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On February 21 2002 ISVAP (the Italian supervisory authority on private insurance) issued Circular No 474 D, which sets out new provisions on unit-linked life insurance policies. Unit-linked policies are those policies the performances of which are connected to shares of funds that may be either internal to the insurance company or external.

In the Circular a distinction is made between policies having a social security purpose and policies not having a social security purpose. The main difference is that policies with a social security purpose must offer a minimum guaranteed yield on the performance of the invested principal, while policies without a social security purpose do not have such guaranteed yield.

The Circular also provides that policies must include a plain indication of the objectives of the investments, must detail the criteria for the selection of financial instruments, must indicate the risks investors could face and any expenses and fees to be charged on the funds.

As for the informative notes related to the policies, the Circular provides that they have to provide investors with information on the main aspects of the agreement including the performances offered and the risks that may be faced on the basis of the expected volatility, ie the possible fluctuations of the invested principal. The costs of the agreement and the expenses charged on the internal funds shall also have to be fully disclosed.

In addition, information requirements are also introduced for unit-linked policies, the performances of which are connected to external funds.

As a result of the introduction of this more detailed information regime, a greater transparency is expected, allowing investors to be in a position to make a true comparison between the products offered. This should stimulate competition on price and performance and favour efficiency and high quality in the services offered.

In the Circular a new classification of the internal funds is provided depending on six different levels of risk that will be determined on the basis of the annual volatility of the various portfolios. Such a criterion is quite new. The old distinction was between different classes of internal funds of insurance companies, which gave relevance to the assets included in each relevant fund, ie bonds, shares etc.

In addition, the Circular sets out new rules for the management of the investments, providing for appropriate internal supervisory procedures in the event that a third party is appointed as investment manager.

The Circular also details various categories of investments in which the proceeds from the funds may be invested, including: (i) financial instruments; (ii) securities investment funds; (iii) currency instruments; and (iv) other assets. Only investment in other assets requires the ISVAP's prior authorization. The ISVAP will decide on a case-by-case basis, upon evaluation of the consistency of the proposed investments with the objectives, characteristics and forecasts relating to the "other assets".

In this respect it is interesting to point out that investments in hedge funds, which under the previous regime were not allowed, may in the future be included among the possible investments falling under the paragraph (iv) provision above.

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