Same framework: investment rules largely maintained

Circular 26/1 builds on the existing Luxembourg rules governing unit-linked and mixed life insurance contracts. In continuity with the framework set out in Circular Letter 15/3, it retains the core investment parameters, including asset eligibility and quantitative limits, without altering the overall system.

For instance, Circular 26/1 confirms:

  • the classification of policyholders into categories N to D, based on financial thresholds and investor sophistication;
  • the admissibility criteria and quantitative investment limits relating to external funds;
  • the long-standing “level playing field” mechanism, subject to appropriate legal substantiation; and
  • the information requirements vis-à-vis policyholders, including enhanced disclosures for alternative and real estate investments;
  • the graduated access to investment strategies through collective internal funds, depending on the policyholder category.

Within this otherwise unchanged framework, Circular 26/1 also incorporates two targeted additions. It introduces, on the one hand, an explicit set of rules applicable to direct investments in structured products, covering eligibility conditions, classifications and quantitative limits, thereby formalising their treatment compared to Circular Letter 15/3. On the other hand, the circular contains specific provisions governing the disclosure of reductions in yield in key information documents (KIDs), requiring such reductions to be presented in an accurate, fair and non-misleading manner and, where they are materially impacted by performance fees at the level of certain underlying assets, to be supported by an explicit value-for-money analysis.

From a legal and operational perspective, Circular 26/1 does not amount to a substantive overhaul of the Luxembourg investment-rule regime applicable to unit-linked life insurance contracts. Rather, it should be read as a consolidation exercise, coupled with specific clarifications for certain assets and related disclosure aspects.

New lens: supervisory expectations more clarified

The added value of Circular 26/1 lies in a more prescriptive supervisory approach, explicitly linking the application of investment rules for structured products to governance requirements, through the formal assessment of complexity and the definition of the target market.

Circular 26/1 requires insurers, in their capacity as product designers, to carry out a formal assessment of the level of complexity of each insurance contract before determining its target market. To this end, insurers shall adopt a clear and proportionate methodology, based on objective factors such as embedded options or guarantees, the nature of the underlying assets, and the charging structure. The methodology, as well as the resulting classification, must be properly documented and capable of being substantiated to the CAA upon request.

The circular further establishes an explicit correlation between the level of complexity and the granularity of the target market definition. The more complex a product, the more precise the segmentation of its target market must be. Insurers are therefore required to implement a formalised process for identifying the target market of each offering, using minimum criteria relating inter alia to policyholders’ financial situation, knowledge and experience, investment objectives, and risk tolerance.

In addition, Circular 26/1 provides that the assessment of complexity and the target market definition be fully embedded in the insurer’s Product Oversight and Governance (“POG”) arrangements and subject to regular review. The relevant processes and supporting documentation must remain current, traceable and available to the CAA, where requested.

Conclusion

Circular 26/1 leaves the foundations of the Luxembourg unit-linked regime intact, while sharpening the supervisory perspective applied to structured and more complex products. Its practical impact is therefore uneven across contract ranges: for structured unit-linked products in particular, increased complexity translates into heightened supervisory expectations. For insurers, the main challenge does not lie in revisiting long-standing offerings, but in ensuring that new, more sophisticated contracts are underpinned by proportionate and well-articulated governance processes. In this context, robust product oversight emerges as a key differentiator, especially where complexity and innovation are combined.