Concern about the financial health of the banks in their home markets, including France, Italy and Spain, is said to be a key factor driving these wealthy individuals towards the Luxembourg insurers.
These HNWIs' international, cross-border lifestyles is another, as Luxembourg insurance products are taxed only in the country of the policyholder.
Explained one Luxembourg insurance company executive: “A French national who holds a life insurance bond with a French company and then moves to the UK, will, in the case of a partial surrender of the bond, be subject to a tax in both countries”, and will be obliged to go through complex channels to prove he is covered by the double-tax treaty between the UK and France.
"However, if the French national's bond were in Luxembourg, he would be taxed only by whichever country he was resident in at the time of the surrender, France or the UK."
Typically the Luxembourg insurance products also offer multi-currency options and similar features that make them well-suited to an international and peripatetic clientele. And because the sums of money being invested are so high – estimates vary, but sources say €1m (£836,000, $1.4m) is a fair ballpark minimum amount – there is an expectation on the clients’ part that the products, and accompanying advice, will be of a high calibre, in addition to being highly personalised, to fit their often complex individual requirements.
“The life insurance contract has always been an efficient way for individuals to organise their wealth succession,” says Marc Hengen, general manager of l’Association des Compagnies d’Assurance (ACA), which represents 68 insurance companies based or active in Luxembourg.
“But that is not new. What has happened since 2008 is that the insurance business model has been seen to have resisted the financial crisis very well.”
Freshly-declared assets
Another factor driving wealthy individuals towards the Luxembourg insurers, some say, has been post-financial crisis crackdowns on tax avoidance and evasion by a number of continental European countries, which has forced a significant volume of previously-hidden wealth into the open.
The owners of these freshly-declared assets, it’s said, see Luxembourg’s insurance bonds as a compelling option in their search for a new, legally correct yet tax-efficient place to stash them.
Many are also tempted by the fact that some of the products on offer – generally by companies such as La Mondiale Europartner, which are part of large French companies – feature a guaranteed return option, which investors can find attractive in comparison to what they stand to gain from banks.
Little known outside Luxembourg
The Luxembourg single premium business model is not new, and the fact that the Friends Life division of Lombard had been active in this area for some time has long been well known in insurance industry circles.
But the extent of the business, and its recent growth, has been relatively little known outside of Luxembourg and the insurance industry, at least until now.
Total annual premiums in this market were averaging around €10bn per annum in the years just before the financial crisis hit, towards the end of 2008. In 2009, they leapt to €17bn, and in 2010, to €21bn, according to data compiled by the ACA. (See chart, below.)
Last year they were in the region of €20bn, market sources told International Adviser.
New business premiums sold
by Luxembourg insurers under the EU's
Freedom of Services regime, by year
(in billions of euros)
| 2008 | 2009 | 2010 | 2011 | 2012 |
2013 (estimate)** |
|---|---|---|---|---|---|
| €10 | €17 | €21 | €14 | €21 | €20 |
Source, 2008 – 2012: L'Association des Compagnies d'Assurances
**2013: market sources estimate
By comparison, in 2008, the year offshore bonds peaked in the UK market, sales of single premium offshore bonds sold by British insurers totalled £7.8bn. Not a small figure, but one that has not been matched since. Last year, according to the Association of British Insurers, the single premium total was around £4.1bn.
'Triangle of Security'
A key selling point for the Luxembourg insurers is the unique way Luxembourg law has been set up to protect policyholders, with what Luxembourgers call their "Triangle of Security".
This ensures that the policyholder's deposits are segregated from those of the life insurer itself, and are legally separate as well from the company's shareholders and creditors and thus, they say, would be ring-fenced in the event of a failure of the insurance company.
Luxembourg law also dictates in detail how life insurers must set up clients’ portfolios, within the life insurance structure. Discretionary asset managers, for example, are forbidden from having a relationship with the end client, and custody of the client’s assets is held with the provider’s bank, never with the discretionary manager’s.
Explains Philippe Burdeyron, deputy chief executive of La Mondiale Europartner: “It’s very, very prescribed, unlike any other jurisdiction.”
The rules and regulations covering the way life insurance portfolios are to be set up in Luxembourg are contained in a document known as the ‘circular letter’, according to Burdeyron, who notes that it “runs to about 40 pages”.
Companies active in this market, in addition to Lombard – which has been the market leader – include Baloise; Swiss Life International; Altraplan; Cardif Lux Vie (an arm of BNP Paribas); La Mondiale Europartner; and Sogelife (part of Société Générale).
Another is IWI International Wealth Insurer, which re-invented itself in 2012 to focus on what Mario da Costa, a member of its executive board, calls “wealth insurance”.
Before February 2012, the company was a conventional life insurer that sought to cater for a broad range of income groups, with multiple business lines aimed at the retail insurance market as well as wealthy individuals.
“In 2012 we reorganised the company, changed our name, recruited new people, and changed our focus to address the high-net-worth and ultra-high-net worth market,” da Costa says.
The strategy proved so successful that IWI “doubled our turnover in 2013, compared with 2012, and we expect it to grow by around 50% this year,” da Costa adds.
“This market is being driven by the fact that clients of private banks, family offices and asset managers have special requirements for wealth structuring, especially where cross-border elements are present. Local insurance providers [in Europe] find it difficult to provide this kind of flexibility, but that's what IWI specialises in.”
Axa’s version
Such cross-border wealth structuring, of course, is also a strength of certain specialist insurers in Ireland and the Isle of Man, as readers of International Adviser know.
So it is perhaps not surprising that one of the most interesting recent developments in the story of the Luxembourg insurers catering for HNWIs has links to both of these other jurisdictions.
As reported here in October, Axa Wealth International, the Isle of Man insurance division of the Paris-based Axa insurance group, launched what it called its Delegation bond, which was designed to cater for a market identical to that of the Luxembourg insurers: HNWIs and UHNWIs.
Except for a couple of things. It targets the UK market, not Europe, and instead of Luxembourg, it is domiciled in Ireland.
Simon Willoughby, Axa Wealth’s head of proposition and the architect of the new product, freely acknowledges that Delegation was modelled on the types of bonds on offer for HNWIs in Luxembourg.
Some executives with other Irish and Isle of Man-based insurance companies that sell offshore bonds into the UK, meanwhile, admit – privately – that they are watching how Delegation fares over the next year or two with interest, because they see a compelling case for such a product, providing it can be proved to work in the UK. At least one other company is understood to be marketing a similar product, but for now prefers not to discuss it.
Like the Luxembourg bonds, the Axa Delegation bond makes use of a discretionary wealth manager to enable it to utilise a broader range of investment options than normally permitted in a conventional UK offshore bond.
Because the discretionary manager is acting on behalf of the client, he or she is able to invest in assets such as direct equities and bonds, derivatives, government and corporate debt and medium-term notes, none of which would normally be allowed to be held inside a standard offshore bond in the UK and still qualify for the tax relief offshore bonds normally enjoy there, Willoughby says.
And he stresses that though the Delegation bond is new, the concept of such a product being made available to the UK market is not.
“Certainly since 2008, there has been evidence of Luxembourg providers coming into the UK market on a Freedom of Services basis and offering [investors] this type of product,” he says.
“It’s been possible in the UK tax code since 1999, but the market took off after the Luxembourg insurance regulator, the Commissariat aux Assurances, freed up the asset restrictions on such bonds in 2008.
“Prior to that, the commissariat insisted on asset concentration limits within the bond portfolios, in order to protect consumers.”
Willoughby is adamant that Axa doesn’t need to be in Luxembourg to offer a product as good as those currently being marketed into the UK market by Luxembourg insurers.
“Certainly in my experience, I have found that you can do everything from Dublin that you can do from Luxembourg,” he says. “And I also believe that there is more cultural affinity for UK distributors with Anglo-Saxon Dublin than with Luxembourg.
“Obviously, if you’re selling into France, Luxembourg makes sense, but as we are part of the world’s largest insurance company, and our market largely consists of the UK, Dublin is right for us, and our UK focus.”
| EU’s Freedom of Services rule |
|
The sector of Luxembourg’s insurance industry that provides investment portfolios to high net worth individuals and UHNWIs across Europe has developed mainly within the past 10 years. However, industry experts trace the business back to 1994, when the EU’s Freedom of Services regime took effect. From July of that year, any insurance company established in an EU member state has been authorised to sell its products in all the other 27 EU member states and, with certain limitations, in the member states of the European Economic Area, a slightly larger group of countries which also includes Norway, Iceland and Liechtenstein. |
|
Luxembourg insurers active in the HNWI single premium bond market |
| Lombard (div of Resolution’s Friends Life) |
| Cardif Lux Vie (Affiliated with BGL BNP Paribas, the Luxembourg bank that in turn is part of the BNP Paribas group) |
|
La Mondiale Europartner (Luxembourg-based division of French insurer AG2R La Mondiale) |
| Swiss Life International (part of the Swiss Life Group) |
| Sogelife (Luxembourg-based insurance arm of the Société Générale banking group) |
| Crédit Agricole Life Insurance (CALI Europe) |
| Baloise Vie Luxembourg (part of Switzerland’s Baloise group) |
| Natixis Life |
| IWI (International Wealth Insurer) |
| Altraplan (part of NPG Wealth Management, Lux) |
