## Technical Note — Germany: Insurance Sector (content unit 1deuea2022006) ## Source details **Canonical URL:** [Technical Note — Germany: Insurance Sector (content unit 1deuea2022006)](https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1deuea2022006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1deuea2022006.pdf.json) --- ### Executive summary: scope and focus - Update on the German insurance sector and regulatory/supervisory oversight as part of the 2021 Financial Sector Assessment Program (FSAP). - Analysis based on virtual and on-site discussions in Germany from September 20 to October 6, 2021, referencing the Insurance Core Principles (ICPs) and ComFrame (IAIS, November 2019). - Main focus areas: recent sector developments; key vulnerabilities (notably for life insurers amid low interest rates); implementation of Solvency II (effective January 1, 2016); and supervisory approach. - Supervisory aspects analysed: supervisory powers, independence, and resources; the solvency framework; supervision (review, on-site inspection, and intervention); and changes of control and resolution. ### Market structure, products, and performance - Active insurers supervised by BaFin at end-2021: 393 (down from 404 in 2016). - Market composition and concentration: - Includes large internationally active insurers and about 127 mutual companies. - Top 10 life insurers: 48 percent share of premiums (lowest in Europe in 2020). - Top 10 non-life insurers: 52 percent share (second lowest). - Premium growth (2017–2020): - Life insurers: 3 percent per annum. - Non-life insurers: 4 percent per annum. - Distribution: predominantly traditional; single-tied agents account for about 77 percent of registered insurance intermediaries. - Interconnectedness: limited bank–insurance linkages compared with neighboring countries. - Year-end counts of active insurers by type: - Life: 87 (2016), 87 (2017), 87 (2018), 85 (2019), 83 (2020), 82 (2021) - Non-life: 251 (2016), 250 (2017), 248 (2018), 252 (2019), 249 (2020), 249 (2021) - Reinsurance: 22 (2016), 23 (2017), 23 (2018), 24 (2019), 22 (2020), 23 (2021) - Captives: 9 (2016–2021) - Burial Funds: 35 (2016), 34 (2017), 33 (2018–2019), 31 (2020), 30 (2021) - Total: 404 (2016), 403 (2017), 400 (2018), 403 (2019), 394 (2020), 393 (2021) ### Profitability, solvency, and key financials - Average returns on equity (last three years): life 4.0 percent; P&C 4.0 percent; reinsurers 11.3 percent. - Average solvency ratios (SCR, end-2020): life 374 percent; P&C 299 percent; reinsurers 270 percent. - Note: life insurers required to generate profits to address GAAP reserving requirements since 2011; some profits realized by sale of fixed income securities to capture gains from low market interest rates — underlying performance may be lower than published figures. - Total investments (2020): - Insurers total: EUR 1,803 billion (GAAP basis); EUR 2,277 billion (Solvency II basis). - Life insurers: EUR 1,057 billion GAAP; EUR 1,272 billion Solvency II. - P&C: EUR 481 billion GAAP; EUR 606 billion Solvency II. - Reinsurers: EUR 264 billion GAAP; EUR 399 billion Solvency II. - Life insurers’ direct asset composition: - Government securities 19 percent; bonds 20 percent. - Listed equity 0.3 percent; alternative investments 1 percent. - Direct loans 7 percent; real estate 1 percent. - Indirect investments via funds: 34 percent of assets (funds composition: 60 percent debt funds; 9 percent equity funds; 7 percent real estate funds; 5 percent asset allocation funds; 19 percent other). - Total assets of banks: EUR 9,291 billion. - Life insurers’ liability metrics (end-2020): weighted average years to maturity 26.3 years; modified duration 13.3 years. ### Solvency II implementation and internal models - Solvency II transposed into the VAG before start of regime; applies to insurers accounting for more than 99 percent of industry premiums and assets; very small regional insurers remain under Solvency I. - Internal model usage: 37 insurers using a full or partial internal model (most full). - Model change reporting (2018–2020): 1,013 model changes (minor and major) reported to BaFin. - BaFin practices: - Thorough approach to internal model approvals and ongoing reporting. - Introduced pre-application phase to manage six-month approval window. - Expert quantitative supervisory department conducts desk and on-site reviews; approved models subject to permanent supervision. ### Risks and vulnerabilities - Search for yield and asset allocation shifts: - Share of bonds with maturities >10 years increased from 43 percent to 56 percent since 2016; weighted average maturity increased by more than 2 years. - Share of total assets invested outside Germany stable at 42 percent in 2020; but greater shares of sovereign and corporate bond investments outside Germany (58 percent and 61 percent, respectively, in 2020). - Insurers plan to increase alternative investments (particularly infrastructure and private debt) from a current base of under 6 percent. - Downgrade and credit risk: - 2020: rating of 18 percent of securities in insurers' portfolios was downgraded; average of 13 percent in the two previous years. - End-2020: 29 percent of securities had a negative rating outlook. - BaFin scenario testing: downgrade risk material but manageable. - Funds and derivatives exposure: - End-2020: total investment in funds exceeds 30 percent of assets; many are specialized funds that may use derivatives. - BaFin maintains database of fund contracts and cooperates with securities supervisors on EMIR data reporting to access derivatives information. - Guarantees and Zinszusatzreserve (ZZR): - Some policy guarantees up to 4 percent, generally for entire policy term. - ZZR requires reserves equal to expected interest-rate shortfall over next 15 years; reference rate = 10-year average of zero-coupon Euro swap rates with duration 10 years. - Dividends may not be paid unless ZZR funded. - ZZR recalibration (2018) limits yearly change of reference rate; final amount unchanged but build-up slower. - Expected significant realizations: EUR 12 billion in 2021; EUR 7-9 billion each year from 2022 to 2024; expected to decline significantly thereafter. - Interest rate dynamics: - Higher market rates could increase interest income and allow release of ZZR if reference rate rises, but could also reduce unrealized gains needed to fund ZZR. - Technology, cyber, and climate risks: - Growing technology-related operational and strategic risks; cloud usage and pooled audits common. - About 60 insurers offering cyber products (small book of business). - Climate/sustainability: BaFin internal sustainable finance network; Guidance Notice on Dealing with Sustainability Risks (December 2019); participation in EIOPA transition and physical risk studies. - Severe flood event in 2021: gross insurance claims estimated as much as EUR 8.2 billion, of which about EUR 6 billion reinsured; not a significant solvency concern but under ongoing assessment. ### Stress testing, ORSA, and supervisory review - ORSA and stress testing requirements: - Insurers must perform scenario analysis and stress testing as part of ORSAs; BaFin and EIOPA provide guidance; some insurers apply more severe stresses than guidance. - BaFin reviews ORSA results and performs its own scenario testing (e.g., credit downgrade risk). - 2021 EIOPA stress test: assessed resilience to prolonged “lower for longer” interest rate environment; confirmed market shock vulnerabilities but insurers would cope when using transitional provisions and management actions; liquidity not a significant vulnerability. - BaFin supervisory review: - Shifted toward risk-based approach under Solvency II with off-site analysis and on-site work driven by risk classification. - Use of data analytics: text mining (ORSA), dashboards, Risk Dashboard, Cockpit IT tool. - Off-site monitoring groups insurers into four supervision-intensity groups from “basic supervision” to “intensified supervision”. - On-site inspection guideline allows up to 12-year intervals for low-impact/high-quality insurers; IAIG head-level inspections every 7 to 9 years and as necessary. - BaFin does not disclose insurer market impact and quality ratings; some insurers request more comprehensive feedback. ### Supervisory powers, independence, and resources - Institutional arrangements: - BaFin: federal institution governed by public law; subject to oversight by the Federal Ministry of Finance (MoF). - MoF chairs BaFin’s Administrative Council and sets Articles of Association; MoF accountable to the Federal Parliament. - BaFin operationally independent in practice but real and perceived risks to independence persist due to extensive reporting to MoF and presence of government representatives and industry experts on Administrative Council. - Resources and reorganization: - BaFin completed reorganization by end-2021; new units: Data Intelligence Unit, Task Force coordination unit, and unit for continuous development. - Insurance supervision staff (FTE, December 2020): 300 (compared with 295 at end-2016). - 77 percent of BaFin’s insurance supervisors have five or more years of supervisory experience. - Recommendation: BaFin and MoF should take steps to reduce real and perceived risks to operational independence (reviews of reporting requirements, reporting levels, and Administrative Council composition). ### Solvency framework strengths and areas for enhancement - Solvency II framework: - Total balance sheet approach; SCR calibrated to 99.5 percent VaR over one year; MCR subject to floor and cap (25 percent and 45 percent of SCR). - Valuation principles: market-consistent assets and liabilities; best estimate discounted using EIOPA risk-free curve; UFR extrapolation beyond 20 years. - Adjustments: matching adjustment (no German users) and volatility adjustment (98 insurers using VA at year-end 2020). - Transitional arrangements: 16-year transitional for pre-2016 contracts; at end-2020: two insurers using transitional on risk-free rates; 60 insurers using transitional on technical provisions; 26 insurers required to provide annual progress reports. - Recommendations to enhance valuation contribution to solvency assessment: - Consider impact of more extreme interest-increase scenarios on funding of the ZZR. - Prepare for IFRS 17 implementation and use resulting financial statements in supervisory assessment. - Encourage inclusion of an income statement in Solvency II reporting. - Identify opportunities to harmonize valuation and reporting requirements (example: reform ZZR to align with Solvency II and prudent person principle). - Strengthen liquidity risk management reporting and liquidity stress testing; maintain liquidity reporting introduced during COVID-19 as annual requirement. - Streamline internal model approval and reporting to reduce costs and encourage internal model use while continuing active supervision of capital adequacy. - Provide additional guidance on insurers setting target solvency ratios and set supervisory control levels for Solvency I insurers. ### Supervision: inspection scheduling, intervention, and feedback - On-site inspection scheduling and risk classification: - Guideline sets intervals by Supervisory Category; BaFin’s 2021 plans show inspections more frequent than guideline in practice. - Recommendation: reassess minimum and actual inspection frequencies; consider changes to direct charging if inspection costs deter frequency; consider publishing guideline and actual frequencies. - Intervention and effectiveness: - BaFin focused strongly on solvency concerns; less attention to non-solvency supervisory concerns. - Management information systems do not systematically track nature, timelines, progress, and effectiveness of interventions. - Recommendations: - Use intervention powers more intensively for non-solvency concerns. - Develop management information systems to track intervention measures and their effectiveness. - Develop and publish a guide to intervention. - Feedback to insurers: - Recommendation: provide more comprehensive feedback on supervisory findings, including highlights of risk assessment and market impact and quality ratings. ### Group-wide supervision, colleges, and crisis preparedness - BaFin’s group-wide role: - Works with supervisory colleges to map group structure, identify material entities, and lead group supervision using group ORSA and solo information. - For IAIGs, BaFin provides ICS calculations and supporting data to colleges. - Colleges and crisis arrangements: - Colleges supported by coordination arrangements and internal process handbook; Crisis Management Group (CMG) used where applicable. - Crisis management arrangements largely untested (only one EIOPA test of contactability). - Recommendation: test crisis management arrangements for IAIGs (simulations, college exercises, cooperation with EIOPA). ### Changes of control, resolution, and guarantee schemes - Changes of control: - Notification requirements for qualifying holdings (direct/indirect holdings at least 10 percent, and thresholds at 20 percent, 30 percent, 50 percent); BaFin can require notification of ultimate beneficial owners. - Portfolio transfers and guarantee assets: - BaFin empowered to approve portfolio transfers; guarantee assets required to be held in EEA, managed separately, and recorded in register; trustee oversight required. - Guarantee assets arrangements do not apply to reinsurers. - Resolution powers and gaps: - Resolution regulated by insolvency and corporate law; no dedicated official resolution authority for insurers; BaFin functions as resolution authority for insurers in practice. - Gaps: BaFin lacks some IAIS minimum set of resolution powers for IAIGs and lacks explicit legal power to require resolution plans. - Recommendation: federal government should strengthen BaFin’s powers (require contingency and resolution plans; expand powers to facilitate prompt and orderly exit of failing insurers; address IAIS minimum powers). Proposed Insurance Recovery and Resolution Directive may address some gaps. - Insurance guarantee schemes capacity and recommendations: - Two schemes: Protektor (life) and Medicator (private health); membership mandatory for life and health insurers (EEA branches excepted); BaFin supervises schemes. - Life scheme financing: - Ex ante funding: up to 1 per mille of net technical provisions of all members; current fund about EUR 1.075 billion. - Special contributions: additional 1 per mille available. - Private arrangements: life insurers committed to raising total of 1 percent of assets (about EUR 10 billion). - Health scheme: ex-post funding (no contribution until a call). - No guarantee scheme for P&C insurers other than motor third party liability. - Capacity likely sufficient for small to medium-sized insurer failure; possibly inadequate for failure of larger insurer/group depending on coverage gap. - Recommendations to enhance schemes: - Increase communication between schemes and BaFin. - Increase capacity to raise funds. - Undertake contingency planning for large failures. - Provide greater flexibility in use of funds. - Consider establishing a guarantee scheme for P&C insurers. - Continue engagement at European level to avoid cross-border gaps. ### Key recommendations (excerpted with priority and timeframe) - Supervisory powers, independence, and resources - 1) Take steps to reduce the real and perceived risks to BaFin’s operational independence. (¶37) - Priority: H (BaFin /MoF); Timeframe: I - Solvency framework - 2) Take steps to enhance the contribution of valuation to solvency assessment. (¶69) - Priority: H (BaFin /MoF); Timeframe: I - 3) Strengthen the requirements around liquidity risk management reporting and liquidity stress testing. (¶70) - Priority: M; Timeframe: NT - 4) Continue active supervision of capital adequacy, while seeking to streamline internal model approval and reporting requirements. (¶71) - Priority: M; Timeframe: NT - 5) Consider providing additional guidance on certain aspects of capital adequacy. (¶72) - Priority: L; Timeframe: NT - Supervision - 6) Reassess guidelines on the minimum and actual frequency of on-site inspections in relation to the Supervisory Categories of insurers. (¶114) - Priority: M; Timeframe: NT - 7) Enhance management reporting to facilitate systematic tracking and reporting of the timeliness of off-site and on-site supervisory activities. (¶115) - Priority: H; Timeframe: I - 8) Provide more comprehensive feedback to insurers on supervisory findings, assessments, and concerns. (¶116) - Priority: M; Timeframe: NT - 9) Take steps to enhance the effectiveness of intervention in driving improvements, particularly in relation to supervisory concerns other than the solvency ratio. (¶117) - Priority: H; Timeframe: I - 10) Take steps to test the crisis management arrangements for IAIGs. (¶118) - Priority: M; Timeframe: NT - Changes of control and resolution - 11) Strengthen BaFin’s powers, including providing the power to require contingency plans and resolution plans, and expanding the range of powers to facilitate the prompt and orderly exit of failing insurers. (¶134) - Priority: H (MoF); Timeframe: NT - 12) Enhance the ability of insurance guarantee schemes to identify, prepare for, and fund potential losses. (¶135) - Priority: M (MoF); Timeframe: MT *Source: EXECUTIVE SUMMARY and selected chapters, Technical Note prepared for the 2021 Financial Sector Assessment Program (laws, regulations, and supervisory practices in place as of October 6, 2021).* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Introduction and background - This Technical Note (TN) provides an update on the German insurance sector and analyzes regulatory and supervisory oversight as part of the 2021 Financial Sector Assessment Program (FSAP). - Analysis draws on virtual and on-site discussions in Germany from September 20 to October 6, 2021, and refers to the Insurance Core Principles (ICPs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) issued by the IAIS in November 2019. - Main focus areas: recent sector developments, key vulnerabilities (notably for life insurers amid low interest rates), implementation of Solvency II (effective January 1, 2016), and supervisory approach. - The TN analyzes four supervisory aspects: supervisory powers, independence, and resources; the solvency framework; supervision; and changes of control and resolution. ### Market structure, products, and performance - Number of active insurers supervised by BaFin at end-2021: 393 (down from 404 in 2016). - Market diversity: includes large internationally active insurers and about 127 mutual companies. - Market concentration: top 10 life insurers have a 48 percent share of premiums (lowest in Europe in 2020); top 10 non-life insurers have a 52 percent share (second lowest). - Premium growth (2017–2020): life insurers averaged 3 percent per annum; non-life insurers averaged 4 percent per annum. - Distribution channels: predominantly traditional, majority of sales through single-tied agents. - Interconnectedness with other parts of the financial sector and bank–insurance linkages: limited compared with neighboring countries. - Table of active insurers by type (year-end counts): - Life: 87 (2016), 87 (2017), 87 (2018), 85 (2019), 83 (2020), 82 (2021) - Non-life: 251 (2016), 250 (2017), 248 (2018), 252 (2019), 249 (2020), 249 (2021) - Reinsurance: 22 (2016), 23 (2017), 23 (2018), 24 (2019), 22 (2020), 23 (2021) - Captives: 9 (2016–2021) - Burial Funds: 35 (2016), 34 (2017), 33 (2018–2019), 31 (2020), 30 (2021) - Total: 404 (2016), 403 (2017), 400 (2018), 403 (2019), 394 (2020), 393 (2021) ### Solvency II implementation and internal models - BaFin and the insurance industry moved to Solvency II in 2016, producing positive effects on industry practices and supervisory regime. - Implementation complexity increased in Germany due to product nature and ongoing importance of national GAAP in life insurance policyholder bonuses. - Number of insurers using internal models for solvency calculations: 37. - BaFin applies a thorough approach to internal model approvals and reporting. ### Risks and vulnerabilities - Diverse risks identified, including those related to prolonged low interest rates: - Evidence of search for yield: maturities lengthening; bond investments shifting toward foreign jurisdictions with higher interest rates; movement toward alternative investments. - Significant allocation to funds, some of which actively use derivatives. - Life insurers face an ongoing need to build reserves against the potential cost of guarantees, which might affect profitability and investment decisions. - Technology-related risks, climate change, and other sustainability risks are growing. - Recommendation: BaFin must continue to analyze, highlight, and monitor insurers’ management of these risks. ### Supervisory powers, independence, and resources - BaFin is the federal German insurance supervisor; subject to oversight by the Federal Ministry of Finance (MoF), which is accountable to the Federal Parliament. - BaFin is operationally independent in practice (not subject to instruction or intervention by government in supervisory decisions). - Real and perceived risks to BaFin’s operational independence persist due to: - Extensive reporting to the MoF. - Presence of government representatives and industry experts on the Administrative Council. - Recommendation: More steps needed by BaFin and the MoF to reduce real and perceived risks to operational independence. ### Solvency framework: strengths and areas for enhancement - The solvency regime is comprehensive, but scope exists for strengthening and simplification to enhance effectiveness. - Suggested enhancements: - Consider the impact of more extreme interest-increase scenarios on funding of the ZZR (Additional Provision to the Premium Reserve). - Prepare for implementation of IFRS 17 Insurance Contracts. - Promote inclusion of an income statement as part of Solvency II reporting. - Identify and promote opportunities to harmonize valuation and reporting requirements. - Strengthen liquidity risk management reporting and liquidity stress testing requirements. - Streamline internal model approval and reporting requirements to reduce costs and encourage internal model use. - Provide additional guidance on insurers setting target solvency ratios and set supervisory control levels for Solvency I insurers. - Continue active supervision of capital adequacy while seeking to streamline internal model processes. ### Supervision: review, on-site inspection, and intervention - BaFin’s supervisory review has shifted toward a risk-based approach with Solvency II but requires reinforcement. - Recommendations: - Reassess guidelines on minimum and actual frequency of on-site inspections by Supervisory Category to ensure sufficient frequency for robust risk identification and assessment. - If inspection costs deter frequency, consider changes to the system of direct charging. - Enhance management reporting to systematically track and report timeliness of off-site and on-site activities versus procedures and supervisory plan. - Provide more comprehensive feedback to insurers on supervisory findings, including highlights of risk assessment and market impact and quality ratings assigned. - Enhance effectiveness of intervention: - Use intervention powers more intensively for non-solvency concerns. - Systematically assess effectiveness of intervention measures. - Develop and publish a guide to intervention. - Test crisis management arrangements for IAIGs. ### Resolution and insurance guarantee schemes - Actions required to strengthen the resolution regime, especially for larger insurers or groups: - Provide BaFin the power to require contingency plans and resolution plans. - Expand the range of powers to facilitate prompt and orderly exit of failing insurers. - Enhance capacity of insurance guarantee schemes to identify, prepare for, and fund potential losses: - Increase communication between schemes and BaFin. - Increase schemes’ capacity to raise funds. - Undertake contingency planning for a large failure. - Provide greater flexibility in use of funds. - Consider establishing a guarantee scheme for P&C insurers. - Continued engagement at the European level is recommended to promote harmonization and avoid gaps that could weaken policyholder protection and threaten financial stability. ### Key recommendations (Regulation and Supervision of Insurers) — Germany (excerpted with priority and timeframe) - Supervisory powers, independence, and resources - 1) Take steps to reduce the real and perceived risks to BaFin’s operational independence. (¶37) - Priority: H (BaFin /MoF); Timeframe: I - Solvency framework - 2) Take steps to enhance the contribution of valuation to solvency assessment. (¶69) - Priority: H (BaFin /MoF); Timeframe: I - 3) Strengthen the requirements around liquidity risk management reporting and liquidity stress testing. (¶70) - Priority: M; Timeframe: NT - 4) Continue active supervision of capital adequacy, while seeking to streamline internal model approval and reporting requirements. (¶71) - Priority: M; Timeframe: NT - 5) Consider providing additional guidance on certain aspects of capital adequacy. (¶72) - Priority: L; Timeframe: NT - Supervision - 6) Reassess guidelines on the minimum and actual frequency of on-site inspections in relation to the Supervisory Categories of insurers. (¶114) - Priority: M; Timeframe: NT - 7) Enhance management reporting to facilitate systematic tracking and reporting of the timeliness of off-site and on-site supervisory activities. (¶115) - Priority: H; Timeframe: I - 8) Provide more comprehensive feedback to insurers on supervisory findings, assessments, and concerns. (¶116) - Priority: M; Timeframe: NT - 9) Take steps to enhance the effectiveness of intervention in driving improvements, particularly in relation to supervisory concerns other than the solvency ratio. (¶117) - Priority: H; Timeframe: I - 10) Take steps to test the crisis management arrangements for IAIGs. (¶118) - Priority: M; Timeframe: NT - Changes of control and resolution - 11) Strengthen BaFin’s powers, including providing the power to require contingency plans and resolution plans, and expanding the range of powers to facilitate the prompt and orderly exit of failing insurers. (¶134) - Priority: H (MoF); Timeframe: NT - 12) Enhance the ability of insurance guarantee schemes to identify, prepare for, and fund potential losses. (¶135) - Priority: M (MoF); Timeframe: MT *Source: EXECUTIVE SUMMARY, Technical Note prepared for the 2021 Financial Sector Assessment Program (laws, regulations, and supervisory practices in place as of October 6, 2021).* ### 8. The insurance industry remains profitable with high solvency ratios, although careful ### 8. The insurance industry remains profitable with high solvency ratios, although careful analysis is needed of these numbers, especially in the case of life insurers. ### Profitability and solvency - Average returns on equity in the last three years were 4.0 percent for life, 4.0 percent for property and casualty (P&C) and 11.3 percent for reinsurers. - The average solvency ratios (SCR under Solvency II) at the end of 2020 were 374 percent for life insurers, 299 percent for P&C and 270 percent for reinsurers. - Life insurers have been required to generate profits to address additional GAAP reserving requirements in place since 2011, and some of these profits have resulted from the sale of fixed income securities to realize the investment gains created by low market interest rates. - The underlying performance of life insurers could therefore be much lower than the published figures. ### Investment profile and asset composition - Life insurers’ directly invested assets: government securities 19 percent and bonds 20 percent. - Direct exposures to listed equity and other risky assets are limited: listed equity 0.3 percent of the total, alternative investments 1 percent. - Direct loans and investments in real estate: loans 7 percent and real estate 1 percent. - Life insurers invest indirectly through funds set up by asset management companies (34 percent of assets); including direct and indirect investments, exposure of life insurers to real estate is only about 3 percent of assets. - Investment allocation of non-life insurers (P&C and reinsurers) is similarly conservative. - Total investments of insurers in 2020: EUR 1,803 billion (GAAP basis; EUR 2,277 billion Solvency II basis), composed of: - life insurers: EUR 1,057 billion GAAP; EUR 1,272 billion Solvency II - P&C: EUR 481 billion GAAP; EUR 606 billion Solvency II - reinsurers: EUR 264 billion GAAP; EUR 399 billion Solvency II - Note: All ratios in the specified paragraph are on a Solvency II basis, against total assets unless mentioned specifically. - Footnote data on insurer funds: 60 percent of these investments are in debt funds, with 9 percent in equity funds, 7 percent in real estate funds, 5 percent in asset allocation funds, and the remaining 19 percent in other types of funds. - Total assets of the banks were EUR 9,291 billion. ### Products, markets, and distribution - Life insurance market dominated by products with minimum guarantees (including participating policies). - Pure unit-linked products accounted for less than 10 percent of new business of life insurers in 2020. - Including hybrid products, products with unit-linked elements increased share of new sales from 31 percent in 2017 to 37 percent in 2020; industry projects increase to 45 percent in 2024. - Market share of with-profit policies with traditional guarantees decreased to 15 percent in 2020 and is projected to decrease to 13 percent in 2024. - With-profit policies with more flexible new kinds of guarantees accounted for 20 percent of new business in 2020 and are projected to decrease to 15 percent in 2024. - Life insurers increasingly emphasizing protection against biometric risks, such as death and disability. - Non-life insurance dominated by traditional lines: motor 35 percent of total premium income, property 30 percent, and general liability 14 percent. - Less traditional lines limited: credit and surety insurance and cyber-risk insurance together account for about 1 percent of total premium income. - Distribution channels mostly traditional: single-tied agents account for about 77 percent of the registered insurance intermediaries; the balance are brokers. - Other distribution channels: direct sales (via employees or Internet) and comparison websites (typically registered as brokers, mainly active in motor third-party liability insurance and other mass market non-life products). ### Interconnectedness with banking and international business - Small number of significant insurers are part of groups that include significant banking; majority of small insurers are independent. - Linkages to other financial sectors primarily through holdings of bonds issued by banks rather than derivatives. - Exposures to banks accounted for 16.8 percent of the total assets of insurers at the end of 2021, compared to 19.0 percent one year earlier; half of these bank exposures are covered bonds. - Cross-border insurance business does not appear to pose a significant risk; based on direct gross written premiums, Germany was a “receiver country” in 2020; when reinsurance premiums are included, Germany was a “donor country”. ### Solvency II implementation and supervisory approach - BaFin and the insurance industry moved to Solvency II in 2016; Solvency II was transposed fully into the Insurance Supervision Act (VAG) before the start of Solvency II without additional requirements. - Solvency II applies to insurers that account for more than 99 percent of industry premiums and assets; very small regional insurers remain under Solvency I (in the VAG). - BaFin actively involved in Solvency II development and uses its understanding to implement it consistently and proportionately; provides internal guidance and engages with EIOPA expert networks to promote convergence. - BaFin guidance includes publishing interpretation decisions, articles in the BaFin Journal to communicate supervisory concerns, and regular updates on quantitative and qualitative reporting requirements. - Solvency II implementation in Germany is more complex due to the nature of insurance products and the continuing importance of national GAAP: - Policyholder bonuses are determined on a GAAP basis, differing fundamentally from Solvency II. - Life insurers must project future GAAP valuations to estimate discretionary bonuses, deferred tax movements, and other inputs into Solvency II calculations. - National GAAP process significantly impacts solvency figures, while Solvency II applies only to regulatory solvency calculation. - Even insurers using the standardized approach must use complex models to compute solvency figures, necessitating supervisory oversight to prevent under-valuation or misreporting. - Internal models usage: 37 insurers are using a full or partial internal model for solvency calculations (most full internal models). - From 2018 to 2020, 1,013 model changes (minor and major) were reported to BaFin. - BaFin has deployed expert resources for internal models work and extensive international cooperation; industry feedback highlighted BaFin’s thoroughness in model approvals and reporting. - BaFin will assess the need for changes following the Solvency II Review; the European Commission published its draft of proposed legal changes on 22 September 2021, but the process is ongoing. ### Risks and vulnerabilities - Search for yield amid prolonged low interest rates: - Share of bonds with maturities >10 years increased from 43 percent to 56 percent since 2016; weighted average maturity increased by more than 2 years. - Share of total assets invested outside Germany remained stable at 42 percent in 2020, but greater shares of sovereign and corporate bond investments were outside Germany (58 percent and 61 percent, respectively, in 2020). - 2020 BaFin survey: more than half of insurers stated that, for new investments, issuers’ average creditworthiness declined over the last five years. - Insurers plan to increase alternative investments (particularly infrastructure and private debt) from a current base of under 6 percent. - Downgrade risk heightened by the pandemic: - Average ratings of bond portfolios did not decline between 2016 and 2020, but corporate insolvency risk is increasingly affecting portfolios. - In 2020, rating of 18 percent of securities in insurers' portfolios was downgraded, whereas in the two previous years, on average, only 13 percent of securities were affected by downgrades. - At the end of 2020, a further 29 percent of the securities had a negative rating outlook. - Life insurers using the standard formula could experience a double impact on SCR ratios (decrease in own funds and increase in required capital). - BaFin scenario testing shows downgrade risk to be material but manageable. - Investments in funds and derivatives: - As of end-2020, total investment in funds exceeds 30 percent of assets; many are specialized funds set up by asset managers for insurers. - Most securities (including securities lending transactions) in the funds can be looked through by insurers. - BaFin maintains a database of contracts for specialized funds, including intended use of derivatives. - Derivatives reporting is covered under EMIR; BaFin’s insurance supervisors are cooperating with securities supervisors on an EMIR data reporting system to enable supervisors to access information on all derivatives to which insurers are a party, whether directly or through funds. - Guarantees and duration risks for life insurers: - Guarantees on some policies are as high as 4 percent and generally apply to the whole term of the policy. - Weighted average years to maturity of German life insurers’ liabilities at end-2020: 26.3 years; modified duration: 13.3 years. - Maximum rates for GAAP valuation purposes set by the MoF reduced gradually to 0.90 percent in 2017 and 0.25 percent in 2022; this effectively sets a maximum rate on guarantees for new product sales, although most insurers offer lower guarantees than the maximum. Guaranteed rates for existing policies remain as when sold and cannot in practice be reduced. - Zinszusatzreserve (ZZR) — Additional Provision to the Premium Reserve: - ZZR requires a reserve for each policy that guarantees a return above the reference rate for expected asset returns of the capital market; required reserve equals interest rate shortfall expected to arise over next 15 years. - Reference rate set as the 10-year average of the zero-coupon Euro swap rates with a duration of 10 years. - Dividends may not be paid to shareholders of a life insurer unless the ZZR has been funded. - ZZR was amended in 2018 to limit the yearly change of the reference rate; final amount unchanged but recalibration leads to slower build-up of reserves, preserving unrealized gains on assets while prolonging period in which profits cannot be paid out. - Significant realizations still expected in 2021 to 2024: EUR 12 billion in 2021 and EUR 7-9 billion each year from 2022 to 2024; expected to decline significantly thereafter. - Interest rate movement implications: - Movement toward higher interest rates should enable insurers to generate more interest income to cover guarantees and release ZZR reserves if reference rate moves higher. - However, higher market interest rates might reduce or eliminate unrealized gains, complicating insurers’ ability to fund ZZR build-up. - Technology, cyber, and climate risks: - Technology-related risks (operational and strategic) are growing with digitization; many insurers use cloud service providers and perform pooled internal audits of providers. - Cyber-risk is both a concern and business opportunity; currently about 60 insurers offering cyber products (book of business very small). - Insurers collaborating on model terms, risk assessment tools, and awareness efforts; BaFin highlights need to address technology-related risks and monitors progress. - Climate change and sustainability risks receiving attention; BaFin has an internal sustainable finance network and issued a cross-sectoral Guidance Notice on Dealing with Sustainability Risks in December 2019. - BaFin participated in EIOPA’s transition risk study in 2020 and physical risk study in 2021. - Severe flood event in Germany in 2021 generated gross insurance claims estimated as much as EUR 8.2 billion, of which about EUR 6 billion was reinsured; impact on solvency not of significant supervisory concern, but BaFin will continue to assess insurers’ treatment of such risks in internal models and ORSAs. ### Stress testing, ORSAs, and supervisory actions - Insurers are required to perform scenario analysis and stress testing as part of ORSAs; BaFin and EIOPA provide guidance, and some insurers apply more severe stresses than guidance (e.g., level and timing of interest rate shocks). - BaFin carefully reviews ORSA results, conducts surveys (e.g., on search for yield), and performs its own scenario testing (e.g., credit downgrade risk). - EIOPA organizes periodic stress tests in which largest German insurers and groups participate. - The 2021 EIOPA insurance stress test assessed resilience to a prolonged COVID-19 “lower for longer” interest rate environment from solvency and liquidity perspectives: - Confirmed main vulnerabilities stem from market shocks, but insurers would be able to cope. - Application of Solvency II transitional provisions, together with management actions, would enable an adequate solvency position to be maintained. - Liquidity was not shown to be a significant vulnerability; results for German participants were consistent with overall results and with insurer ORSAs and BaFin-requested liquidity stress tests. - BaFin will continue engagement with insurers on stress issues, including nature and timing of reactive measures in response to stress scenarios. - For climate and sustainability risks, BaFin assesses how insurers model climate risks and evaluates ORSA results; EIOPA studies transitional and physical climate risks and highlights need to improve asset-level data, for example via templates to obtain more details on assets held within pooled funds and related companies. _International Monetary Fund_ ### 28. BaFin is the federal insurance supervisor. BaFin is part of the executive branch of the ### 28. BaFin is the federal insurance supervisor. BaFin is part of the executive branch of the ### Institutional framework and legal status - BaFin is a federal institution with legal personality governed by public law and is subject to oversight by the Federal Ministry of Finance (MoF). - The MoF is accountable to the Federal Parliament. - The MoF chairs BaFin’s Administrative Council, the body responsible for oversight of the management of BaFin. - Supervision of insurance companies in Germany is based on the VAG; insurers also must comply with other acts, codes, ordinances, and circulars issued by the federal government or BaFin. - The MoF leads at federal government level on laws, regulation and public policy related to financial supervision; other ministries, including the Ministry of Justice, have responsibility for aspects of the overall framework. - Federal State (Bundesland) authorities are responsible for supervising publicly-owned insurers limited to the relevant federal state, and private insurers of lesser economic significance representing in total only 0.1 percent of the total premium income of the market. - Insurance intermediaries are subject to licensing and supervision by the Chambers of Industry and Commerce (Industrie- und Handelskammer – IHK). BaFin exercises indirect supervision over agents affiliated with licensed insurers by placing requirements on the insurer’s relationship with the agent. ### Guarantee schemes and supervision - Since the end of 2004, there have been statutory guarantee schemes for life insurance and substitutive health insurance. - The guarantee funds are supervised by BaFin. - There are two schemes, for life insurers and health insurers. - These schemes have not so far been called upon to support a failing insurer, although the life insurance scheme originated in a private sector mechanism used to support the failing life insurance company Mannheimer Life in 2003. ### Roles of German and European institutions - The MoF is responsible for financial market legislation and the legal (Rechtsaufsicht) and technical (Fachaufsicht) oversight of BaFin (section 2 FinDAG). - BaFin is an integrated financial sector supervisory authority responsible for prudential supervision of credit institutions, insurers and pension funds, capital markets intermediaries as well as market conduct and consumer protection. - BaFin’s budget needs annual approval by its Administrative Council and is funded through fees and charges imposed on supervised institutions. - Other German authorities supervise certain aspects of insurance activities (see Federal State authorities and Chambers of Industry and Commerce). - The European Insurance and Occupational Pensions Authority (EIOPA) is an independent EU Authority promoting convergence of supervisory practices and is mandated to assess risks and vulnerabilities in the EU insurance and occupational pensions sectors. ### MoF–BaFin relationship, reporting, and oversight - The relationship between the MoF and BaFin is governed by the FinDAG and Principles. These define the purpose of the MoF’s supervision (the legality and fitness for purpose of BaFin’s administrative actions), its role in chairing the Administrative Council and the Council’s budgetary approval powers. - The Principles set out BaFin’s reporting requirements to the MoF on organizational and supervisory issues, including reports on supervisory measures of material importance, noteworthy events at systemically important institutions, and extreme events at smaller institutions. - BaFin’s Articles of Association (a regulation issued by the MoF) recognize the right of the MoF to issue instructions to BaFin’s Executive Board. - The 2011 and the 2016 FSAPs recommended that the federal government review BaFin’s reporting requirements to the MoF and provisions for dismissal of BaFin Executive Board members to ensure robust operational independence; this recommendation has not been addressed. - Despite BaFin being operationally independent in practice, extensive reporting to the MoF and the presence of government representatives and industry experts on the Administrative Council weaken real and perceived operational independence. - The MoF has been involved in development and oversight of BaFin’s reorganization program, concluded in December 2021. - The MoF and BaFin are restructuring the reporting regime; they should ensure that for ongoing supervision reporting takes place regularly ex-post, at a predetermined frequency, and at an aggregate sectoral and cross-sectoral level or event-driven. ### Reorganization and supervisory capacity - BaFin completed a wide-ranging reorganization process by the end of 2021. - Changes include strengthening the role of BaFin’s President and establishing three new units reporting to the President: a Data Intelligence Unit; a unit responsible for coordinating a forensically-trained Task Force and the entities under intensive supervision; and a unit dedicated to the continuous development of BaFin. - Administrative processes have been more centralized and standardized under the Internal Administration and Legal Affairs Directorate. - As of December 2020, BaFin had 300 staff (full-time equivalent) in insurance supervision, compared with 295 at the end of 2016. - Insurance supervision draws on cross-sector expertise; 77 percent of BaFin’s insurance supervisors have five or more years of supervisory experience. - BaFin emphasizes staff development through internal training programs and secondment to federal government ministries and European and international organizations; training topics include special requirements of Solvency II supervision, the audit of internal models, and decentralized data analysis. ### Recommendation on operational independence - BaFin and the MoF should take steps to reduce the real and perceived risks to BaFin’s operational independence. Actions should include: - Reviewing BaFin’s reporting requirements to the MoF. - Reviewing organizational levels at which reporting and communication occur. - Reviewing the composition of the Administrative Council. ### Solvency framework overview (Solvency II, GAAP, IFRS, ICS) - The ICPs focus on valuation for solvency purposes and Solvency II applies to insurers that account for more than 99 percent of industry premiums and assets. - Exceptions are very small regional insurers subject to VAG regulations based on Solvency I requirements. - Valuation under national GAAP remains important for measurements related to solvency such as dividends and calculation of guarantee assets. - Some insurers prepare valuations under IFRS or the ICS (Insurance Capital Standard 2.0 of the IAIS). - The German Commercial Code (Handelsgesetzbuch – HGB) requires insurers that raise funds in the capital markets to prepare consolidated financial statements in accordance with IFRS; this applies to six groups accounting for roughly 40 to 50 percent of premiums in the German insurance market. - Three groups are internationally active insurance groups (IAIGs): Allianz, Munich Re and HDI; they prepare valuations on the basis of ICS (currently in a 5-year monitoring period), which are available to the supervisory colleges. - BaFin reviews results of IFRS and ICS valuations for relevant insurers, but such valuations are not the basis for solvency assessments that might result in supervisory intervention. ### Solvency II valuation principles and adjustments - Under Solvency II, both assets and liabilities are valued on a market-consistent basis reflecting risk-adjusted present values of cash flows; an insurer’s own credit standing cannot be recognized in the valuation of liabilities. - Best estimate: probability-weighted average of present values of future cash flows associated with insurance liabilities, discounted using a specified risk-free yield curve provided by EIOPA. - Cash flow projections consider all cash in- and out-flows required to settle insurance obligations over their lifetime, including current estimates of all expenses, inflation and all payments to policyholders and beneficiaries, including future discretionary bonuses. - Yield curves are determined by referring to market rates up to 20 years. From 20 years to 40 years, an extrapolation method is used to the Ultimate Forward Rate (UFR), which is calculated and published by EIOPA on a yearly basis beyond 60 years. - With BaFin approval insurers may use: - A matching adjustment for valuation of predictable liabilities cash-flow matched using fixed income assets; no German insurers are using the matching adjustment. - A volatility adjustment to avoid pro-cyclical investment behavior; the adjustment is calculated by EIOPA. Insurers using volatility adjustments must disclose two solvency ratios, with and without the adjustment. As at year end 2020, 98 insurers were using the volatility adjustment. ### Transitional arrangements under Solvency II - On BaFin’s approval, a 16-year transitional arrangement is allowed for technical provisions for insurance contracts concluded before the start of the Solvency II regime. - Insurers may apply a transitional deduction from technical provisions calculated with regard to valuation principles applying before December 2015. The transitional measures are phased out on a linear basis over the transitional period. - As at year end 2020: - Two insurers were using the transitional on risk-free interest rates. - 60 insurers were using the transitional on technical provisions. - Insurers using transitional arrangements must disclose two solvency ratios (with and without the transitional arrangement) and submit an annual report to BaFin describing measures necessary to meet the SCR without transitional measures. - BaFin can limit the impact of transitional arrangements if their application could lead to solvency requirements lower than those under GAAP. ### Supervisory actions related to transitional measures and progress monitoring - BaFin approves any application to use a transitional measure and ensures the transitional adjustment is adequately calculated and applied. - If necessary, BaFin imposes a limitation of the transitional deduction to technical provisions to ensure capital requirements do not fall below pre-Solvency II levels. - BaFin closely monitors the impact of the transitional measure on insurers’ solvency positions. - Insurers not complying with the SCR without transitional measures must submit a phasing-in plan setting out measures to establish eligible own funds covering the SCR or to reduce the risk profile; BaFin assesses the adequacy of these measures and engages in close dialogue; several insurers were required to amend their phasing-in plans. - Insurers applying transitional measures must provide an annual progress report; as at year-end 2020, 26 insurers were required to provide such progress reports. - To avoid over-optimistic assumptions, BaFin published three interest rate term structures (an optimistic, an average and a pessimistic scenario) at the beginning of 2020; insurers must make projections under all three scenarios. - BaFin developed internal standards for assessment of progress reports and facilitates central monitoring and comparisons across insurers. - BaFin published guidance and expectations via articles in the BaFin Journal (May 2020 and February 2021) and plans to examine whether additional guidance concerning progress reports is necessary in the internal supervisory program for 2022. - BaFin supports the European Systemic Risk Board (ESRB) recommendation on dividends for the fiscal year 2020 and has issued internal supervisory guidelines for a risk-oriented and case-by-case assessment of insurers’ planned dividend distributions. ### GAAP valuation principles and implications - The German Commercial Code sets out the principle of prudence, encompassing realization (profits must be shown only after they are realized) and imparity (possible losses must be shown even if not yet realized). - On the asset side, GAAP is underpinned by the principle of lower-of-cost-or-market value; insurers must also determine market value of investments to make transparent hidden reserves or liabilities. - Margins in valuation of liabilities are implicit; insurers are expected to determine technical provisions at a value necessary to fulfill obligations under insurance policies applying reasonable business judgment. - For life insurance obligations, no explicit allowance is made for future discretionary payments to policyholders; policyholders with with-profit contracts benefit when margins inherent in valuation of technical provisions can be released. - GAAP valuation of technical provisions for P&C insurance does not explicitly consider the time value of money; financial impact is limited due to the short duration of the majority of P&C obligations. *Source: 1deuea2022006 - 28. BaFin is the federal insurance supervisor. BaFin is part of the executive branch of the* ### 47. Maximum discount rates for GAAP valuation purposes are set by the MoF ### 47. Maximum discount rates for GAAP valuation purposes are set by the MoF ### Discount rates, guarantees, and effect on product terms - Maximum discount rates for GAAP valuation purposes are set by the MoF and have been reduced gradually in accordance with market rates, to 0.90 percent in 2017 and 0.25 percent in 2022. - This effectively sets a maximum rate on the guarantee that can be offered on new product sales, although most insurers offer lower guarantees than the maximum. - Guarantee rates for existing policies remain as when they were sold and cannot in practice be reduced. ### GAAP additional reserves (ZZR) and regulatory changes - Since 2011, insurers have been subject to an Additional Provision to the Premium Reserve (ZZR), which requires them to hold a reserve for each policy that guarantees a return above a reference rate. - The required reserve equals the interest rate shortfall that is expected to arise over the next 15 years. - The reference rate is set as the 10-year average of the zero-coupon Euro swap rates with a duration of 10 years. - Dividends may not be paid to shareholders of a life insurer unless the ZZR has been funded. - The 2016 FSAP recommended amending ZZR to encourage meaningful improvements in solvency (e.g., reduction of dividends, cost cutting, restructuring) rather than reliance on recognizing unrealized gains and costly realization transactions; this recommendation has been addressed. - The ZZR was amended in 2018 to limit the yearly change of the reference rate. While the final amount of ZZR required was not changed, the recalibration leads to a slower build-up of reserves. - Effects of the recalibration: - Facilitates preservation of unrealized gains on assets. - Leads to a longer period in which profits cannot be paid out to shareholders but instead must be retained to improve funding of guarantees. - BaFin monitors projected development of the ZZR under a range of future interest rate scenarios and finds positive effects from recalibration. - Under Solvency II valuation, the recalibration significantly reduced the previous effect whereby heavy reliance on hidden reserves to build up the ZZR led to decreasing own funds and increasing solvency requirements. ### Valuation transparency and supervisory checks - BaFin checks compliance with valuation provisions through off-site monitoring and on-site inspections. - Transparency supported by: - Extensive confidential reporting requirements to BaFin. - Public disclosure requirements. - For Solvency II insurers: Solvency and Financial Condition Report (SFCR) contains detailed valuation information. - Under GAAP: insurers must describe in the annex to annual accounts the valuation methods for technical provisions, the market value of investments, and resulting overall hidden reserves or liabilities. ### Investment regulation, guidance, and supervisory monitoring - Investment principles: - All insurers must invest to ensure the security, quality, liquidity, profitability, and diversity of the portfolio as a whole, and ensure access and availability. - Solvency II insurers are subject to the prudent person principle and principle-based boundaries in the VAG; EIOPA Guidelines on the System of Governance with regard to investments apply; BaFin interpretive decisions apply. - Solvency I insurers must comply with investment principles in section 124(1) of the VAG and with the Regulation on the Investment of Guarantee Assets (AnlV) for assets eligible to cover technical provisions. - Requirements on risk understanding: - Insurers must perform their own credit assessments and not rely only on third-party ratings; document assessments including quantitative evidence if more favorable than third-party ratings. - Investments must be appropriate to the nature and duration of liabilities and in assets whose risks can be identified, assessed, monitored, controlled, managed, reported, and considered in the ORSA. - BaFin supervisory practices and actions (addressing the 2016 FSAP recommendation): - BaFin regularly monitors investment activity and analyzes key and emerging investment risks. - BaFin reviews insurers’ investment policies for compliance with requirements and guidelines. - Insurers submit investment data, including details on individual assets, which BaFin analyzes (type, country, sector, duration, collateral, valuation basis, listed/unlisted, etc.). - Analyses are performed quarterly or annually depending on insurer risk classification; comparisons over time and peer comparisons are performed. - Off-site analysis includes review of audit and actuarial reports; in-depth analyses occur during on-site inspections. - At end of 2020, BaFin conducted a survey on investment behavior to identify insurers with above-average exposures to asset classes deemed higher risk; used as basis for supervisory contact and dialogue. - BaFin may perform on-site review of investment activities in response to off-site risk analysis or as part of internal model review; conducts surveys in response to market disruptions. ### Coordination on derivatives and investment funds - The 2016 FSAP recommended continued coordination with securities supervisors to monitor derivatives activities used by investment funds given insurers’ allocations and leverage risks; this has been addressed. - BaFin insurance supervisors coordinate with securities supervisors on these issues and further development is underway. ### Enterprise risk management (ERM) and governance - ERM and ORSA are governed by VAG (section 26 and others), Article 260 of the Solvency II Delegated Regulation, BaFin circular 02/2017 (MaGo), and EIOPA Guidelines on System of Governance (GSG). - ERM requirements include: - Strategies, processes and reporting to identify, evaluate, control, monitor and report all reasonably foreseeable and relevant material risks and their link to capital management. - Consideration of particular risks: insurance, market, credit, liquidity, concentration, operational, strategic, group-level risks; risk interdependencies. - Consistent ERM framework across group legal entities, considering intra-group transactions (IGT) and assessing their risk through the ORSA. - Risk assessment with suitable assumptions and methods; stress tests for possibly material risks. - ERM framework based on risk strategy and reflecting relationships among risk appetite, risk limits, regulatory capital, economic capital, and monitoring processes; documented in written policies. - ERM framework to include policies on investments, ALM, underwriting, and liquidity risk; guidance on expected ERM policy content. - Regular review of ERM framework by governance, risk management function, management board member assessments, and internal audit. ### ORSA requirements and supervisory use - Insurers and groups must perform an ORSA at least annually and upon material changes in risk profile; requirements and guidance drawn from VAG and BaFin Interpretive Decisions on ORSA. - ORSA requirements include: - Board and Senior Management responsibility; ORSA as basis for strategic decisions. - Consideration of all material risks in medium and, if applicable, long-term; macroeconomic stresses and counterparty exposures if material. - Group-wide ORSA must consider all material group risks, including those from legal and management structures and strategic measures; risks considered individually and in aggregate. - Stress testing required as part of ORSA and to verify continual compliance with regulatory requirements. - ORSA must include determination of prospective capital requirements and resources; BaFin expects ORSA to address origin of capital within a group and circumstances affecting availability, transferability, or fungibility. - ORSA horizon: normal planning horizon usually three to five years; insurers providing long-term guarantees must use significantly longer forecast periods, extending at least to the end of the Solvency II transitional period; all medium and longer-term strategy aspects must be considered. - Sustainability risks: - EIOPA Opinion (April 2021) expects companies to assess sustainability risks (if material) in ORSA with very long-term stress tests up to the year 2100. - Recovery planning: - BaFin requires insurers/groups to evaluate risks and options in recovery scenarios and can require a general recovery plan describing risk scenarios and corrective measures. - To meet the 80 percent market coverage required by EIOPA for recovery plans, BaFin established criteria for insurers/groups required to submit a recovery plan based on size, risk profile, business model, cross-border activities, lack of networking, and substitutability. - Recovery plans generally updated every three years or when there are material changes. - BaFin can require recovery actions if solvency is jeopardized. - All insurers/groups must have internal information systems able to produce recovery-plan-relevant information. ### Supervisory review of ERM and ORSA - BaFin receives ORSA reports annually and uses them as key inputs to risk assessments. - Line supervisors review ORSA reports assisted by a text-mining system that analyzes reports against requirements to identify topical coverage; supervisors read ORSA reports and use findings as part of key supervisory reports. - BaFin plans to expand text-mining capabilities and provide further training to supervisors. - Frequency of on-site ERM review depends on insurer size and risk rating; BaFin can require strengthening of ERM, solvency assessment and capital management where necessary. ### Solvency II coverage and capital adequacy framework - Solvency II applies to insurers that account for more than 99 percent of industry premiums and assets; very small regional insurers remain under Solvency I and the VAG. - Solvency II regulatory architecture: - Directive 2009/138/EC (Solvency II Directive) sets the framework. - Commission Delegated Regulation (EU) 2015/35 (Solvency II Delegated Regulation) provides further details. - Solvency II Directive transposed into national law (VAG in Germany); the Delegated Regulation is directly effective. - Further requirements set by RTS and ITS (e.g., internal model approvals); supplemented by EIOPA guidelines, opinions, decisions, and national circulars and interpretative decisions. - EIOPA SRP handbook supports supervisory convergence; BaFin maintains assessment guidance (“Prüfleitfäden”) and principle notes (“Grundsatzvermerk”). - Solvency II measurement and capital metrics: - Total balance sheet approach with consistent economic measurement of assets and liabilities and explicit identification and measurement of risks. - Two levels of regulatory capital requirements: Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR). - SCR is calibrated to correspond to the value-at-risk with a confidence level of 99.5 percent over a one-year period; several methods allowed (standard formula, partial and full internal models). - MCR is based on a simple formula and subject to a floor (25 percent) and cap (45 percent) of SCR. - SCR and MCR calculation frequency: SCR at least annually; MCR quarterly. - Risk coverage: - Solvency II covers market risk, counterparty default risk, underwriting risk and operational risk. - Market risk includes ALM, equity, property, spread (bonds), and credit derivatives. - Underwriting risk includes longevity, lapse, and catastrophe risks. - Standardized approach uses a prescribed correlation matrix that recognizes diversification benefits twice (within market risk and in overall SCR calculations). ### Supervisory responses to capital shortfalls - Insurers must assess ability to meet regulatory capital requirements at all times as part of the ORSA and report the ORSA result to BaFin within two weeks of completion. - Non-compliance triggers submission requirements: - Non-compliance with SCR triggers requirement to submit a realistic recovery plan within two months for supervisory approval. - Non-compliance with MCR triggers requirement to submit a realistic finance scheme within one month for supervisory approval. - Recovery timelines: - Insurers are required to recover from any non-compliance with the SCR within six months, which BaFin can extend by three months. - Recovery period for breaches of the MCR is three months and cannot be extended. - Supervisory stance and tools: - BaFin does not formally intervene as long as insurers hold enough capital to meet the SCR but communicates concerns about sufficiency given SCR fluctuations. - BaFin has the power to impose capital add-ons and is developing internal guidance to assess conditions for imposition and ensure uniform approach consistent with Solvency II legal requirements. - Groups must report annually on capital adequacy at the group level and meet requirements at all times. - BaFin has developed internal guidance on a wide range of actions available for dealing with group solvency concerns. *IMF staff summary of chapter text.* ### 65. Solvency II incorporates both standardized and more tailored approaches to ### 65. Solvency II incorporates both standardized and more tailored approaches to determining regulatory capital requirements. ### Capital requirement frameworks and aggregation - Minimum Capital Requirement (MCR) is based on a simple formula. - Solvency Capital Requirement (SCR): - Standardized method: the "standard formula". - Tailored approaches (subject to BaFin’s approval): insurer-specific parameters within the standard formula, partial internal models, or full internal models. - Internal models must be calibrated to the same confidence level as the standard formula. - SCR covers: - unexpected losses from the existing business, and - expected losses from new business written in the following 12 months. - Diversification effects between different risks and risk categories are material: - Standard formula aggregates risks via correlation matrices. - Internal models allow for more advanced aggregation approaches, such as the use of copulas. ### Own funds, eligibility, and the volatility adjustment (VA) - Distinction between available own funds and eligible own funds for regulatory capital requirements. - Available own funds are classified into three tiers reflecting: - quality to absorb unexpected losses, and - availability on a going-concern basis or in case of winding up. - Eligibility rules: - Determined by Solvency II Delegated Regulation. - Tier 2 and Tier 3 are subject to limits; e.g., sum of Tier 2 and Tier 3 cannot exceed 50 percent of the SCR. - Observed practice in Germany: - Tier 1 capital formed a majority of capital resources of German insurers: 94 percent of the capital eligible to meet the SCR at the end of 2020. - Volatility adjustment (VA): - Available upon BaFin’s approval. - Aims to avoid pro-cyclical investment behavior when bond prices deteriorate owing to low liquidity or exceptional expansion of credit spreads. - Effect: stabilizes insurers’ capital resources and is set by EIOPA. - Insurers using VA must disclose two solvency ratios: with and without the adjustment. ### Monitoring and use of the VA - 2016 FSAP recommendation: encourage building capital resources during stable volatility via ORSA so VA is used countercyclically — recommendation addressed. - For all insurers applying VA, BaFin monitors implications on: - valuation of technical provisions, - the SCR, and - solvency position. - Insurer reporting to BaFin on VA use: - quantitative impact as part of regular quantitative reporting; - qualitative information as part of regular supervisory report (RSR) and ORSA. - BaFin assessment: VA has been working adequately for the German market and insurers applying it; no immediate action necessary. ### Internal models, validation, and BaFin supervisory approach - Status and activity: - 37 insurers are using a full or partial internal model for solvency calculations (most are full internal models). - From 2018 to 2020, 1,013 major and minor model changes were reported to BaFin. - BaFin resources and processes: - Deploys expert resources and extensive international cooperation for internal model work. - Industry feedback highlighted thoroughness of BaFin’s approach to model approvals and reporting. - Examples of BaFin’s model assessment approach: - Solvency II Directive allows only six months for model approval; BaFin introduced a pre-application phase to facilitate thorough assessment within this timeframe. - Examination stages include meetings, desk-based documentation study, and on-site interviews. - On-site inspections regularly take one or two weeks; results are core to approval opinions. - Approved models are permanently subject to ongoing supervision; insurers regularly deliver a specified documentation package on parameters, assumptions, and validation activities for desk-based supervision. - BaFin creates tables and plots comparing quantitative model outputs of German insurers, split into peer-groups, and holds regular expert group meetings or colleges. - Participation in EIOPA comparative studies to foster understanding, compare model outputs, and promote supervisory consistency. - BaFin has a special department of quantitatively-trained supervisors to examine internal models, assessing methodology appropriateness, assumption plausibility, data quality, and simulation techniques — aspects also part of insurer validation. ### Recommendations on valuation and capital adequacy - BaFin and the federal government should enhance the contribution of valuation to solvency assessment, considering: - Extend assessment of GAAP results to consider impact of more extreme interest-increase scenarios on funding of the ZZR. - Continue monitoring insurers’ implementation progress of IFRS 17 Insurance Contracts and prepare to utilize resulting financial statements in supervisory assessment. - Continue to encourage EIOPA and other national authorities to include an income statement as part of Solvency II reporting to facilitate assessment of insurers’ earnings. - Identify and promote opportunities to harmonize valuation and reporting requirements, recognizing barriers; example: reform ZZR to make it more congruent with Solvency II requirements and the Solvency II prudent person principle for investment management to reduce incentives to sell low-risk fixed income securities to realize gains to finance the ZZR. - BaFin should strengthen requirements around liquidity risk management reporting and liquidity stress testing: - Existing requirements and guidance cover stress testing, maintenance of liquid assets, and contingency plans. - ORSA is a key source of liquidity exposure information, but insurers are not required to submit specific liquidity management reports to BaFin; liquidity information requested during the COVID-19 pandemic will be maintained as an annual reporting requirement. - BaFin should continue active supervision of capital adequacy while seeking to streamline internal model approval and reporting requirements, noting insurer concerns that BaFin’s approach can be more onerous than other national authorities. - BaFin should consider additional guidance on capital adequacy, e.g.: - Highlight importance of insurers setting target solvency ratios and identifying in ORSA the actions management would take if the solvency ratio fell below this level; BaFin could monitor proximity to target solvency ratios. - Guidance could set supervisory control levels for Solvency I insurers. ### Supervision: risk-based approach, monitoring, and inspection scheduling - Supervisory review evolved to a more risk-based approach aligned with Solvency II: - Core processes: off-site analysis based on extensive reporting and on-site work driven by a risk classification system. - Documentation guides framework application and is regularly reviewed. - 2016 FSAP recommendations on qualitative supervision have been addressed: - IT-based risk classification system enhanced in 2020 to reflect qualitative aspects. - BaFin is developing internal guidance on capital add-ons to facilitate assessments and ensure uniform approach consistent with Solvency II. - Monitoring sources: - regular supervisory reporting, communications with insurers, stress test results, unscheduled data requests (e.g., COVID-19 pandemic), market data. - Use of technology for data validation, data visualization, text mining of narrative reporting (e.g., ORSA reports), and dashboarding. - A risk dashboard provides sector-level information; Cockpit IT tool provides insurer-level risk metrics and ratings by category and will facilitate drill-down once complete. - Supervisors submit written analysis on key reports within specified periods and review/update risk ratings periodically. - Risk classification system: - Identifies and assesses current and future risks and insurers’ ability to identify, assess, monitor, manage and report on those risks. - BaFin assesses insurer impact based on market impact and quality, using quantitative indicators and supervisory assessment of governance and qualitative factors; seeks to capture conduct risks via management-quality indicators. - Risk classification data, indicators, and processes are thoroughly validated at least once every five years, with less extensive checks annually. - Peer-group analysis and supervisory planning: - Standard reports compare a selected insurer with a peer group by line of business and market impact; ad hoc peer group analyses draw on statutory accounts and Solvency II data. - Supervisory priorities and resource allocation are based on risk assessments. - Multi-annual supervisory plan lists high-priority topics, reviewed at least annually, indicating inspection method and expected intensity (e.g., inspection of Solvency II models for technical provisions and real estate market risk). - Overall audit plan prepared by mid-December for the following year, reviewed quarterly. - Off-site monitoring groups insurers into four supervision-intensity groups from “basic supervision” to “intensified supervision”. - Supervisory plans developed at solo and group levels; IAIGs’ plans include annual risk assessment in line with EIOPA guidelines. - Conduct of business in risk classification: - 2016 recommendation to include more explicit conduct-related issues partly addressed. - Risk classification built around five sections: asset and financial position, profit position, future viability, business organization, and holders of significant holdings. - Conduct-related issues (sales remuneration, product-approval process, compliance) considered under business organization. - On-site inspection scheduling: - Guideline sets regular interval for on-site inspections based on market impact and quality, with insurers grouped into four Supervisory Categories. - Guideline allows frequencies of up to 12 years for an insurer with low market impact and very high quality. - Deviations permitted if reasons documented; based on 2021 plans, inspections being performed more frequently than the guideline. - For IAIGs, on-site inspections at Head of IAIG level are done every 7 to 9 years and as necessary; BaFin has organized/taken part in some joint IAIG on-site inspections. ### Communication of supervisory findings and enforcement - Communication of concerns: - BaFin communicates risks or concerns via telephone, e-mail, or letter based on off-site analysis. - End-of-inspection process: findings assessed, final on-site discussion, summary of irregularities and recommendations provided, and documented in a formal letter. - BaFin does not disclose the market impact and quality ratings it assigns to insurers, viewing ratings as an internal control tool; some insurers requested more comprehensive feedback. - Enforcement powers and approach: - BaFin has comprehensive powers under VAG section 298 and other specific powers to require preventive and corrective measures and impose sanctions against insurance groups, individual insurers, and responsible persons; applicable to insurance holding companies and mixed financial holding companies where relevant. - BaFin applies a graduated approach and is explicitly required to apply the principle of proportionality under VAG and German administrative law. - Informal exchanges typically resolve issues; formal letters requiring corrective actions are issued when breaches are established. - BaFin has internal guidance on actions for insurers under close supervision; supervisors must inform a designated unit before intervening and serious cases are escalated for management review. *Source: INTERNATIONAL MONETARY FUND* ### 84. The 2016 FSAP recommended that BaFin continues to develop its approach to early ### 1deuea2022006 - 84. The 2016 FSAP recommended that BaFin continues to develop its approach to early ### Early and effective intervention - 2016 FSAP recommendation: BaFin should continue to develop its approach to early and effective intervention on the full range of regulatory and supervisory issues, building on existing Solvency II work (including its internal change management program) to reflect the particular challenges of a more principles-based regulation. - Status: Partly addressed. - Findings: - BaFin has a strong focus on dealing with solvency concerns, including both current and projected failures to meet solvency requirements. - Less attention appears to be given to interventions in relation to other supervisory concerns. - Management information systems do not facilitate tracking and reporting on the nature, timelines, and progress of intervention measures. ### Intervention on deterioration under national GAAP - 2016 FSAP recommendation: BaFin should consider its approach to intervention in case of a deterioration in the financial position of an insurer as measured under the national GAAP framework. - Status: Addressed. - Findings and actions: - In cases of a mild deterioration, BaFin uses informal measures and suasion, which it indicates is usually successful. - Section 132 of the VAG requires insurers to have appropriate processes to identify deterioration and to immediately notify BaFin where deterioration could jeopardize solvency or compromise ability to meet insurance obligations. - BaFin strengthened this early warning tool via: - A pilot survey to evaluate insurers’ practices. - An external communication setting out the expectation that all insurers critically review their systems and processes in light of identified deficiencies. - A more in-depth and wide-ranging survey in 2020. - BaFin is using survey findings to develop guidance to improve insurers’ identification of a deteriorating financial condition. ### ORSA, target minimum solvency, and capital add-ons - 2016 FSAP recommendation: As BaFin’s work on ORSAs develops, consider introducing a system of target minimum solvency requirements to be communicated to insurers based on ORSA review; and develop an internal policy framework for the imposition (and removal) of formal capital add-ons. - Status: Partly addressed. - Findings and actions: - BaFin is developing internal guidance on capital add-ons to facilitate assessment of conditions for imposition and ensure a uniform approach consistent with Solvency II legal requirements. - BaFin has not introduced a system of target minimum solvency requirements above the SCR, on the basis that it could not require additional capital unless an insurer’s capital would be insufficient to ensure the insurer is able to meet the SCR continuously. ### Conduct of business and consumer protection - BaFin’s supervisory objectives encompass conduct of business; the primary objective is to protect policyholders and beneficiaries of insurance services. - Responsibilities include monitoring compliance with regulatory requirements and handling complaints made directly to BaFin by customers of primary insurers. - Division of responsibilities: - Different ministries have responsibility for regulations on financial consumer protection. - Insurance intermediaries are licensed and supervised by their local Chamber of Commerce and Industry; BaFin has an indirect regulatory and supervisory role through insurer requirements and monitoring of intermediary use. - Regulatory instruments: - BaFin circular 11/2018 sets conditions for insurer cooperation with intermediaries. - Insurers must conduct business only with licensed intermediaries and respond to complaints about intermediaries and conduct necessary investigations. - 2016 FSAP recommendation on scope of conduct requirements (limitation to primary insurers): Reconsidered. - Status: Addressed, but no change made. - Rationale: Scope is regularly reconsidered with objective of protecting those who need protection—generally, retail consumers. Insurers are considered professional clients; certain VAG sections are not applicable to reinsurance intermediation. ### Fair treatment of customers and complaints handling - Requirements (VAG, VVG, circular 11/2018, circular 2/2017): - Insurers must make fair treatment of customers part of business strategy, product design, distribution, and performance. - Insurers must have internal processes to consider interests of different consumer types in product development and distribution. - Insurers and intermediaries must have arrangements to ensure fair treatment of customers and avoid or properly manage conflicts of interest. - Internal controls must enable identification, collection, evaluation of management information and generation of reports to monitor and measure fair treatment performance. - Promotion, disclosure, and sales practices: - Requirements set out in VVG and VVG-InfoV; further details in UWG. - Disclosure requirements cover pre-contractual and contractual information, Internet/digital sales specifics. - Where advice is given before contract conclusion, insurers and intermediaries must consider disclosed customer circumstances and explain and document recommendations. - Service and claims handling: - Insurers required to service policies through to satisfaction of all obligations; handling of claims and complaints governed by VAG, VVG, Civil Code, circular 3/2013. - Insurers must have reliable policies and procedures to handle claims in a timely and fair manner. - BaFin complaints handling: - A dedicated unit handles consumer complaints; unresolved matters are referred to the ombudsman or courts. - Most insurers recognize one of two ombudsmen (health insurance and all other sectors); ombudsman is independent and reports publicly at least annually. - BaFin’s approach reflects the EIOPA guideline on complaints management for insurers and extends responsibility to tied agents under the indirect supervision approach. - 2016 FSAP recommendation: BaFin review whether it can reduce volume of individual customer complaints by directing to ombudsman services. - Status: Addressed. - Actions taken: - BaFin continues to deal with complaints due to right of petition under section 17 of the German Constitution and as a source of supervisory information. - To reduce informational requests, BaFin publishes responses to common insurance questions. - A project is underway to reduce complaint-processing resources via technical, procedural, and organizational changes. - BaFin responses to complainants regularly include references to ombudsman services where suitable. ### Data protection and consumer outreach - The GDPR and national data protection laws govern insurer and intermediary handling of customer data; compliance supervised by special authorities of the Bundesländer. - BaFin can take administrative measures when an insurer systematically breaches data protection legal provisions. - Publications and services: - BaFin publishes complaints handling data in its annual report and consumer protection information on its website and monthly BaFin Journal. - BaFin publishes brochures to promote consumer understanding of insurance contracts and maintains a consumer helpline offering co-browsing and a service for people with hearing difficulties. - BaFin issues warning notices to consumers to avoid transactions with insurers that are unlicensed or have suspended/revoked licenses. ### Group-wide supervision, IAIGs, and supervisory structure - BaFin applies European rules on group-wide supervision as set out in the Solvency II Directive and the VAG. - No specific IAIG rules in VAG; BaFin addresses IAIG expectations through supervisory practices and general group-wide rules. - Identification and supervision of IAIGs: - BaFin, with other supervisors, has identified three German insurance groups as IAIGs; determinations are reviewed annually. - All German insurance groups are subject to Solvency II; all legal entities of a group must be reported in the relevant Solvency II template. - VAG provides for group supervision at the level of the ultimate parent company; Solvency II also deals with identification of the head of the group. - BaFin cooperates with other supervisors on identification and scope of group-wide supervision; scope is not narrowed due to lack of authority over particular legal entities. - Internal supervisory allocation: - One BaFin unit supervises the largest groups, including all IAIGs; smaller groups allocated to other units depending on dominant insurer nature. - Some smaller groups have cross-border business but are too small or insufficiently international to be IAIGs. - Any group with a foreign subsidiary has a supervisory college (standard EIOPA practice). - BaFin has internal colleges for most groups that include banks and asset management companies. - Risk assessment and stress testing: - BaFin performs risk assessments at solo and group levels; emphasis depends on group internationalization, entity size, and solo risk ratings. - Stress testing is done at both solo and group levels. ### Macroprudential framework, data collection, and analyses - German Financial Stability Committee (Ausschuss für Finanzstabilität – FSC): - Central committee for macroprudential surveillance in Germany. - MoF, Deutsche Bundesbank (BBk), and BaFin each have three voting representatives on the FSC. - BaFin has one non-voting advisory representative responsible for BaFin’s bank resolution mandate. - FSC established in 2013; in 2020 it updated and streamlined its macroprudential strategic approach. - 2016 FSAP recommendation: Consider giving FSC more scope to take macroprudential action without legislative change. - Status: Addressed. - Finding: Germany feels comfortable with its macroprudential setup; FSC can issue warnings and recommendations and resembles ESRB structure. - BaFin data collection and analysis: - Collects broad information: regular periodic insurer submissions and special data requests covering assets, liabilities, income statement data (not part of Solvency II reporting), and other topics. - Monitors broader financial market developments and obtains analyses through relationships with BBk, ECB, EIOPA, ESRB, FSB, and IAIS. - Analyses focus on inward risks to sector resilience, including: - Regular stress tests as part of EIOPA program. - Analyses on low interest environment, COVID-19 risks, downgrade risks, risk management practices. - Long-term projections and surveys required of insurers. - Tools and publications: - Database and tools support standard and customized reports, including a regularly-updated Risk Dashboard summarizing qualitative and quantitative data and risks by line of business and relative to European/international developments. - Publishes some analysis results on website (e.g., residual debt insurance market, alleged age discrimination). - Publishes annual statistical information on lines of business, premiums, investments, results, and staff. ### Systemic importance, macroprudential tools for reinsurers, and recovery planning - Systemic importance identification: - BaFin does not have a formal process for identifying systemically important insurance groups. - Assesses systemic importance as part of risk classification and expanded its matrix to include a “very high” level of market impact. - Has not identified any insurer it considers systemically important but has identified up to 20 insurers (with quarterly fluctuations) under intensified supervision due to current risk exposure. - Use of macroprudential supervision results: - BaFin has required 15 insurance groups to prepare recovery plans. - Selection criteria for recovery plans: interconnectedness, size, risk profile, systemic relevance, business model, cross-border activity, membership of a financial conglomerate, and substitutability. - BaFin holds annual discussions with management boards of at least 15 insurance groups to learn about market trends and developments. - BaFin’s analysis of low-interest rate developments was an input to changes to the ZZR and the maximum guaranteed interest rate for new business. - Reinsurers: - 2016 FSAP recommendation: Consider applying macroprudential tools to larger reinsurers (stress tests, recovery and resolution planning). - Status: Addressed. - Findings: Larger reinsurers generally head or are dominant parts of insurance groups and are subjected to extended group reporting, filing of recovery plans, special inquiries, and are required to provide comprehensive information comparable to primary insurers, including stress tests and scenario analyses. - HLA for G-SIIs: - 2016 FSAP recommendation: Consider implementation plans for IAIS HLA framework for G-SIIs. - Status: Not currently relevant. - Rationale: - FSB temporarily discontinued G-SII designations until 2022 to allow development and application of the IAIS Holistic Framework adopted November 2019. - Review in 2022 will consider first 3 years of application and Implementation Assessment. - In absence of a G-SII designation the IAIS has not continued work on HLA and HLA is not part of the Holistic Framework; therefore no additional steps have been undertaken to prepare for HLA. ### Supervisory cooperation and coordination - 2016 FSAP observation: Approach to supervisory cooperation and coordination was still developing; agreeing risk assessments for each group to inform group-wide coordination remained a challenge. - Improvements: - BaFin improved approach consistent with EIOPA Guidelines on supervisory review process. - Standardized risk classification process for groups; results feed into coordinated creation of work plans by supervisory colleges. - Solvency II and VAG require establishment of colleges except where a group has only domestic activities; BaFin has run colleges for all major groups and IAIGs at least since 2016. - Determination of group-wide supervisor for cross-border groups: - BaFin discusses and agrees with involved supervisors which authority is the group-wide supervisor; role may be re-discussed annually as groups develop. - If joint decision cannot be reached, EIOPA is consulted and the EIOPA Regulation binding mediation mechanism applied. - BaFin participates in supervisory colleges of several IAIGs, including Allianz, Munich Re, and HDI as group-wide supervisor and Generali and Axa as a host authority. *Source: IMF staff summary of BaFin supervisory framework and 2016 FSAP recommendations (excerpts).* ### 110. As a group-wide supervisor, BaFin works with the college of supervisors to build ### 110. As a group-wide supervisor, BaFin works with the college of supervisors to build ### Group-wide supervision and colleges - BaFin, as group-wide supervisor, works with the college of supervisors to build understanding of the group and lead its supervision. - Colleges are supported by individual college coordination arrangements that generally provide for a free flow of information among members. - BaFin undertakes a comprehensive mapping exercise, in cooperation with the group and other involved supervisors, to identify the group structure and assess its significant and material entities. - Other involved supervisors are consulted on the agendas for college events and the agreed follow up actions are documented in the minutes. - BaFin provides an overall assessment of the risk and solvency of the group on the basis of the group ORSA and information generated at the solo level. - In the case of an IAIG, BaFin also provides the results of the ICS calculation and relevant supporting data and facilitates a discussion within the college and with representatives of the group. ### Supervision of solo insurers and information exchange - Where it is another involved supervisor, BaFin supervises solo insurers operating in Germany and seeks to join supervisory colleges to obtain complementary supervisory information and to review interactions and interconnectedness within the group. - BaFin takes steps to overcome problems hampering participation in a college or seeks to establish a bilateral information exchange. - BaFin exchanges non-public supervisory information with eligible partners such as other signatories to the IAIS Multilateral Memorandum of Understanding on Cooperation and Information Exchange (MMoU) and other authorities that were found equivalent in terms of professional secrecy. - BaFin maintains a database of equivalence assessment results (with respect to professional secrecy) coming from assessments undertaken by EIOPA, the IAIS (under the MMoU), and on its own. ### Formalization, internal support, and crisis management coordination - BaFin seeks to formalize cooperation and coordination within colleges via written coordination arrangements based on comprehensive European regulations and guidelines. - Internal support includes BaFin’s internal process handbook and a comprehensive intranet knowledge base regarding colleges of supervisors, which includes legal background, process-oriented information, and identifies internal advisors. - For one IAIG a separate crisis management group was established when the group was identified as a G-SII; for the other two IAIGs the college currently plays this role. - Coordination of crisis management preparations is required by Article 355 of the Delegated Regulation, which calls for an emergency plan to be agreed by the college of supervisors. - BaFin has documented crisis management processes and procedures in a special Annex E “Emergency Plan” of the coordination arrangements. - These crisis management arrangements have not been tested, other than a test organized by EIOPA to determine whether the identified contact persons could be reached. ### Recommendations on supervisory practices and crisis testing - BaFin should reassess its guidelines on the minimum and actual frequency of on-site inspections in relation to the Supervisory Categories of insurers, to ensure inspections are sufficiently frequent to support robust identification and assessment of risks. - Both the minimum and actual frequencies are quite long, for all Supervisory Categories. - If concern about the potential cost of an inspection to a particular insurer is a barrier to greater frequency, changes to the system of direct charging should also be considered. - BaFin should consider publishing information on the guideline and actual frequencies of its on-site inspections. - BaFin should enhance its management reporting to facilitate systematic tracking and reporting of the timeliness of off-site and on-site supervisory activities in comparison with established procedures and the supervisory plan. - BaFin should provide more comprehensive feedback to insurers on its supervisory findings, assessments, and concerns, including the highlights of its risk assessment and the market impact and quality ratings assigned to the insurer. - BaFin should take steps to enhance the effectiveness of intervention in driving improvements, particularly in relation to supervisory concerns other than the solvency ratio. - Options include using intervention powers more intensively for non-solvency concerns; developing management information systems to track and report the nature, timeliness, progress, and effectiveness of intervention measures; and developing and publishing a guide to intervention. - BaFin should take steps to test the crisis management arrangements for IAIGs, which might include crisis simulation exercises involving the supervisory colleges or crisis management groups, perhaps organized in cooperation with EIOPA. --- ### D. Changes of Control and Resolution ### Notification and assessment of changes in control - Legislation and BaFin’s powers require notification of changes in control broadly defined and enable BaFin to prevent changes that could place policyholders at risk. - Qualifying holdings are defined as a direct or indirect holding equivalent to at least 10 per cent of the capital or voting rights of an insurer or another arrangement in which significant influence can be exercised over the management of the insurer. - A person must notify BaFin of a proposal to acquire a qualifying holding, to increase its holding above thresholds of 20 percent, 30 percent, and 50 percent, or to dispose of a qualifying holding or to reduce it below such thresholds. - Insurers must notify BaFin when aware of such acquisitions or disposals and must notify BaFin annually of their stock of shareholders. - BaFin has power to require notification of ultimate beneficial owners and maintains dedicated resources to process such transactions. ### Portfolio transfers and safeguarding policyholder interests - BaFin is fully empowered to approve portfolio transfers expeditiously with regard for policyholder interests. - The VAG requires transfers of portfolios by primary insurers and reinsurers to be subject to approval by the applicable supervisory authorities. - BaFin bases decisions on whether the interests of insured parties are safeguarded and whether there is sufficient evidence that obligations under insurance contracts can be fulfilled at all times. - For participating policies, BaFin can approve a transfer only when satisfied that the profit participation of policyholders (in both the transferor and transferee companies) is no less than before the transfer, using a fair value approach to measurement of assets and liabilities. ### Guarantee assets and protection in insolvency or market exit - When an insurer is subject to market exit proceedings, policyholders, including those with outstanding claims, are protected by requirements on insurers to hold restricted assets in trust for policyholders (“guarantee assets”), effectively making them the highest class of creditors in case of insolvency. - Guarantee assets must be at least equivalent to the balance sheet values (or fair value, if lower) of the relevant liabilities calculated under GAAP. - Guarantee assets must be held within the European Economic Area (EEA), managed separately, and recorded in a register set up for the purpose. - Insurers must select higher quality assets first when choosing which to register as guarantee assets. - A trustee must be appointed to monitor the guarantee assets; releases require trustee consent and that residual assets do not fall below the required amount (trustee and insurer act as joint custodians). - The value of assets in the register are controlled, assessed, and confirmed in writing by the trustee, a responsible Board member and the external auditor. - BaFin checks the registers during on-site inspections. - These arrangements do not apply to reinsurance companies, so there is no preferment of primary insurers’ claims in case of the insolvency of a reinsurer. ### Powers, gaps, and prior FSAP recommendations - There is a wide range of powers and procedures providing for the prompt and orderly exit of failing insurers, although some gaps exist. - BaFin lacks some elements of the minimum set of powers a supervisor and/or resolution authority should be able to exercise for the resolution of an IAIG, as set out by the IAIS, and BaFin lacks the legal power to require resolution plans. - Proposals are under consideration at the European level to address these shortcomings. - The 2016 FSAP recommended: - Requiring significant insurers to develop recovery plans (addressed: BaFin extended requirement to a total of 15 insurance groups, fulfilling more than 80 percent market coverage required by the EIOPA Opinion on the 2020 review of Solvency II; supervisory teams engaging with groups and all but one of the required recovery plans have been submitted). - Applying recovery and resolution planning to all larger groups, not only G-SIIs (addressed: BaFin has resolution planning in place for the former G-SII group and assessed extension to other groups and concluded not currently necessary). - Filling gaps to require companies to be ready to report necessary information in case of crisis and to maintain contingency plans (partly addressed: Section 43 of the VAG requires insurers to provide all necessary information in a timely manner at BaFin’s request; EIOPA Guidelines require contingency plans as part of ERM under Solvency II, but BaFin’s power to require such plans could be more explicit). ### Resolution framework and scheme roles - In Germany, resolution is regulated by insolvency law and corporate law; no official resolution authority for insurers has been established to date. - In absence of an explicit official EU provision implemented in the VAG, BaFin functions as the German resolution authority for insurers, except for the few insurers supervised by Länder authorities. - BaFin would exchange information via the college of supervisors or the Crisis Management Group (CMG) for resolutions with cross-border implications. - BaFin can be required to order the transfer of a portfolio to an insurance guarantee scheme if an insurer has notified BaFin that it is insolvent or it is otherwise clear the insurer cannot permanently meet its liabilities and such transfer is necessary to safeguard insured interests. - BaFin can order such a transfer without consent from the insurer, the guarantee scheme, or policyholders. ### Insurance guarantee schemes: scope, role, and capacity - Two schemes at present: Protektor (life insurance) and Medicator (private health insurance). - All life and health insurers in Germany must be a member of the relevant scheme; exception: branches of insurers based in another EEA country. - BaFin is responsible for supervision of these schemes. - No guarantee scheme for P&C insurers exists other than for motor vehicle third party liability insurance. - Role of the guarantee schemes in life and health insurance is to provide continuity of insurance policies and to run off insurance contracts, though they may seek to transfer them to other insurers. - The schemes do not guarantee full compensation for losses caused by an insurer’s failure; e.g., a minimum interest guarantee would be covered but not higher returns. - BaFin must reduce contractual benefits by up to five percent if scheme resources are insufficient and the scheme may amend insurance terms and tariffs of transferred portfolios if reasonable. - BaFin can take measures to prevent a large number of contract cancellations. - Capacity: - Life scheme has ex ante financing arrangements: funded up to 1 per mille of the net technical provisions of all members. - Currently the fund for life insurance has about EUR 1.075 billion in assets. - If inadequate, special contributions of another 1 per mille of the net technical provisions can be levied from members. - In addition, life insurers have committed, under private arrangements, to raising a total of 1 percent of assets (about EUR 10 billion). - Health scheme is funded on an ex-post basis; there is no contribution until a call is made on the guarantee. - Capacity likely sufficient for a small to medium-sized insurer failing; for larger insurers and groups capacity possibly inadequate depending on size of the coverage gap potentially created. - In P&C insurance, absence of a guarantee scheme (other than motor third party liability) exposes insured parties to potential reductions in policyholder liabilities imposed by BaFin or to delays in settling claims due to the insolvency process. ### Prior recommendation on forced transfers and legislative change - The 2016 FSAP recommended review of whether BaFin should have power to require a portfolio transfer to another (willing) insurer as well as to an insurance guarantee scheme. - This recommendation has been considered but not implemented. - Due to the fundamental right of property in German law, an impending insolvency situation is a prerequisite for a forced transfer of an insurer’s portfolio. - In 2020, legislation was changed to ensure a procedurally secure process if the portfolio of a life or health insurer has to be transferred to an insurance guarantee scheme (Article 6 of the German Risk Reduction Act (Risikoreduzierungsgesetz – RiG)). ### Recommendations on powers and guarantee schemes - The federal government should strengthen BaFin’s powers, including: - Providing the power to require contingency plans and resolution plans. - Expanding the range of powers to facilitate the prompt and orderly exit of failing insurers. - Addressing gaps in relation to the minimum set of powers for resolution of an IAIG as set out by the IAIS. - This recommendation might be addressed, at least in part, by a proposed Insurance Recovery and Resolution Directive that is currently being discussed. - The federal government and BaFin should enhance the ability of insurance guarantee schemes to identify, prepare for, and fund potential losses. Steps to consider include: - Increasing communication between the schemes and BaFin to facilitate identification of potential failures and preparation. - Increasing the capacity of the schemes to raise funds to better enable dealing with the possible failure of a large insurer or group (depending on the size of the coverage gap potentially created). - Undertaking contingency planning for dealing with a failure whose costs might be beyond the capacity of the scheme. - Providing greater flexibility to the schemes in the use of funds to reduce losses to policyholders. - Establishing a guarantee scheme for P&C insurers. - Continuing engagement on these issues at the European level to avoid gaps related to international business that might weaken protection of policyholders and threaten financial stability. *Source: Excerpt from IMF staff report chapter on Germany (content unit 1deuea2022006).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1deuea2022006.pdf_