The crash of Lehman Brothers and the financial crisis and subsequent nationalisation of Islandsbanki has caused, inter alia, relevant financial losses to many Italian retail investors who in the recent past had acquired index-linked insurance policies with underlying assets constituted by securities issued by such financial institutions.

As a consequence, just prior to the end of 2008 the Italian Insurance Regulator, ISVAP, issued a consultation paper on a new regulation concerning the structuring and issuing of unit and index-linked insurance products. This regulation aims to protect policyholders in the event of the failure of securities which insurance products that were previously deemed “safe” by investors are linked to.

The most important changes are:

  • Index-linked products may not make reference to the market prices of specific assets or securities held by insurers, but only to official and recognised equity or debt indexes calculated by independent third parties on the basis of predetermined and objective parameters (providing also for the possible replacement or deletion of one or more underlying assets), publicly published on a daily basis and related to securities negotiated on regulated markets.
  • Although inflation rate indexes are still eligible (provided that they are clearly structured and insurers cover the related reserves by investing in assets which are consistent with their obligations), other indexes (such as, for example, those making reference to commodities, climate changes, securitisation deals) are not allowed any more.
  • In any case the counterparty risk should be borne by insurers both in respect of unit or index-linked insurance products, in addition to the performance and base risks usually borne by insurers where a minimum capital or interest rate guarantee and/or an obligation to adjust performances in line with the NAV of the underlying funds or assets are undertaken.
  • Insurers have to comply with the close matching principle in establishing reserves, by investing in the same or in the most similar class of negotiable securities which compose the reference value or index, except for where insurers are granted a buy-back option by the relevant issuer or any third party.
  • Moreover, in order to limit the concentration risk resulting from investments made to cover their reserves in compliance with the close matching principle, insurers cannot be exposed vis-à-vis a single issuer for more than 10% of the reserves related to all their unit and index-linked insurance products.

This proposed regulation, which according to ISVAP aims at increasing transparency and protection for investors, is actually expected to require a 3 per cent increase in the solvency margin of insurers (unless insurers exactly replicate the reference value or index by directly acquiring the securities on which it is structured).

The financial engineering staff of all the investment banks are looking at this proposed regulation in order to structure new products and securities for the insurance industry which are in compliance with the expected new rules. However, according to the comments made by most of our clients, in practice this proposed regulation is likely to result in unit and index-linked insurance products losing most of their appeal to the insurance (and bancassurance) industry. The consultation closed on 15 February, however not surprisingly ISVAP has not yet published the results of it.