- 4 min
The Sapin 2 Law: what it will change in the insurance sector
The Sapin 2 Law contains several controversial measures aimed at strengthening the financial strength and stability of insurers, and which have, as a result, sowed seeds of doubt in savers’ minds.
The law on transparency, the fight against corruption and the modernisation of economic life, the so-called "Sapin 2 Law", which came into force on 11 December 2016, includes a series of measures intended to reinforce the regulation and stability of the financial sector. Some of them specifically concern insurance. The case of the rejection of the cancellation on an annual basis, in creditor insurance was also examined.
Limiting surrenders of life insurance policies in the event of serious crisis
The Sapin 2 Law authorises the High Council for Financial Stability (HCSF*) to restrict movements on life insurance contracts in the event of a serious threat to the financial situation of insurance organisations or to the stability of the financial system. This would particularly concern the case of a sudden rise in rates on the financial markets which would destabilise the insurers as a result of massive withdrawals from the Euro funds of life insurance policies.
The HCSF can, following a proposal by the Governor of the Bank of France and after consulting the Supervisory College of the ACPR (French Prudential Supervision and Resolution Authority):
• temporarily limit the performance of certain operations or activities;
• temporarily restrict the free disposal of some or all of the assets;
• temporarily limit the payment of the surrender value;
• delay or temporarily limit the possibility of arbitrage or the advance payments on policies;
• temporarily limit the distribution of dividends to shareholders, the remuneration of mutual capital and parity certificates, and the remuneration of mutual members' shares.
These exceptional measures can only be decided upon for a maximum period of 3 months, which may be renewed if the conditions justifying their introduction have not disappeared. The measure temporarily limiting the payment of surrender values cannot be maintained for more than 6 consecutive months.
In its decision, the HCSF must guarantee the protection of financial stability and the interests of policyholders, members and beneficiaries.
These measures are added to a prudential system that is already very comprehensive and are likely to reassure savers. As in the banking sector, the protection scheme in the insurance sector is strengthened by these measures.
Controlling the yields of Euro funds
The Sapin 2 Law gives the HCSF the power to intervene in the remuneration of life insurance Euro funds, following a proposal by the Governor of the Banque de France, by adjusting the rules on the creation and release of provisions for the profit sharing reserve ("PPB"). The stated aim of this measure is to give the supervisory authorities more power to limit the use of PPBs, in a context of low rates in which certain Euro funds are suspected of paying yields above what their portfolios produce and in which there could be a danger of a rise in interest rates.
Accordingly, the regulatory authorities regularly remind insurers of the need to set aside sufficient provisions to smooth out and protect the yields paid to policyholders over time.
Reinforcing the powers of the ACPR
Unlike in the banking sector, until now there has been no resolution regime (i.e. a mechanism for dealing with the financial difficulties of an insolvent organisation) in the insurance sector, at either the European or national level.
One aim of the Sapin 2 Law is to strengthen the powers of the ACPR in order to prevent the occurrence of crises liable to affect insurance organisations and, where appropriate, to intervene rapidly with these bodies in order to avoid a bankruptcy and its potential repercussions on financial stability, government funds and the rights of policyholders.
In addition, the Law authorises the Government to introduce, by Ordinance, between now and December 2017, the measures required to lay the foundations of a national insurance resolution regime (without waiting for the adoption of a European regime), by making the ACPR the resolution authority for the insurance sector, by allowing this authority to request the production of preventive recovery plans by insurance organisations under its supervision and by giving the ACPR the task of identifying the obstacles to resolution and taking the preventive measures required to remove them.
Mortgages: no power to cancel creditor insurance on an annual basis
The Sapin 2 Law intended to give borrowers the opportunity to cancel the creditor insurance policy attached to their mortgage each year (after an initial period of 12 months after signing the mortgage offer) and to replace it with a new insurance policy offering an equivalent level of cover.
As these provisions were added while the law was being debated, they were censured by the French Constitutional Council as they were not connected, even indirectly, with the provisions of the initial bill.
*HCSF : the authority consisting of the directors of the French regulators (AMF, ACPR and ANC), the Governor of the Bank of France and the Minister of the Economy and Finance
Sources: Ministry of the Economy and Finance - Law on transparency, the fight against corruption and the modernisation of economic life