinions on general guidelines concerning the CAA’s conditions and charges.
    - Proposes appointment of the CAA’s approved auditor and may ask for specific verifications.
    - Issues opinions on questions raised by the Minister or the CAA’s Director concerning the development and supervision of the insurance sector.
    - Has no power to intervene on prudential and supervisory matters or day-to-day management.
    - Composed of five members appointed by the Government in Council (three appointed for a term of five years on a proposal from the Minister responsible for the CAA, one from among professionals of the insurance sector, and one from among insurance policyholders).
  - The Directorate:
    - Principal executive body; composed of a Director (President) and at most two members who report to the Director.
    - Takes decisions collegiately.
    - Members appointed by the Grand Duke on a proposal from the Government in Council for a term of six years; appointments are renewable.
    - Government may propose dismissal of the Directorate as a whole in cases of fundamental disagreement, or dismissal of an individual member in specified circumstances; the Government shall consult the CAA’s Board before submitting a proposal for dismissal.

### Governance concerns and staffing
- Legal setup of the CAA’s Board could give rise to questions about independence and compliance with international standards due to government majority and presence of industry representatives.
- Recommendation 1: Safeguard the independence of CAA Board members through proposing changes to the law as required; where legal amendments are not feasible, consider issuing subsidiary legislation to establish procedural safeguards; define clear roles for both the Board and Directorate and develop criteria regarding government actions related to budget proposals, Board member nominations, and dismissals.
- Recommendation 2: Narrow down and spell out more explicitly the reasons on which the CAA’s Directorate could be dismissed; ensure process transparency, publication of the Board’s considerations, a right for the Directorate to be heard, and clearly established criteria.
- CAA staffing:
  - Staff increased from 38 in mid-2016 to 81 in mid-2023.
  - Growth welcomed by the insurance sector as further professionalization.
- New tasks requiring resources:
  - Support to the insolvency scheme in motor insurance, competencies under DORA, competencies under the Insurance Recovery and Resolution Directive (IRRD).
  - These additional tasks should be reflected in medium-term budgeting.

### Internal controls and IT governance
- The CAA currently does not have an internal audit function; the external auditor’s role is limited to auditing financial accounts only.
- The CAA is not subject to investigations by the Luxembourg Court of Audit as it does not receive any public funding.
- IT governance:
  - IT solutions are predominantly developed in-house, increasing buy-in but also key person risks.
- Recommendation 3: Set up an internal audit framework to evaluate and improve the effectiveness of risk management, control and governance processes; the internal audit charter of the Commission de Surveillance du Secteur Financier (CSSF) might serve as a model framework.
- Recommendation 4: Strengthen IT governance to improve internal controls and mitigate key person risks, including formalization of processes, clear ownership and responsibility for tools and underlying data, and all relevant aspects of IT security.

*Source: IMF staff calculations based on CAA, EIOPA.*

### 28.      Recommendation 5: Going forward, ensure commensurate resources with expanding tasks,

### 28.      Recommendation 5: Going forward, ensure commensurate resources with expanding tasks, especially with regard to upcoming EU legislation.  

### B. Enforcement
- The CAA has a robust enforcement framework based on clear, objective and consistent criteria; it regularly issues formal orders and injunctions related to prudential, market conduct, or AML/CFT supervision following annual or quarterly reporting, thematic off-site activity, or on-site inspections.  
- A formal order or injunction results in a remediation plan to be set up by the insurer.  
- The CAA uses monetary sanctions depending on the type of non-compliance:
  - Less severe cases give rise to smaller fixed fines; more severe cases can, on a case-by-case basis, result in a higher amount.
  - An administrative procedure must be launched which can take a few months before the sanction is finally issued; the concerned undertaking has a right to be heard and to defend itself.
  - The amount of sanctions is typically capped at a fixed amount which in some cases might not always be sufficiently deterring compared with other legislation where fines are capped by, e.g., 5 or 10 percent of a company’s revenues.
  - Final sanctions are generally published on the CAA website; if not relevant for stakeholders, publication can be done anonymously.
- Recommendation 6: Review the maximum limit of monetary sanctions in the Insurance Act, potentially aligning them more with other financial sector regulation, e.g., by using relative limits based on revenues. Recent EU Regulations, e.g., the Market Abuse Regulation, could serve as guidance for reviewing the current sanctioning regime.

### A. Solvency II Implementation — Main findings
- With implementation of Solvency II in 2016, prudential insurance regulation in the EU was harmonized; Solvency II created an economic valuation regime for assets and liabilities, a risk-based solvency framework, enhanced governance and risk management practices, and more transparency through public disclosures.
- The Solvency II Directive was transposed into Luxembourgish law through the Law of December 7, 2015 on the Insurance Sector (“Insurance Act”), entering into force on January 1, 2016.
- All insurers and reinsurers in Luxembourg must apply the Solvency II regime; some 35 health mutual companies under the Law of August 1, 2019 on Mutual Societies are exempted based on Article 5(2) of the Solvency II Directive and fall under the supervision of the Ministry of Social Security.

Valuation of Assets and Liabilities
- In addition to Solvency II valuation rules, technical liabilities must also be valued under LUX-GAAP, which follows a more conservative approach. Example for life insurance liabilities: (i) a maximum technical interest rate as determined by the CAA, (ii) mortality tables without deductions based on general population and adapted to type of risk, and (iii) no lapse rates.
- Financial assets for general accounting principles are valued on historic values and prudent assumptions (lower of cost or market for equity investments and amortized cost for bond investments), while Solvency II uses market valuation.
- Insurance Act requires coverage of insurance liabilities by representative eligible assets: market value of these assets must always be equal to or exceed the maximum of total insurance liabilities under Solvency II and total insurance liabilities under local-GAAP.

Capital Adequacy
- Eligible own funds must cover the solvency capital requirement (SCR) calculated by the company at all times according to Article 104 of the Insurance Act. The SCR is calculated using either the standard formula or an internal model authorized by the CAA.
- The CAA may require an authorized internal model or prescribe a capital add-on if a company’s risk profile deviates substantially from standard formula prerequisites.
- Total capital requirements of the sector amounted to EUR 14bn at end-2022, with most requirements stemming from modular SCR components for market risks and non-life underwriting risks.

Internal Models and Long-Term Guarantee Measures
- Five (re)insurers use internal models: three use a full internal model and two use a partial internal model for non-life underwriting risks. Assets of these internal model users account for around 11 percent of total insurance sector assets.
- The CAA monitors internal models through reporting template analysis, risk profile evolution analysis, minor model change logs, participation in expert networks, comparative studies at EIOPA, and comparisons against the standard formula; the CAA requested model changes on several occasions (calibration, methodology, dependencies, internal model governance).
- Of the Solvency II Long-Term Guarantee Measures, only the Volatility Adjustment (VA) is of some relevance but the overall impact is very limited:
  - 39 solo entities use the VA; its use is not subject to approval by the CAA.
  - For insurers using the VA, technical provisions are reduced by 0.2 percent and eligible own funds are 0.3 percent higher.

### B. Supervisory Review and Reporting
Reporting
- Reporting requirements expanded with Solvency II in 2016. Examples of submitted data include:
  - Balance sheet and certain key elements from the income statement;
  - Detailed list of assets;
  - Calculation of the solvency capital requirement and information on available own funds;
  - Technical provisions and projection of future cash flows.
- The CAA continues requesting national reporting templates based on LUX-GAAP.
- Since QRT introduction the CAA has worked to improve data quality: extensive quality checks on submitted data (including national reporting templates) and requires corrections when data appear inaccurate.
- Regular quantitative reporting is complemented by other regular and ad-hoc reports:
  - Annual financial statements and a Solvency and Financial Conditions Report;
  - Own Risk and Solvency Assessment (ORSA) annually or ad-hoc when risk profile changes;
  - Regular Supervisory Report at least every three years (undertakings using an internal model submit yearly);
  - Ad-hoc reporting used for thematic reviews, stress tests, or EIOPA data requests.

Supervisory Review
- The CAA’s supervisory review framework intensity is determined by a risk score; insurers are allocated to one of four risk categories with expert judgement able to shift the score up or down by one category.
- The risk score combines quantitative and qualitative factors including size, growth, solvency ratio, and quality of annual reporting. Almost 30 indicators are analyzed as part of the supervisory review.
- Dashboards are used to analyze profitability (annual) and solvency (quarterly, and annually for captives).
- Early-warning signals developed following the 2017 FSAP include:
  - (i) an SCR ratio with a significant variation or below 110 percent;
  - (ii) the coverage of insurance liabilities by tied assets;
  - (iii) stress test results in actuarial report (as part of the annual reporting analysis).

### C. On-Site Inspections
- The CAA considers on-site inspections important and strives for frequent inspections:
  - For life insurance, minimum frequency is generally every five years.
  - Non-life sector coverage was recently a bit lower due to choosing comprehensive instead of targeted inspections for newly licensed entities (e.g., Brexit movers); CAA plans more focused reviews to cover more entities per year.
- On-site inspection process is clearly structured and scope communicated transparently. The CAA uses a self-developed IT tool linking twelve modules to around 500 control points and their links to the regulatory framework.
- Recommendation 7: Transition the on-site inspection tool to a more robust and audit-proof IT platform; this transition is planned by the CAA.
- After on-site inspections:
  - CAA communicates findings and recommendations to insurer management and expects management to share results with the board.
  - Insurers are expected to present a remediation plan; the CAA issues a final report—historically finalized more than one year after the inspection.
  - The insurer’s internal audit function must regularly follow up on the remediation plan; the external auditor follows up annually in its special audit report.
  - For significant weaknesses, the CAA may order an external party to review remediation implementation or conduct a follow-up inspection shortly after the first one.

### D. Governance, Internal Controls, and Risk Management
- The CAA applies stringent supervision of corporate governance and assesses board and licensed manager fitness and propriety in detail upon appointment and continuously; board effectiveness is typically reviewed during on-site inspections.
- Circular Letter 22/15 sets out the CAA’s expectations regarding the board of directors; the CAA requires insurers to follow EIOPA’s Guidelines on the System of Governance.
- The CAA has defined seven control functions for insurance undertakings:
  - The four Solvency II functions: internal audit, compliance, actuarial, and risk management;
  - Distribution control function (Insurance Distribution Directive compliance);
  - A function responsible for compliance with professional obligations related to AML/CFT;
  - An AML/CFT compliance officer.
- Expectations regarding Solvency II key function holders are outlined in Circular Letter 21/12; expectations for distribution key function holder are set out in Circular Letter 18/10.
- Key function fitness and propriety is assessed at appointment and continuously; frequency of CAA meetings with key function holders depends on size, risk, and complexity—ranging from a few times a year to meetings only during on-site inspections. The responsibility of the control function cannot be outsourced.
- The CAA reviewed business continuity plans during the COVID-19 pandemic in 2020 and found many insurers’ plans inadequate for a pandemic; Circular Letter 22/16 on outsourcing includes CAA expectations on business continuity planning related to outsourcing.
- The CAA monitors risk management practices closely, though direct contacts with the risk management function are less frequent than with licensed manager or actuarial function; interaction is sought during on-site inspections at minimum.
- Recent CAA risk management focus was on liquidity risks; ORSAs are regularly and comprehensively reviewed with clarifications requested when needed.
  - A thematic review of life insurers’ ORSAs was conducted in 2019.
  - In 2023 the CAA reviewed how insurers include climate risks in the ORSA, noting room for improvement on management of transition risks.
- Physical climate risks gained attention after flood events in July 2021 in Germany and the BeNeLux region:
  - The Ministry of State established a working group (Association of Luxembourg Insurers and Reinsurers invited) to discuss potential protection gaps and government declaration conditions for natural disaster; discussions may include options to insure certain perils.
- Recommendation 8: Coordinate closely, also with the insurance sector, on the role of private insurance in managing climate risk and natural disasters. Policy measures aimed at reducing the climate insurance protection gap should:
  - Provide prompt payouts of claims to policyholders;
  - Incentivize risk mitigation and adaptation measures;
  - Reduce moral hazard;
  - Lower the share of economic losses borne by the public sector over the long term.
  - The principles set out by the European Central Bank and EIOPA in a recent discussion paper should be considered.

### E. Reinsurance
- Luxembourg is a hub for reinsurers and captive insurers; the CAA uses market knowledge and appropriate tools to supervise the sector and primary insurers’ reinsurance programs.
- The CAA is the European lead supervisor for one of the globally largest reinsurers; Brexit shifted additional reinsurance activity to Luxembourg.
- Given high sector concentration, the CAA supervises the five largest reinsurers through dedicated account managers; remaining reinsurers and captive insurers have an account manager only for annual reporting review.
- Alternative risk transfer instruments like catastrophe bonds are uncommon in Luxembourg.
- All captive insurers domiciled in Luxembourg are subject to Solvency II; the CAA applies proportionality in supervision for certain requirements on key function holders, outsourcing, and supervisory reporting.
- The CAA is aiming for more digital processes with supervised entities to increase overall efficiency of supervision.

*Source: 1luxea2024007 - 28.      Recommendation 5: Going forward, ensure commensurate resources with expanding tasks, especially with regard to upcoming EU legislation.*

### 59.      The CAA follows a prudent approach in requiring collateral for reinsurance contracts.

### The CAA follows a prudent approach in requiring collateral for reinsurance contracts.

### Collateral requirements for reinsurance
- The CAA follows a prudent approach in requiring collateral for reinsurance contracts.
- For life reinsurance, Article 115 of the Insurance Act allows the CAA to always ask for a full collateralization, as a deposit or a pledge.
- In practice, the CAA requires 100 percent collateral for reinsurance of life insurance products including a savings element.
- For pure risk products, the CAA does not require a collateral if the reinsurer is domiciled in the EEA, in an equivalent country, or in the United States, provided the U.S. reinsurer respects the conditions set by the EU-US bilateral agreement.

### Consolidated supervision and supervision of cross-border business
- The CAA participates in the work of 40 supervisory colleges for 65 (re)insurance companies domiciled in Luxembourg which are part of an international group for which such a college has been established.
- Supervisory colleges generally meet annually; for several groups quarterly updates are requested by the lead supervisor.
- The CAA organizes one college as the home supervisor; for remaining colleges it participates as a host supervisor.
- For one large reinsurance group, the CAA previously organized meetings as the European lead supervisor to liaise with EU host authorities; these meetings were paused during the pandemic and membership of the global college was extended to include branch supervisors; the CAA plans to resume these meetings from 2024 onwards.

### Information exchange and professional secrecy
- Revealing confidential information is only allowed in some defined circumstances in accordance with Article 300 of the Insurance Act; exemptions cover outsourcing and communication with foreign supervisory authorities.
- In accordance with European legislation, the information exchange with European supervisors is channeled through the CAA, allowing the CAA to keep track of the demands of host supervisors.
- The insurance sector lobbies for a further liberalization of the professional secrecy rules, for example with regard to the use of cloud-computing services.

### Macroprudential supervision
- Macroprudential supervision is grounded in the CAA’s explicit financial stability mandate (Article 3 of the Insurance Act), which includes cooperation with the Government, the Central Bank of Luxembourg, and other prudential authorities, and requires taking into account potential pro-cyclical effects in periods of extreme volatility in the financial markets.
- The Systemic Risk Committee (Comité du Risque Systemique, CdRS) is the coordinating macroprudential body; established by the Law of April 1, 2015; chaired by the MoF; brings together BCL, the CSSF and the CAA.
- The CAA primarily assesses risks on a microprudential level; its macroprudential mandate is limited to participation in the CdRS.
- Most important macroprudential risks for Luxembourg insurance:
  - Inflation (mostly for non-life).
  - Rising interest rates (mostly for life).
- Current risk management approach:
  - Risk-based approach on an undertaking-by-undertaking basis.
  - Use of macro indicators to establish controls at micro level: stress tests in actuarial reports, quarterly liabilities coverage statement, control of pledged assets, solvency monitoring.
- The CAA publishes data and statistics on the insurance sector only on an aggregated level; to be fully aligned with the ICPs, publication of data at the level of individual insurers would be necessary.
- Recommendation 9: Expand supervisory disclosure by publishing key figures at company level. Suggested implementation: a dedicated statistics section on the CAA website, including downloadable tables and time series, or a repository linking to insurers’ websites on which the Solvency and Financial Condition Reports are published.

### Conduct of business and consumer protection
- The CAA applies business conduct supervision across supervisory departments, including product governance, registration and examination of agents, disclosures to (prospective) clients, reporting requirements for brokers (from 2024 also for agents), analysis of complaints data, and on-site inspections.
- The CAA provides an extra-judicial dispute resolution mechanism (see Box 2).
- Product oversight and governance (POG):
  - Recent focus due to concerns about insufficient definition of target market and insufficient product testing.
  - The CAA issued a questionnaire to all life insurers on POG compliance and followed up with outliers.
  - On-site inspections focused on market conduct largely confirmed questionnaire findings.
- Life insurance oversight:
  - Targeted controls of governance of insurance-based investment products.
  - Analysis of fees of main insurance-based investment products marketed domestically and cross-border found actual fees generally lower than those presented in key information documents.
  - The CAA asked life insurance companies to review key information documents to ensure consistency with binding contractual documents.
- Non-life insurance:
  - Since 2022, inflationary surges led (re)insurers to review prices through automatic indexation mechanisms and/or renegotiations at renewal.
  - The CAA reminded insurers and intermediaries of their transparency obligations towards consumers.
- Recommendation 10: Develop business conduct indicators and use them as part of a risk-based supervisory methodology.

### Dispute resolution (Box 2 summary)
- Insurance Ombudsman: Consumers residing in Luxembourg or another EU Member State have access to the Insurance Ombudsman for extra-judicial settlement of insurance litigations between Luxembourg-based insurers and consumers.
- CAA out-of-court dispute resolution:
  - Offered free of charge under CAA Regulation 19/03 to find amicable solutions to complaints against entities supervised by the CAA.
  - Procedure is not a formal mediation but aims to facilitate resolution outside judicial proceedings.
  - Principles: impartiality, independence, transparency, expertise, effectiveness and fairness.
  - Reasoned conclusions are not binding; parties are free to accept or refuse them after a reasonable period of reflection; if no agreement, parties may seize courts and tribunals.
  - Opening conditions: complaint must have been previously dealt with by the relevant professional and sent in writing to the person responsible for complaints handling; no satisfactory answer within 90 days from the date complaint was sent.
  - A request may be filed with the CAA within one year after the original complaint to the professional if no satisfactory answer was received.
  - The CAA issues a reasoned conclusion within 90 days.
  - If the CAA concludes the request is totally or partly justified, it asks the parties to contact each other to settle the dispute and to inform the CAA of the follow-up.

### Insolvency scheme and protection of creditors
- Luxembourg does not have a general insurance compensation fund but is transposing the latest EU Motor Insurance Directive into law.
- A motor insolvency scheme will be in place within the first quarter of 2024; this insolvency fund will be a public body operationally managed with the support of CAA’s employees.
- Protection of creditors of insurance contracts:
  - Luxembourg grants a privilege to insurance claims and a “super-privilege.”
  - All assets matching technical provisions constitute segregated assets allocated preferentially to guaranteeing payment of insurance claims; this preferential right takes precedence over all other preferential rights as soon as matching assets are registered in the permanent inventory or the mortgage registration becomes effective.
  - Insurance undertakings must maintain the permanent inventory of matching assets and report quarterly positions to the CAA.
  - If segregated assets are inadequate, policyholders, insured parties or beneficiaries retain a preferential claim against the insurance undertaking in respect of any surplus (super-privilege).
  - In case of liquidation of an insurer, the CAA is involved in every step of the process, including the choice of the liquidator.

### AML/CFT supervision
- Luxembourg has a solid AML/CFT framework and a good understanding of its money laundering and terrorist financing risks, as outlined by the FATF.
- FATF Mutual Evaluation Report of September 2023 notes supervisors have expanded supervisory and sanctioning powers, automatized tools and processes, increased human resources, and combine off-site and on-site work.
- Under the AML/CFT Law and CAA Regulation 20/03:
  - Life insurers must implement adequate internal control systems covering AML/CFT policies and procedures and cooperation with competent authorities such as the Financial Intelligence Unit (Cellule de Renseignement Financier, CRF).
  - Two required functions: (i) a person at senior management level responsible for compliance with AML/CFT obligations including implementation of an adequate AML/CFT regime; and (ii) an AML/CFT compliance officer at an appropriate hierarchical level.
- CAA supervisory approach:
  - Risk-based approach to supervising insurers’ AML/CFT compliance.
  - Conducts on-site inspections and desk-based supervisory activities, including on-site inspections dedicated to AML/CFT reviewing procedures related to cooperation with authorities and treatment of (potentially) suspicious transactions.
  - Regularly requests annual AML/CFT approved statutory auditor report and annual AML/CFT Compliance Officer reports of life insurance undertakings for perusal and integration into CAA’s risk-based approach and expert judgment.
- FATF recommendation: CAA should make use of the sanctions available for non-compliance including sanctions on individuals where appropriate.
- The CAA uses external information sources, including meetings with the CRF and the CSSF and information provided within AML/CFT colleges implemented per the Joint Guidelines on Cooperation and Information Exchange for Directive (EU) 2015/849.

### Key Financial Soundness Indicators (selected figures; percent)
- Assets / liabilities: 2018 108.0; 2019 107.9; 2020 108.1; 2021 107.9; 2022 108.4; 2023-Q3 109.0
- SCR coverage ratio (Solvency II) – life, median: 2018 180; 2019 171; 2020 158; 2021 148; 2022 180; 2023-Q3 ...
- SCR coverage ratio (Solvency II) - non-life, median: 2018 201; 2019 212; 2020 225; 2021 198; 2022 193; 2023-Q3 ...
- SCR coverage ratio (Solvency II) – reinsurance, median: 2018 270; 2019 249; 2020 255; 2021 234; 2022 240; 2023-Q3 ...
- MCR coverage ratio (Solvency II) – life, median: 2018 422; 2019 579; 2020 537; 2021 490; 2022 541; 2023-Q3 ...
- MCR coverage ratio (Solvency II) - non-life, median: 2018 600; 2019 543; 2020 646; 2021 653; 2022 619; 2023-Q3 ...
- MCR coverage ratio (Solvency II) – reinsurance, median: 2018 696; 2019 670; 2020 700; 2021 620; 2022 724; 2023-Q3 ...
- Unrestricted Tier 1 capital / eligible own funds: 2018 94.7; 2019 93.0; 2020 91.7; 2021 90.8; 2022 91.0; 2023-Q3 91.3
- Tier 3 capital / eligible own funds: 2018 0.2; 2019 0.8; 2020 0.7; 2021 1.0; 2022 0.4; 2023-Q3 0.6
- Growth in gross written premiums - life: 2019 7.8; 2020 -13.9; 2021 23.4; 2022 -13.3; 2023-Q3 ...
- Growth in gross written premiums - non-life: 2019 76.7; 2020 1.0; 2021 10.3; 2022 13.8; 2023-Q3 ...
- Loss ratio (net paid claims / net premiums) - non-life: 2018 57.8; 2019 59.2; 2020 55.4; 2021 52.2; 2022 52.7; 2023-Q3 ...
- Combined ratio (loss ratio plus expense ratio) - non-life, median: 2018 93.4; 2019 102.8; 2020 94.5; 2021 92.1; 2022 91.5; 2023-Q3 ...
- Investment yield – life: 2018 2.4; 2019 2.2; 2020 1.8; 2021 1.9; 2022 1.6; 2023-Q3 ...
- Return on equity – life, median: 2018 5.9; 2019 6.3; 2020 6.8; 2021 7.1; 2022 5.1; 2023-Q3 ...
- Return on equity – non-life, median: 2018 -0.4; 2019 0.1; 2020 1.8; 2021 3.9; 2022 1.2; 2023-Q3 ...
- Stocks / total investments excl. unit-linked: 2018 2.6; 2019 2.2; 2020 2.1; 2021 2.7; 2022 1.4; 2023-Q3 1.3
- Bonds / total investments excl. unit-linked: 2018 67.7; 2019 72.6; 2020 72.7; 2021 72.2; 2022 69.8; 2023-Q3 70.8
- Average maturity (in years) – life excl. unit-linked: 2018 6.6; 2019 ...; 2020 6.9; 2021 ...; 2022 6.9; 2023-Q3 ...
- Non-investment-grade / total fixed-income excl. unit-linked: 2018 0.9; 2019 ...; 2020 0.6; 2021 ...; 2022 1.0; 2023-Q3 ...
- Liquid assets / technical provisions excl. unit-linked 1/: 2018 56.3; 2019 59.7; 2020 59.1; 2021 60.2; 2022 62.0; 2023-Q3 67.4
- Lapse rate, based on contracts - life: 2018 19.9; 2019 20.4; 2020 19.3; 2021 15.4; 2022 8.6; 2023-Q3 ...
- Lapse rate, based on volume - life: 2018 7.7; 2019 7.4; 2020 8.2; 2021 7.2; 2022 9.3; 2023-Q3 ...
- Risk retention ratio (net technical provisions/ gross technical provisions) - life: 2018 82.3; 2019 81.5; 2020 82.1; 2021 83.2; 2022 82.1; 2023-Q3 ...
- Risk retention ratio (net premium / gross premium) - non-life: 2018 35.4; 2019 42.2; 2020 48.0; 2021 45.0; 2022 42.3; 2023-Q3 ...
- Note 1/: Liquid assets include government bonds, corporate bonds, listed equity, cash and deposits, and investment funds.
- Source of indicators: IMF staff calculations based on CAA and EIOPA data.

*Source: IMF staff summary of the chapter titled "The CAA follows a prudent approach in requiring collateral for reinsurance contracts."*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1luxea2024007.pdf_