On 11 March 2022, IVASS launched a public consultation on a draft regulation on linked products (the “Draft Regulation”), aimed at laying down the new rules governing linked insurance contracts by updating - in line with the new European and national legislation - the provisions contained in ISVAP Circular no. 474 of 21 February 2002 and in ISVAP Regulation no. 32 of 11 June 2009, respectively governing insurance products whose benefits are directly linked to the value of assets contained in an internal fund held by the insurance undertaking or to units of a collective investment undertaking (unit-linked policies) or in a share index or other reference value other than those mentioned above (index-linked policies).
- Purpose: a full review of the current regulatory framework on linked products was long-awaited from the market given that the regulations currently in force are no longer aligned with Solvency II Directive and related implementing rules. In accordance with Solvency II inspiring principles, including the freedom of investments of insurance undertakings to be exercised in accordance with the prudent person principle, IVASS confirms its power to limit by regulation the types of underlying assets or reference values of linked products in case the investment risk is borne by a policyholder who is a natural person.
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Scope: the Draft Regulation would apply to (i) Italian insurance undertakings, (ii) EU insurance undertakings authorised to operate in Italy under right of establishment or under freedom to provide services, with the exception of certain obligations related to mandatory documents of the internal fund, (iii) Italian branches of insurance undertakings with registered office in a third Country and (iv) Italian ultimate parent insurance undertakings. With respect to EU insurance undertakings operating in Italy, IVASS considers the identification of the provisions applicable to the same as particularly relevant, taking into account the purpose of ensuring an adequate level playing field between Italian and other Member States players placing linked products on the domestic market, thus such provisions will be included in the list of general good provisions for insurance undertakings.
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Assessment of the demographic risk requirement: pursuant to the Draft Regulation, insurance undertakings would be required to have a sufficiently structured and adequate internal process for assessing and determining the demographic risk, to which key functions in their respective areas of responsibility must contribute. In line with the provisions on Product Oversight and Governance, the compliance function would be assigned an important role, being responsible for ascertaining - within the context of the summary report to be sent annually to the administrative body, as provided for by IVASS implementing provisions on corporate governance - that the demographic risk assessment process has been carried out.
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Insurance contracts linked to internal funds: with respect to investments allowed and related limits, the provisions set out under the Draft Regulation require the consistency of the insurance undertaking's investments with the relevant specific policy, with the adequate control of the risks within the risk management system and with the need to preserve their liquidity so as not to compromise the company's obligation to liquidate the insured benefits according to the insurance terms and conditions. Of particular importance is the assessment of the liquidity of the financial instruments in which the company's assets are invested in consideration of a series of identified parameters (in terms of volume, frequency and entity of the exchanges, objectivity of the prices and effective realisability on the market, trend of purchase and sale prices and related comparability, disclosure of prices through reliable and verifiable information sources). The main interventions of IVASS Draft Regulation in this regard relate to: (i) rating, (ii) investment limits, (iii) investment limits of pension policies and (iv) regulation of the internal funds.
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Insurance contracts directly linked to undertakings for collective investment in transferable securities (“UCITS”): in the case of policies directly linked to UCITS, the regulatory interventions are aimed at ensuring a level playing field with financial sector products, due to the contiguity of the markets, by ensuring overall coherence of the regulations laid down for unit policies both in the event of direct connection with UCITS and in the case of internal funds. Particular attention is paid to management fees: in this regard, the application of a management fee by the company would be allowed if an effective management service is provided based on an investment strategy, consistent with predefined risk-return objectives. It is also provided that the management service - which includes at least the activity of safeguarding and monitoring - is indicated in the insurance policy terms and conditions according to predetermined and verifiable methodologies and parameters and that it is conducted, in any case, in the best interest of the insured party. IVASS also considers important that the company ensures, with a view to protecting the interests of the policyholder, that costs are contained and that the commissions applied are such as not to compromise the expected returns of the insurance-based investment product.
- Index-linked contracts: the existing regulatory provisions concerning index-linked policies would be adapted in consideration of the amendments made with the national implementation of the Solvency II framework. The category of eligible indices would also be extended to include the financial indices governed by the Bank of Italy's Collective Investment Management Regulation, in order to ensure consistency with this regulatory framework. In particular, with regard to financial indices, attention should be paid to: (i) their adequate diversification; (ii) whether they represent an adequate benchmark for the market to which they refer; (iii) the frequency with which the index is rebalanced; (iv) the methodologies for selecting and rebalancing the individual components; and (v) the relevant publication regime.
Pursuant to the Draft Regulation, the new provisions would apply to unit and index linked contracts concluded after the date of entry into force of the Draft Regulation, whatever form the insurance-based investment product takes (e.g. multi-line or hybrid products). Undertakings would be required to adapt the regulations of pre-existing internal funds to the new provisions within six months of the entry into force of the Draft Regulation. The current regulatory provisions concerning unit and index-linked policies would also be repealed by the Draft Regulation.
In addition to the above, on the same day, IVASS published a discussion paper on preliminary considerations for future regulatory actions of IVASS on life insurance products (the “Discussion Paper”), aimed at obtaining comments from market players (including professors and consultants) on the following aspects: (i) the elaboration of proposals for regulatory interventions for the development of new life insurance products, also on the basis of the experiences in other European insurance markets; (ii) determining the terms and conditions under which insurance companies might propose to policyholders changes to the rule for determining the average rate of return of the segregated fund (Gestione Separata) to which the contracts are linked, providing for the application of the profits fund (Fondo Utili) and (iii) how to establish the coverage of the demographic risk in class III insurance products.
Next steps
The public consultations on the Draft Regulation and on the Discussion Paper will be open until 9 June 2022 and we are in the process to review them in detail with the aim to submit comments to the Italian regulator.
Authored by Silvia Lolli, Giulia Monacelli and Davide Valloni.
