Life Insurance Companies in Liechtenstein

Message: In case of bankruptcy of an insurance company, its clients are well protected

With swisspartners Insurance Ltd., Vaduz, and its branch in Feldkirch, we are very active in the international life insurance market for wealthy families. Our clients sign up for life insurance policies for themselves and their family members, and transfer considerable private assets to our insurance company as insurance premiums. Their intentions usually are the following:

• Long-term inheritance and estate planning for the family of the policyholder
• Wealth preservation and protection against third parties
• Tax advantages, such as tax deferral or reduced taxes upon cancellation of the policy or death of the policyholder, as the case may be in the policyholder’s country of residence.

Our clients (and their families rely on the long-term financial stability of our insurance company and trust that the above mentioned intentions can and will be safeguarded in the future.

It is widely known, that Liechtenstein employs very strict solvency requirements for insurance companies.[1] It is also common knowledge that the Liechtenstein Financial Market Authority (FMA) which is the supervisory body of the financial services sector, has a number of measures at hand to prevent and manage crisis situations of regulated insurance companies. For example, the FMA may order the transfer of an entire insurance portfolio to another regulated life insurance company in Liechtenstein which will administer the policies thereafter.

There has never occurred a bankruptcy case of an insurer in Liechtenstein, But what would actually happen in case an insurance company in Liechtenstein came into such a financially desperate situation that it had to declare itself bankrupt and open bankruptcy proceedings?

«Help! Where is my money?»

We wish to use this forum for a short summary of the legal and technical consequences of an insurance company filing bankruptcy. Here are the steps:

• Firstly, the debtor (the insurance company) or a creditor files a petition with the Court of Justice (Landgericht) and by order of the court, bankruptcy proceedings will be opened.
• The FMA will withdraw the license of the insurance company without delay. It will also inform the competent authorities of member states of the European Economic Area and the respective European authority, the EIOPA.
• The withdrawal of the license has an important effect: The policyholders will have the right to terminate their insurance contracts with immediate effect. If a policyholder does not terminate the policy, the insurance contract will automatically expire four weeks after the announcement of the opening of the bankruptcy proceedings. In both cases, the policyholders are entitled to reclaim the policy reserve (“Deckungskapital”).
• The insurance claims are given preferential treatment during the bankruptcy proceedings. The assets to cover the claims are the technical provisions, i.e. in broad terms, the sum of all premiums paid plus any income and gains. They constitute a separate estate for the purpose of satisfying all insurance claims. They are separate assets, segregated from the insurance company’s “own” assets.
• The policyholders hold preferential claims, and they are to be satisfied immediately after the establishment and maturity of their claims.
• In case the policy reserve is not sufficient to satisfy all insurance claims, such claims will rank first-class in the bankruptcy proceedings.

In plain language, what does the above mean to the protection of the policyholders?

1. Policyholders’ financial interests are protected and their claims are segregated from the insurance company’s own assets.
2. In case the segregated funds are not sufficiently high to meet all claims, the policyholders will rank top before any ordinary creditors.
3. In view of the specific business model of life insurance companies in Liechtenstein, i.e. relatively low additional risk cover and high reinsurance cover, there is only a very remote danger that at any point the segregated funds (“technical provisions”) will not suffice to cover all policyholders’ claims. In other words, even if an insurance company goes bankrupt, the policyholders’ claims will be protected.

It goes without saying, that an insurance company may face bankruptcy for a variety of reasons. This is part of business reality. But our message is: policyholders should not worry about “their” assets. They are safe and well protected, even if the insurer goes belly up.

[1] For your information: swisspartners Insurance Ltd. solvency ratio stands at ca. 200!

Written by:
Christian Rockstroh | Partner