This article was originally published in Funds People. Read the original article here (in Spanish).

The need to protect investors from losing their money has always been a key consideration for private clients and their advisers. The policyholders of unit-linked life insurance contracts issued by Luxembourg insurers benefit from a unique investor protection mechanism. 


The keystone of this protection regime is the Luxembourg legal requirement that all assets linked to life insurance policies, i.e. the technical reserves, have to be entirely separated from the insurance company’s own corporate assets and be held in custody with an independent custodian bank approved by the Luxembourg regulator, the Commissariat aux Assurances (“CAA”). All technical reserves are held off the bank’s and the insurer’s balance sheets.

The regime, underpinned by a tripartite agreement signed by the life insurance company, the custodian bank and the CAA, is commonly referred to as the “Triangle of Security” and protects policyholders in the case of bankruptcy of either the insurance company and/or the custodian bank.

This separation made at inception of the policies could become utterly relevant later, either at the beginning of a bankruptcy proceeding or when a conflict with a creditor occurs. Should the insurer or the custodian bank fail, the technical reserves would be fully protected and reserved for the policyholders and beneficiaries of the life policies. The CAA would freeze the accounts where these are held in custody and policyholders or beneficiaries would have an absolute preferential right, before any other creditors, over the technical provisions for the value of their policy.

This Luxembourg policyholder protection regime has proven to work. In October 2008, as the global financial crisis intensified, the Icelandic banking system collapsed claiming, amongst others, Kaupthing Bank and Glitnir Bank as its victims (both banks were established in Luxembourg and were custodian banks for Lombard Intl. Assurance’s policyholders). The CAA used its powers to freeze the segregated accounts at these banks. Following the appointment of an administrator by the Luxembourg district court, Lombard Intl. Assurance was able to recover the assets linked to its policies –in these cases both securities and cash– and transfer them to another of its appointed custodian banks. The securities of the first policies were transferred within 5 weeks, the bulk of them within 4 months and the balance within 12 months.

This specific legal protection adds up to the fact that Lombard Intl. Assurance exclusively issues unit-linked (i.e. not-guaranteed) life insurance policies, which entails that its clients will not be exposed to situations where adverse investment markets impair the insurer’s capacity to meet its liabilities vis-à-vis policyholders. This is key to private clients as other insurers offering other types of insurance products may carry on this potential risk (guaranteed products where the investment risk is borne by the insurer may affect policyholders having invested through unit-linked contracts in case the insurer liquidates as both businesses are not strictly segregated).

In short, the Luxembourg “Triangle of Security” together with Lombard Intl. Assurance’s business model, provides investors with a unique protection. This ensures to its maximum extent that the assets held through a life insurance policy with Lombard Intl. Assurance are fully immune to any financial contingency, in a jurisdiction, Luxembourg, with well-proven and demonstrated track record in the global financial industry and with a stable AAA credit rating.

By Pablo Peciña 
Associate Director - Wealth Planning, Wealth Structuring Solutions
Lombard International Assurance