Unit linked insurance products – New IVASS rules

On 27 May, the second public consultation ended for IVASS Document No. 2/2024 containing “Provisions on insurance contracts referred to in Article 41 paragraph 1 and paragraph 2 of the Private Insurance Code” (the Document).

The high number of comments the Supervisory Authority received for the first consultation (which opened in March 2022 and ended in June of the same year) led IVASS to launch a second public consultation on the Document. This second consultation also included comments from operators in relation to Discussion Paper No. 1/2022. It was submitted for consultation at the same time as the first consultation of the Document and contained some “Preliminary considerations for future regulatory interventions by IVASS on life products” (the Discussion Paper).

The reforming intervention that, through the Document, the Institute intends to carry out, was long overdue. The current rules on life insurance policies linked to internal funds or UCITS date back to 2002. ¹ Since then, they haven’t undergone any changes of a substantial nature, despite the developments that have taken place in financial and market legislation and regulation.

At the heart of the initiative is the Supervisory Authority’s intention to implement Article 41 paragraph 5 of Legislative Decree No. 209 of 7 September 2005 (Private Insurance Code, the Code). The Code was introduced as a result of the transposition in Italy of Directive No. 2009/138/EC (Solvency II) through Legislative Decree No. 74 of 12 May 2015. The aim is also to identify a level playing field valid for all operators, both Italian and foreign, who market class III life insurance products in Italy.

Article 41 paragraph 5 of the Code states that “IVASS may, by regulation, limit the types of assets or reference values to which benefits may be linked, where the investment risk is borne by the policyholder who is a natural person. For insurance contracts whose benefits are directly linked to the value of units of a collective investment undertaking, the provisions established by IVASS are consistent with the provisions of Legislative Decree No 47 of 16 April 2012.”²

It’s clear from the wording of the rule (which reproduces the text of Article 133 paragraph 3 of Solvency II³ ) that IVASS’s regulatory power to limit the assets or reference values of linked policies only concerns policies in which there’s an investment risk, which is borne by the policyholder, and if the policyholder is a natural person.

These three conditions must be met cumulatively for IVASS to exercise the regulatory powers referred to in paragraph 5 of Article 41 of the Code. As a result, unit-linked insurance policies that are entered into by legal persons or entities or that provide for a guarantee of investment performance or any other guaranteed benefit are left de facto unregulated. Or at least they’re not covered by the rules set forth in the Document. In fact, they would end up falling within the scope of application of paragraph 4 of the aforementioned Article 41. ⁴

The Document wouldn’t be applicable, as indicated by IVASS itself, ⁵ to unit-linked policies that provide for a dedicated internal fund (ie a fund in which the premium of a single policyholder is invested). This is because the reference made by Article 133 paragraph 3 of Solvency II and Article 41 paragraph 5 of the Code to mutual funds in which the management of resources is collective.

This seems to restrict the future scope of application of the Document (which, in fact, would mainly apply to linked policies aimed at clients seeking collective management of the premium invested, ie without any customization). But this shouldn’t overshadow certain passages of the Document, undoubtedly innovative and in contrast with the practice established in other European countries, which are raising some concerns. ⁶

First of all, IVASS’s intervention would be based on a reading of the concept of general interest in the insurance sector (that’s not entirely shared at Community level), as represented in the European Commission’s Interpretative Communication on the freedom to provide services.⁷ Based on this reading, IVASS would feel entitled to intervene in a sector (that of linked policies with the above-mentioned features) that, according to the Authority, is not harmonised.

By virtue of this conclusion, IVASS would intend to attribute to the Document, once it has been published in the form of a regulation, the nature of a rule of general interest, as such applicable to all life insurance undertakings authorized to carry on class III business in Italy. That would include European insurance undertakings operating under freedom of establishment or freedom to provide services regime. This would entail, including for the latter, the obligation to comply with the indications of the Italian insurance supervisory authority as to the assets that may be used as underlying of such policies and the relevant concentration and investment limits.

The latter argument would be in stark contrast with the practice established to date, under ISVAP Circular No. 474/2002, and with the provisions of Article 193 paragraph 1 of the Code. ⁸ According to the Article, the regulatory power and financial supervision over the underlying assets of unit-linked policies is the responsibility of the undertaking’s home state (ie the state that issued the authorization to operate in class III), rather than the host state, where the operator’s policies are marketed.

But there’s more. Again, based on the assumption that the sector would not be harmonized, IVASS would also qualify as a rule of general interest Article 5 paragraph 1 of the Document, concerning the demographic risk. ⁹ The presence of demographic risk “[...] appropriately calibrated on the basis of the policyholder’s need for insurance cover [...]” would be necessary to quantify the insurance performance by the company.

The provision, in its current form and qualification as a rule of general interest, would seem to be in line with the most recent case law. ¹⁰ So only those linked policies that provide for the assumption of a demographic risk by the insurance company would qualify as life insurance policies.

This would be based on an oriented reading of Article 41 of the Code, which, in fact, doesn’t provide for the demographic risk among the elements qualifying a linked policy as a life insurance policy. ¹¹ Nor would this element be provided for by the Solvency II provisions or be referred to in the relevant EU case law.

In light of the above, IVASS’s position seems even more peculiar.

The Institute would like to qualify the provision as a rule of general interest. As such, it would apply to all operators present in the unit-linked policy market in Italy. But the actual presence in the policy of the demographic risk would depend on evaluating the policyholder’s concrete coverage needs. These elements alone (the policyholder’s need for cover and the undertaking’s assessment ) are sufficiently uncertain, as to their presence, not to allow the demographic risk to be considered as key with respect to a provision that one would like to qualify as being of general interest.

Not to mention the provisions in paragraphs 2 to 4 of Article 5 of the Document. They would indicate, only for domestic companies and not for Community companies, the criteria on the basis of which to carry out an assessment of the appropriateness of the demographic risk with respect to the features of the product and the reference market. And this would make the provisions discriminatory with respect to Italian life insurance companies, in clear contrast with the intent allegedly achieved by the Institute to create a level playing field valid for all operators in this area as well.

The initiatives that, also in other European countries, are being taken to highlight the various inconsistencies of the Document, including with respect to the European regulatory framework of reference, are to be welcomed.