To navigate through challenges: Insights into 4 issues discussed at the ACA Insurance Day

Our world is currently facing numerous challenges that impact our daily lives, both professionally and personally. Terms such as geopolitical instability, conflicts in Ukraine and Palestine, energy crisis, recession, rising interest rates, and inflation are concerns that shape our everyday experiences.

During the ACA Insurance Day academic session, Marc Hengen, Managing Director of ACA, provided key figures, paving the way for an in-depth analysis of certain industry issues.

One of these challenges, at the heart of our concerns, is Corporate Social Responsibility (CSR).

One of these critical issues is Corporate Social Responsibility (CSR), central to our concerns. We are living in a new reality shaped by significant environmental, societal, and economic challenges. The industry is called upon to play an active role in addressing these challenges.

The undeniable impacts of climate change are compelling insurers to increasingly compensate victims of natural disasters. This not only concerns events abroad but also in Luxembourg. For example, in 2019, the sector disbursed over 100 million euros for damages resulting from the tornado in Pétange/Bascharage, and in 2021, it incurred costs of around 130 million euros for floods.

Rather than merely covering risks and managing claims, the industry continues to contribute to shaping a more sustainable future using its skills and significance. A key area in this regard is investments.

There is an increasingly integrated focus on Environmental, Social, and Governance (ESG) criteria in investment decisions. This role is crucial not only to mitigate emerging risks but also to play a key role in creating a more resilient society.

Clients have, and will continue to have, the freedom to make their investment decisions. However, thanks to the available investment options, greener and more sustainable alternatives are now offered, providing genuine choices.

The sector will persist in contributing to climate and societal challenges while actively participating in the transition to a more sustainable economy and society. Simultaneously, it commits out of conviction rather than merely reacting to regulatory constraints. Regulation, although essential, should not be the sole driver of commitment to Corporate Social Responsibility (CSR).

Another challenge lies in the regulatory sphere, with particular attention given to the risk of overregulation.

Always convinced of the need for a clear legal framework, securing the system as a whole and protecting the interests of clients and stakeholders remain priorities. However, caution must be exercised against overregulation, which generates constraints and additional costs without added value for clients.

Striking the right balance between a relevant and robust regulatory framework, protecting clients while allowing the sector to thrive, is essential. In this balance, insurers will have the opportunity to grow and remain competitive. Once regulations are established, it is equally crucial to apply them fairly. Dialogue between regulators and insurers has always been a strength and must continue.

Regarding regulation, let’s closely examine a persistent issue for actors, namely, professional secrecy, which has been a concern for several years.

It must be adapted because, in its current version, it hinders the development and digitization of the sector. For a comprehensive understanding, let’s hear from Pierre-Michaël de Waersegger, Partner at Arendt, who answered the question “What are the key legal challenges related to professional secrecy in insurance, and how do you address them as a specialized lawyer?” on the new season of “La Boîte à Questions“:

To illustrate Pierre-Michaël’s remarks, current provisions of professional secrecy imply, for example, obtaining the agreement of each existing client before resorting to cloud services. This is despite basic IT tools like messaging soon being available only in a Cloud hosting mode. The same goes for most CRM solutions, accounting and financial management platforms, electronic signatures, instant translation, and others.

Having to do without these services in favor of on-site alternatives (if they exist) hampers innovation and inevitably impacts the competitiveness of Luxembourg insurers and the quality of service provided.

A solution is needed to allow the sector to continue its digitization while preserving the obvious confidentiality interests of client data. The Ministry of Finance is aware of the issue, and we thank them for the assistance they have already provided and will continue to provide to solve this problem and finalize the ongoing bill.

At the local level, the crucial subject for the financial future of the country and for each of us individually is the sustainability of our retirement pension system.

Looking closely at the situation of our first pension pillar, we can rejoice in a very generous legal pension in Luxembourg. Replacement rates are almost double what is known in our neighboring countries. This generous system has been able to finance itself so far due to the permanent and significant growth of our active population over the decades.

The financing of our legal retirement system is based on the principle of distribution, meaning that today’s employees finance today’s retirement pensions. This financing requires regular annual growth in our active population, and this growth has supported our distribution system until now.

Continuing to hope for such growth over the decades to come is simply not realistic! The IGSS has simulated with more realistic growth rates – according to these simulations:

• In 2027, annual contributions will no longer be sufficient to finance all annual pensions, so we will be forced to draw from the reserve.
• And by 2047, all reserves will be depleted.

It is possible to discuss at length the assumptions used for these simulations and adjust them in one direction or another to assess the impacts. This will have an impact on dates but will not change the basic observation that our current system is not sustainable! The new government’s coalition agreement announces: “A broad consultation will be organized with civil society on the long-term viability of our pension system to find a consensus on this matter.” Just like: “The possibility of increased promotion of the second and third pillars of old-age provision will be analyzed, particularly through improved tax incentives.”

ACA unequivocally supports a strong first pillar as the basis of the retirement system, alongside a second and third pillar funded respectively by employers and individuals and encouraged by tax benefits to increase their adoption

Christian Strasser, President of ACA, during the academic session of the ACA Insurance Day 2023

Finally, the third challenge to address, though familiar, remains essential: the unwavering defense of the FOS, the Freedom to Provide Services

Since its creation 30 years ago, the internal market of the European Union has ended commercial barriers, promoted competition, and fueled economic growth. All member states have benefited, including Luxembourg. Our sector provides diverse and tailored services to the needs of individuals and businesses throughout the European Union.

FOS distribution accounts for over 90% of annual insurance premiums. The reasons for this success are manifold, including the expertise of our insurers, protection through the security triangle, a wide choice of underlying assets, or contract portability. It also relies on the daily interaction that insurers have with other actors in the financial sector across Europe: distributors, bankers, and asset managers.

While freedom of services meets the needs of many European citizens, there is now a rise in protectionism in some EU countries. They create obstacles to FOS, such as considering cross-border activities as riskier and requiring supervision not only by the member state of origin. Or the requirement of double AML reporting or increased supervision fees. This trend is worrying, and the risk that other countries will follow suit is real.

We therefore need both the support of the political world to remove obstacles to FOS and to ensure respect for the fundamental principles of the European Union.

Whether on these issues or others, ACA is determined to defend the interests of Luxembourg insurance for the benefit of our sector, clients, and the financial center!

Our financial center represents a quarter of Luxembourg’s GDP and remains the main driver of the country’s wealth and well-being. The insurance sector achieved an annual