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A reinforced Luxembourg Triangle of Security

European Directive 2001/17/ECon the reorganisationand winding-up of insurance undertakings provides Member States with two methods for the treatment of insurance claims. Since the entry into force of this Directive, Luxembourg has elected to grant insurance claims absolute priority over any other claimsagainst theinsurance undertaking.

This rightoverinsurance receivables is sometimes referred to as a “super-privilege”. It is a key element in the protection of the rightsof creditors under insurance contracts concluded with Luxembourg insurance companies. It allows insurance creditorsto exercise claims under their insurance contractsin priority to all other creditorsof the insurance company(and in particular employees, shareholders, social security institutionsand the State).

In addition, Luxembourg law requires that the insurance company treat the assets representing its insurance liabilities as distinct,andmanaged separately,from its own assets. These representative assets must be deposited with a custodian bank. A custodyagreement binds the insurance company and the bank and must be approved by the Commissariat aux Assurances (CAA) before the deposit of any representative assets. Insurance creditors (policyholders and/or beneficiaries)thus have the status of super-privileged creditors over the segregatedassets corresponding to their contracts.

This system of protection for insurance claims is commonly referred to as the “Triangleof Security” because of the involvementof three parties: insurance company, custodian bank and CAA. TheTriangle of Security provides a form of legal protection that is unique in Europe and is one of the significant advantages of a life insurance policy concludedwith a Luxembourg insurance company.

In the contextof financial marketrisk, the law of 10 August 2018strengthened the existingframeworkby further clarifyinghow the Triangleof Security is to be implemented.

The legislation states clearly that life insurance contracts linked to investment funds, and guaranteed return life insurance contracts,correspond to separate pools of assets. Each of these pools of assets is reserved primarily for the execution of commitments underthe corresponding type of contract.

The super-privilege of insurance creditors over the separate assets corresponding to their contracts is now classedas a first ranking claim(privilège de premier rang)and, as a result,is strengthened.

Life insurance receivables for which the investment risk is borne by the policyholder (e.g. unit-linked investments) are valued by referenceto the number of units held on the day the liquidation is opened. For other types of investment (e.g. guaranteed-capitalinvestments), insurance receivables are equal to the value of the corresponding technical provisions on the day the liquidation is opened.

The protection of consumers’ rights, and in particular the prospectof compensation within a reasonable timeframe, is further enhanced by the option to satisfy insurance claims by transferringsome or all assets in specierather than transferring the proceeds of their liquidation