Luxembourg has recently completed its 2018 national risk assessment, which covers data from 2016–2017. This mandatory exercise was performed in preparation for the Financial Action Task Force (FATF) visit taking place in autumn 2020. The results from the assessment help clarify the money laundering and terrorist financing (ML/TF) risks the country faces, making it possible to coordinate national actions against ML/TF and to concentrate resources on high-risk areas. The regulator will check that identified risks are properly mitigated.
The Commissariat aux Assurances (CAA), Luxembourg's regulator for the insurance sector, classified the residual risk as "medium" overall, but "high" for life insurance companies. This is due to the size of this sub-sector, its very diverse product offering, and the intervention of intermediaries distributing higher-risk products that involve lots of transactions and that target foreign residents.
It is in this context that the CAA has issued Circular 18/9, which enables it to conduct granular risk assessments, furthering enhance the risk-based approach of supervisors. As part of this circular, life insurance companies are requested to assess their own inherent risk based on a ML/TF quantitative questionnaire of 51 questions—by 1 September 2019 for new business and by 31 December 2019 for all policies currently in force. As the manual review of all in-force policies might involve assessing a huge number of policies, the CAA has given life insurance companies the option of using a model point to assess higher-risk solutions, including unit-linked solutions, with a deadline of 31 December 2024, and to assess lower-risk ones such as pure biometric risk contracts, with a deadline of 31 December 2027.
Model point methodology
In order to determine which policies are admissible for the model point, a set of 11 questions is to be applied to all in-stock policies. Only those that score four points or fewer are eligible for the model point. Eligible policies then have to be gathered into homogeneous groups according to objective criteria set by the life insurance company. These groups will be reviewed on a sample basis and the scoring obtained through this test will be applied to all the policies belonging to the same group for the year ending 31 December 2019.
The policies included in the model point will be reviewed manually on a risk basis, and must be reviewed immediately if there is a significant change or movement in the contract. In all cases, they must be reviewed by the end of 2024 for unit-linked policies and by the end of 2027 for less risky life insurance solutions. Additionally, a remediation plan is to be defined to ensure completeness and timeliness of the review.
The urgency for approval and implementation
It is crucial that insurance companies make decisions at the top level, so as to let those decisions cascade down through every function in the organization. Procedures will need updating, projects will need launching, action or remediation plans (that include milestones) need finalizing, and criteria for the model point homogeneous groups need setting. All of these actions should be validated by the company leadership by September 2019, ideally by the Board of Directors responsible for the risk appetite definition of the company.
The planned checks
In the coming months, the CAA will define and communicate a reporting format for gathering information about the life insurance company's policy scoring as at 31 December 2019. These reports will also be used by the CAA in the following years to score the risks of all life insurance companies and to perform specific on-site checks.
Also bear in mind that the FATF will visit and interview some life insurance companies in autumn 2020, so as to understand and assess how ML/TF risks are being managed.
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