How The “New Normal” Is Driving New Thinking In Luxembourg

Meanwhile, the economic consequences unfolding mean “zero” (or negative) interest rates for even longer, rendering investment return more difficult to achieve. Not to mention asset price volatility.  All of this is causing insurers to ramp up their modernisation and transformation objectives, review entire business lines,  future focus areas, and operating models. And then there’s Brexit.  Companies which have established themselves in Luxembourg have added considerably to the sector ecosystem and underscore the centre’s relevance as a global insurance hub.

Back in October, in my morning inbox, was the headline announcing the launch of the joint venture between Swiss Re and Daimler, Movinx, designed to transform the automotive and mobility insurance business, just one of many examples where players are seeking to reshape the insurance market. I continue to see the creation of new ecosystems and delivery models across the industry and expect it will change markedly in the coming quarters and years. What is most notable is the step-up in transformation ambitions as well as the increase in desired pace, influenced in part by COVID-19. At the same time, the pandemic underscores the importance of insurance in society, its benefits as well as certain shortcomings. Insurers have generally managed their business operations well through this period. However, it has led leadership across the sector to reevaluate entire business areas and ask how they can reduce the “cost to serve” while seeking to enhance stakeholder experience. These contribute to the burning platforms catalysing the change agenda and new thinking in the sector.

Beyond COVID-19: The Six Key Strategic Priorities For Luxembourg Insurers In A Post-Crisis World

Beyond COVID-19, how should insurers meet changing market demands and how do they need to refine their strategy and business model? Below are six key priorities that have been identified for insurers in Luxembourg. While each should be considered in light of a specific business segment focus, all are relevant, especially as there may be a longer road to economic recovery than may have been envisaged at the outset of the first wave of the pandemic.

1. Realign your cost structure and sharpen productivity.
2. Supercharge digital transformation to create a digital enterprise.
3. Carve out new revenue streams.
4. Prepare your workforce for the new world.
5. Strengthen capital efficiency.
6. Enhance your societal role – your purpose – and underpin your reputation.

Over the past five months, clients have been intensively engaged in the first three areas highlighted above.  While these remain key focus areas, points 4, 5 and 6 are clearly on the agenda of insurers in both the short and medium term.

Luxembourg, A Jurisdiction Of Choice For Insurers & Reinsurers

People from all corners of the world often ask why Luxembourg has been a chosen jurisdiction for so many leading global and international brands.  In short, it's the cocktail of “stability and agility” (often stirred, never shaken!).  As a founding member of the EU, it is strategically positioned at the heart of Europe. We are consistently rated AAA by the three main rating agencies with a responsive tax system. Luxembourg is known as a centre of R&D and innovation and a hub for international talent comprising a highly skilled, multilingual workforce. 

A critical factor for Luxembourg is having a stand-alone insurance regulator. Luxembourg is one of only three EU countries to maintain a dedicated insurance only regulator, in this case the Commissariat Aux Assurances (CAA). This leads to a focus on the sector and its very particular needs and requirements.  Companies often refer to the clear requirements of the regulator from the first meeting. Notwithstanding, the authority has seen its workload increase considerably given the decision of the UK to exit the EU, thereby requiring certain insurers to establish a new regulated entity to maintain distribution access to the wider European market. 

​On 28 September 2020, the CAA published its annual report and key figures for 2019. The Luxembourg market continued to benefit from Brexit and consolidated its international growth. The regulator has already anticipated the effects of the COVID-19 crisis and confirmed it will focus on solvency ratios, especially with respect to Brexit newcomers (i.e. (re)insurers which migrated from the UK to Luxembourg because of Brexit).

In their editorial, the CAA called 2019 “The year that will go down in the annals as that of the completion of the internationalisation of the Luxembourg insurance market.” After reinsurance since the mid-years 1980 and life insurance since the early 1990s, it is the turn of non-life insurance in 2019 to take a direction resolutely turned towards foreign markets. As for the reinsurance and life insurance, around 90% of premiums for non-life activities will henceforth be underwritten internationally.

“This has, of course, been influenced by the eleven non-life insurance companies established in the United Kingdom who decided to relocate their decision-making centre to Luxembourg for their activities in the European Union following Brexit.

“In terms of activity in Luxembourg, the trend in results was generally favourable, with the increase in life insurance and reinsurance profits more than offsetting the erosion of profitability in non-life insurance. Regarding the latter, operators, and in particular those active internationally, will undoubtedly have to adjust underwriting and pricing policies to achieve a better financial balance for all activities, The solvency ratios, if they have remained at their excellent levels of previous years, or even improved, for companies established for longer,  have nevertheless experienced a downward trend. This is due to the fact that companies which have recently settled  here were accustomed in their original home to an increase in their equity in excess of their regulatory requirements to the head of the group rather than to their maintenance at the level of their subsidiaries. Particular attention will therefore be paid by the CAA to the evolution of the capitalisation of these companies in order to preserve the integrity, the solidity and the credibility of the Luxembourg insurance market”. (Source CAA annual report).

Luxembourg’s reputation depends on its compliance and security and 2019-2020 was the time to strengthen the anti-money laundering system and the fight against the financing of terrorism via numerous legislative and regulatory updates.

The CAA also found that the overall solvency ratios decreased, even though they are still excellent (202,09 per cent in 2019; 215,24 per cent in 2018). Many Brexit newcomers up-streamed excess own funds to their holding entities more than in the past. As a consequence, the regulator announced that it will strengthen its focus on solvency capital requirements coverage ratios. The CAA will also extend its supervision scope by becoming an out-of-court complaint resolution entity and highlighted its new CAA regulation 19/03 in that respect. (Transcription Source: Loyens Loeff).

On the technology side, new tools for analysis that are being developed for life insurance have greatly improved the ability to collect and analyse data, leading to better intelligence regarding the risks to which market players are exposed.

These qualities of stability and innovation are valued even more in these times of uncertainty and change. Insurers and reinsurers in Luxembourg are thus well positioned to understand and meet the myriad  challenges - COVID-19 and its impact, regulatory pressures, Brexit, “zero” (or negative) interest rates and the need to not only digitally transform but to raise their competitiveness. As my mother used to often say, necessity is the mother of all invention. In my view, we will see this come to the fore in the coming quarters and from this, create the next opportunities.

Matt Moran
Matt is Partner, Advisory Deputy Leader and Insurance Industry Leader at PwC Luxembourg. Working in London, New York, Dublin and Luxembourg, he has 25 years experience in undertaking transactions, both as lead advisor and as principal/investor. He joined PwC in 2014 - his experience includes fundraising, M&A lead advisory, valuation, due diligence and strategic restructuring of enterprises. Matt graduated from the National University of Wales with a BSc. (Econ) (Hons), qualifying as a Chartered Accountant (ACA, ICAEW) with a Big 4 firm in London. An investment banker in New York, he qualified as a Broker/Dealer (United States National Association of Broker Dealers).