What are the impacts of the new AML Circular Letter?
The publication of the LC18/9 Circular Letter regarding the additional Anti-Money Laundering requirements applicable in Luxembourg will represent a substantial piece of work in the Insurance Industry puzzle.
Impacts of the LC18/9 on the new insurance business
The use of the new AML questionnaires has been made possible for the new group and individual life insurance contracts since 01 January 2019 and will become mandatory for these contracts by 01 September 2019. Therefore, from 01 September 2019 onwards, an AML score (both at the question and at the contract level) will need to be recorded in a system.
The main differences to note regarding the content of the new AML questionnaires in comparison with the old ones are listed below:
- The disappearance of the distinction that used to be made between local and cross-border contracts,
- The replacement of the movement questionnaire by the re-assessment of part of the initially filled-in questionnaire (the scope of this re-assessment remains to be defined at the insurance undertaking level),
- The appearance of additional and more granular questions and,
- The addition of a new questionnaire for tracking the contracts that have been refused at the underwriting stage.
Impacts of the LC18/9 on the legacy insurance business
Every insurance contract that is already part of the portfolio of an insurance undertaking will have to be assessed in terms of AML/CTF against the new questionnaires for 31 December 2019.
Considering the size of such portfolios, the CAA wished to help insurance undertakings to comply with the new legal requirements in due time. For that purpose, the CAA has proposed 2 approaches: A “contract-by-contract” approach and a “model point” approach.
On the one hand, the “contract-by-contract” approach aims at applying the new AML questionnaires to every already existing life insurance policy. Whatever the approach chosen by insurance undertakings for the year 2019, they will have to go through this full reviewing process for their entire portfolio anyway at a later stage: by 31 December 2024 for risky contracts and by 31 December 2027 for the less risky contracts. Therefore, for the insurance undertakings which volume of the legacy life insurance portfolio is not too high or for those, which have already performed the digitization of their portfolio data, this approach is already worth considering now.
Model point approach
On the other hand, insurance undertakings which face a high volume of data regarding their legacy portfolio or those which clients data are inoperable, could make use of the “model point” approach instead in the short-term. However, to be noted: This model point approach can be used only for individual life insurance contracts.
Nonetheless, the use of such a « model point » approach is not without any difficulties.
Individual life insurance contracts need to be grouped into eligible and homogeneous contracts. The CAA provides the definition of the eligibility though, the definition of the homogeneity characteristics remains to be defined at the insurance undertaking level. The complexity of that “Model point” approach lays in the grouping action plan.
"The local regulator has decided to let insurance undertakings the possibility to apply a methodology that avoids a manual review of the entirety of the existing contracts for the 31 December 2019."
To comply with these new regulatory requirements, insurance undertakings will not only have to create internal processes and procedures but also to update their IT systems and collect additional information for filling in the gaps between the new questionnaires’ requirements and the information at hand collected by the past.