As a result of its favorable fiscal regime for insurance companies, Luxembourg has the potential to become one of the major European centers in the insurance sector, as stated in a 2005 U.S. Department of Commerce Country Commercial Guide. In the International Monetary Fund's (IMF) 2002 Financial System Stability Assessment, insurance supervisory practices in Luxembourg were benchmarked against Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Luxembourg had a high level of observance with all relevant ICPs. Furthermore, the report noted that the preconditions for effective insurance supervision were in place and mostly implemented in a satisfactory way. The Insurance Commission was established under the 1991 Law on Insurance Services, which was last amended in December 2007, as an independent supervisory body for the insurance sector. However, given the revision in October 2003 by the IAIS of the ICPs and Methodology, there is insufficient information publicly available regarding Luxembourg's compliance with the new, more stringent principles.

General Overview

Given Luxembourg's high level of compliance with the ICPs and Methodology developed by the IAIS in 2000, the IMF did not make any substantial material recommendations as part of its 2002 Financial System Stability Assessment. The 2002 IMF report noted that the preconditions for effective insurance supervision were in place and implemented satisfactorily, for the most part. Furthermore, the insurance supervisory authority -- the Insurance Commission (Commissariat aux Assurances, or CAA) -- had adequate resources to carry out its duties, including on-site inspections. However, the IMF report recommended increasing the CAA's staff "to face the rapid growth in the number of supervised companies and size of balance sheets" (p. 42).

The legal framework for the insurance sector is mainly based on the 1991 Law on Insurance Services (hereafter LoIS 91). The CAA was established under the LoIS 91 as an independent supervisory body for the insurance sector. Regulatory work was the responsibility of the Minister of Treasury and Budget, within the Ministry of Finance (Ministère des Finances, or MoF), upon recommendation of the CAA, as noted in the IMF's 2002 assessment. The IMF report further noted that the CAA was funded through the levying of taxes on insurance companies. Given the revision in October 2003 by the IAIS of the ICPs and methodology, there is insufficient information publicly available regarding Luxembourg's compliance with the new, more stringent principles.

As a result of its favorable fiscal regime, according to a 2005 U.S. Department of Commerce Country Commercial Guide, Luxembourg has the potential to become one of the major European centers in the insurance sector. As of September 2006, per a 2007 U.S. Department of State International Narcotics Control Strategy Report, there were 95 insurance companies, and 260 reinsurance companies in Luxembourg.

The Principles

ICP 1 Conditions for effective insurance supervision

II

As a member of the EU, according to the IMF's 2002 assessment, Luxembourg has established a clear and detailed legal framework for the insurance sector, which was mainly based on the LoIS 91. The law provides the CAA with several tools to carry out its supervisory task, including on-site inspections. Despite this information, however, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 2 Supervisory objectives

II

As noted in the IMF's 2002 report, the CAA's supervisory objectives were clearly stated in its annual report and circular letters, which provided transparency to insurance supervision in Luxembourg. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 3 Supervisory authority

II

The CAA was established under the LoIS 91 as an independent supervisory body for the insurance sector. Regulatory work was the responsibility of the Minister of Treasury and Budget, within the MoF, upon recommendation of the CAA, as noted in the IMF's 2002 assessment. The IMF report further noted that the CAA was funded through the levying of taxes on insurance companies and had adequate resources to carry out its duties, including on-site inspections. However, the IMF report recommended increasing the CAA's staff "to face the rapid growth in the number of supervised companies and size of balance sheets" (p. 42). Despite all the information provided above, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 4 Supervisory process

II

According to the IMF's 2002 assessment, the CAA provided publicly available information to the market through an annual report and circular letters, and met on a regular basis with insurance companies and consumer groups to inform them of its policies and objectives. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 5 Supervisory cooperation and information sharing

II

As Luxembourg insurance companies conduct the bulk of their business in foreign countries, particularly in the area of reinsurance and life insurance, they are highly dependent on strong international cooperation, as noted in the IMF's 2002 assessment. The IMF report further noted that collaboration among supervisors at the company level seemed to be effectively established. Per the same report, the CAA was given powers under the LoIS 91 to exchange information with other authorities, provided that such information is subject to professional secrecy conditions. However, due to the growing linkages among financial sectors, the IMF assessment recommended improving the coordination process between the different supervisory authorities and the prosecutor. Despite the information provided above, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 6 Licensing

II

As stated in the IMF's 2002 assessment, Luxembourg carried out an in depth supervision of the licensing process. Furthermore, the Minister of Treasury and Budget, within the MoF, approved licensing upon recommendation of the CAA. The IMF report noted that the Luxembourg system of licensing, which appeared to be rather strict, enabled the CAA to assess the suitability of companies' management. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 7 Suitability of persons

II

In its 2002 assessment, the IMF noted that the Luxembourg system of licensing, which appeared to be rather strict, enabled the CAA to assess the suitability of companies' management. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 8 Changes in control and portfolio transfers

II

Under the 2007 amendment to the LoIS 91, according to the IMF's 2002 report, the CAA and the Minister of Treasury and Budget must be informed of a change in control of the company. Per the same report, the CAA had the authority to accept or reject the change in control. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 9 Corporate governance

II

As noted in the IMF's 2002 assessment, the insurance supervisory authorities were "not responsible for exercising control over the roles of the different bodies of the company apart from the provisions of the law dealing with insurance" (p. 43). However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

Until 2006, the corporate governance framework in Luxembourg consisted of the 1915 Law on Commercial Companies (as amended). In April 2006, the Luxembourg Stock Exchange established the Ten Principles of Corporate Governance for listed companies, which entered into force on January 1, 2007. These Principles are based on the comply-or-explain principle, and include requirements on the role and composition of the Boards of Directors, and relations with shareholders and investors, as noted in a 2006 report by the Luxembourg Bankers Association (Association des Banques et Banquiers Luxembourg).

ICP 10 Internal control

II

According to the IMF's 2002 assessment, "the CAA has set up a practical framework of control that enables it to check the quality of the internal controls of insurance companies" (p. 43). The IMF report further noted that internal controls were implemented in accordance with the 2007 amendment to the LoIS 91. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 11 Market analysis

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 12 Reporting to supervisors and off-site monitoring

II

The 2002 IMF assessment noted that the insurance accounting system was regulated by the 1994 Law on the Accounts of Insurance and Reinsurance Undertakings, which sets adequate standards for insurance companies in line with the 1991 EU Directive on the Annual Accounts and Consolidated Accounts of Insurance Undertakings No. 91/674/EEC. Furthermore, the concepts of "auditors" and "actuaries" were established by the Luxembourg supervisory authorities for life insurance companies.

As of 2005, according to the May 2007 update available from the Deloitte & Touche IAS Plus website, Luxembourg companies listed on an European Union / European Economic Area stock exchange, including banks and insurance companies, are required to comply with International Financial Reporting Standards (IFRSs) as adopted by the EU. Deloitte & Touche further note that the IFRSs "will be introduced into the local Luxembourg commercial law as an alternative to the current Luxembourg accounting principles." However, there is insufficient information publicly available regarding Luxembourg's compliance with this principle subsequent to these changes, and as revised by the IAIS in 2003.

ICP 13 On-site inspection

II

As stated in the IMF's 2002 assessment, the legal framework for the insurance sector in Luxembourg was mainly based on the LoIS 91, which provided the CAA with several tools to carry out its supervisory task, including on-site inspections. The IMF report noted that although the CAA was experienced in carrying out in depth on-site inspection on an individual basis, it might be limited by the small number of its staff in conducting effective on-site inspections of reinsurance companies. However, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 14 Preventive and corrective measures

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 15 Enforcement or sanctions

II

According to the IMF's 2002 assessment, while the CAA had "an adequate legal framework to sanction insurance companies that behave inappropriately" (p. 44), it only used its powers occasionally. Per the same report, the CAA had "adequate tools to face difficult situations" (p. 45). Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 17 Group-wide supervision

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 18 Risk assessment and management

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 19 Insurance activity

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 20 Liabilities

II

In its 2002 assessment, the IMF recommended establishing a more comprehensive process, and enhancing the regulatory framework in the field of asset liability management. Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 21 Investments

II

In its 2002 assessment, the IMF recommended establishing a more comprehensive process, and enhancing the regulatory framework in the field of asset liability management. Nevertheless, there is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 22 Derivatives and similar commitments

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 23 Capital adequacy and solvency

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 24 Intermediaries

II

According to the IMF's 2002 assessment, the CAA was responsible for the supervision of Luxembourg-based intermediaries companies. It relied however on foreign supervisory authorities to assess the quality of foreign intermediaries. The IMF report noted that the implementation of the EU Insurance Mediation Directive No. 2002/92/EC into Luxembourg law would ensure a stronger cooperation among authorities in the field of insurance intermediaries. However, there is little further information publicly available as to whether this transposition did occur.

ICP 25 Consumer protection

II

The CAA is responsible for consumer protection, as noted in the IMF's 2002 assessment. The tasks of the supervisory authorities in the field of consumer protection and market conduct are detailed in the 2007 amendment to the LoIS 91. Furthermore, a number of regulations have been implemented in the field of market conduct in Luxembourg. The IMF report noted that sanctions could apply in the event of non-compliance with the CAA's directives on consumer protection. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 26 Information, disclosure & transparency towards the market

II

As noted in the IMF's 2002 report, the CAA's supervisory objectives and activities are clearly stated in its annual report and circular letters, which provide transparency to insurance supervision in Luxembourg. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.

ICP 27 Fraud

II

There is insufficient information publicly available directly addressing Luxembourg's compliance with this principle as revised by the IAIS in 2003.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

In its 2002 assessment, the IMF recommended fully implementing the anti-money laundering (AML) Action Plan to ensure consistent approaches to AML activities within and across all sectors, including insurance. It further encouraged the CAA to improve information sharing with the prosecutor of Luxembourg for AML and combating the financing of terrorism (CFT) purposes. According to a subsequent 2004 IMF report on the implementation in Luxembourg of the Financial Action Task Force (FATF) Recommendations for AML/CFT, "Luxembourg has a well developed supervisory framework that encompasses AML/CFT preventive measures broadly in line with international standards" (p. 7). The IMF report further noted that customer identification requirements for insurance companies were relatively similar to those for banks. The implementation of AML/CFT measures was however currently limited to life insurance products. Nevertheless, the available sources do not directly address Luxembourg's compliance with this principle as revised in 2003 by the IAIS.