## 1. Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles

## Source details

**Canonical URL:** [1. Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11272.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11272.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11272.pdf.json)

---

### Introduction and Methodology
- Assessment carried out as part of the 2011 Financial Sector Assessment Program (FSAP) Update. Main mission: January–February 2011.
- Assessor: Fausto Parente of the Italian Insurance Supervisory Authority (ISVAP).
- Assessment based on review of relevant laws and regulations in force at the time; discussions with supervisors, other government bodies, and market participants; and additional material provided by the authorities.
- Access to inspection reports and institution-specific information was limited due to strong legal restrictions on information sharing.
- Level of observance for each Principle reflects assessments of the essential criteria only; principles graded as observed (O), largely observed (LO), partly observed (PO), or not observed (NO).

### Institutional and Market Structure — Overview
- Insurance supervisor: Federal Financial Supervisory Authority (BaFin). Federal Ministry of Finance (BMF) has legal and supervisory control over BaFin.
- Legal base for supervision: Insurance Supervision Act (VAG); insurers also subject to other acts, codes, ordinances and circulars.
- Insurance sector structure and size:
  - Total number of companies at end-2010: 621.
  - Composition: 98 life insurers, 265 nonlife insurers (including 48 health insurers), 152 Pensionskassen, 36 reinsurers, others including 40 death benefit funds and 30 Pensionsfonds.
  - The 20 largest groups conduct the bulk of business; the five largest insurance groups alone receive about half of all premiums.
  - Total sector assets: roughly €1.4 trillion (end-2009).
  - Life insurers: €804 billion in total assets (end-2009).
  - Pensionskassen and Pensionsfonds: roughly €133 billion in total assets (end-2009).
- Market developments:
  - Sales of traditional life insurance products (endowment policies) have recently declined due to tax law changes; certain types of annuities increased.
  - Life insurance sector trend to single premium contracts, attributed in part to the low interest rate environment.
  - Despite the global financial crisis, soundness indicators have remained generally healthy across the insurance sector.
- Accounting and audit:
  - German listed companies apply IFRS since 2005 as required.
  - Legislative framework requires external auditors to be independent in fact and appearance.
- Macro-financial context:
  - Monetary policy conducted within the European System of Central Banks framework.
  - Budgetary policy within a fiscal framework based on predefined rules and the European Stability Pact.
  - Germany was hit hard by the global crisis but at the time of assessment a strong recovery was under way; trend growth in potential output is relatively slow and interest rates are unusually low.

### Main Findings
- Overall observance of IAIS Insurance Core Principles (ICPs) is very high.
- Many enhancements suggested in the 2003 assessment have been implemented, including new rules improving corporate governance, risk management and internal control requirements for insurance undertakings.
- Reinsurers are now subject to more extensive regulation and supervision, with regulatory treatment reflecting differences between reinsurers and primary insurers.
- New regulations anticipate some Pillar 2 requirements to be implemented with Solvency II, facilitating transition to a new risk-based solvency regime starting in 2013.
- A new risk-based system for selecting supervisory priorities and allocating supervisory resources has been implemented.
- Authorities acknowledge need to continue to develop supervisory capacity, particularly in preparation for Solvency II:
  - Enhancement of BaFin supervisory resources (quantity and quality) will be required.
  - Frequency of on-site inspection should be increased, especially for insurers with medium-sized market impact (current practice: on-site inspection at least every eight years).
  - Group-wide supervision needs enhancement given presence of large, cross-border insurance groups; level of supervisory cooperation should also be improved.
  - Further refinement of stress testing techniques and improved group-wide stability analysis would be helpful.
- Market conduct and intermediaries:
  - Implementation of the EU directive on insurance intermediaries is a major step towards ensuring adequate supervision of market conduct issues.
  - The split of competences between BaFin and the local Chambers of Industry and Commerce should be reviewed to ensure effective market conduct supervision and consumer protection.
- Investment regulation for reinsurers:
  - Most supervisory requirements and tools applied to primary insurers are also applied to reinsurers.
  - Exception: investment activity for reinsurers is regulated on the basis of the “prudent person principle” to account for specific features of reinsurance activity; vigilance is required in its application.

### Key Statistics and Exact Figures Cited
- Main mission: January–February 2011.
- Assessment part of: 2011 Financial Sector Assessment Program (FSAP) Update.
- Assessor: Fausto Parente.
- Number of insurance companies at end-2010: 621.
  - Life insurers: 98.
  - Nonlife insurers (including health): 265 (including 48 health insurers).
  - Pensionskassen: 152.
  - Reinsurers: 36.
  - Others including death benefit funds: 40.
  - Pensionsfonds: 30.
- Largest groups: 20 largest groups conduct bulk of business; five largest insurance groups receive about half of all premiums.
- Sector assets (end-2009): roughly €1.4 trillion.
  - Life insurers: €804 billion (end-2009).
  - Pensionskassen and Pensionsfonds: roughly €133 billion (end-2009).
- Current practice for on-site inspections: at least every eight years.
- Solvency II transition start: 2013.

### Select ICP Gradings and Comments (extract)
- ICP 1. Conditions for effective insurance supervision — O
  - Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure.
- ICP 2. Supervisory objectives — O
  - Objectives fixed under the law mainly focused on protection of policyholders. Consideration could be given to explicitly mention systemic stability.
- ICP 3. Supervisory authority — LO
  - BaFin operationally independent and subject to clear accountability mechanisms; staff experienced and qualified.
  - Recommendation: Public disclosure of reasons for dismissal of board members should be required; review guidance for control of BaFin by Federal Ministry of Finance to reduce reporting burden.
  - Scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
- ICP 4. Supervisory process — O
  - BaFin moving toward a more risk-based supervisory approach; risk model to select and prioritize supervisory analysis is operational and should be further developed to better take into account supervision of insurance groups.
- ICP 5. Supervisory cooperation and information sharing — O
  - BaFin empowered to and does regularly exchange information with other supervisors within and beyond the EU.
  - Signatory to EU/EEA Protocols on supervisory cooperation, IAIS MoU, and a number of bilateral MoUs.
  - Recommendation: Monitor concrete application of confidentiality rules to avoid becoming an obstacle to full information sharing among supervisors.

### Licensing, Suitability, and Changes in Control — Findings
- Licensing. O The licensing regime, based on the EU directives, is clear and transparent.
- Suitability of persons. LO BaFin performs robust due diligence on any proposed significant owner, board members, trustees and appointed actuaries prior to licensing and after by also monitoring subsequent changes.
  - Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies.
  - Suggested that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
- Changes in control and portfolio transfers. O The conditions under which a qualified holding in an insurance undertaking can be assumed are clear and in line with the relevant EU directives. Portfolio transfers must be approved by BaFin.

### Corporate Governance, Internal Controls, and Market Analysis — Findings
- Corporate governance. O BaFin has recently introduced new requirements for insurers, which strengthened the robustness of its assessment of insurers’ corporate governance. Measures anticipate Pillar 2 requirements under Solvency II (2013).
- Internal controls. O BaFin has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls tailored to the nature, scale and complexity of their operations.
- Market analysis. O BaFin performs market analysis and stress tests to identify, assess, and mitigate risks to the insurance sector. Quantitative analysis will need to be enhanced and kept up to date, for example, through more comprehensive stress testing for larger insurers.

### Reporting, On-site Inspection, and Supervisory Measures — Findings
- Reporting to supervisors. O BaFin has a systematic process to review regulatory returns and information provided by insurers as part of its offsite surveillance.
  - Advisable to introduce an explicit obligation on auditors and insurers to inform the supervisor promptly of any material changes affecting current or foreseeable financial condition.
- On-site inspection. O BaFin conducts on-site inspections prioritized by insurers’ risk profiles and market impact.
  - Current practice: Medium market-impact insurers inspected not earlier than 8 years after last inspection (not later than 10); Low market-impact insurers not earlier than 10 years after last inspection (not later than 12).
  - Recommendation: Increase frequency for medium- and low-impact insurers; consider brief inspection visits every three or four years for medium-sized insurers.
- Preventive and corrective measures. O BaFin empowered to take a range of preventative measures; Solvency II will introduce a more specific intervention ladder based on solvency ratios.
- Enforcement or sanction. O BaFin takes a proportionate approach; administrative fines rarely used.
- Winding-up or exit from the market. O Legislation provides for orderly exits and high degree of policyholder protection in insolvency.

### Group-wide Supervision and Risk Management — Findings
- Group-wide supervision. O Regulatory frameworks for insurance groups and financial conglomerates broadly in line with EU directives.
  - Impending Solvency II implementation will strengthen BaFin’s supervision of insurance groups, subject to adequacy of resources.
- Risk assessment and management. O VAG establishes high-level requirements; supplemented by BaFin circulars. Requirements anticipate Solvency II.

### Insurance Activity, Liabilities, Investments, and Derivatives — Findings
- Insurance activity. O BaFin reviews premium pricing for some classes and monitors insurance risks through assessment of risk management and technical provisions.
- Liabilities. O Clear legal principles and regulatory guidelines for estimating insurance liabilities; BaFin monitors technical provisions off-site and on-site and can require remediation.
  - Recommendation: Increase staff with actuarial expertise and related quantitative skills.
- Investments. O Regulatory requirements in place; specific quantitative limits for primary insurers; reinsurers regulated under “prudent person principle.”
  - Recommendation: Keep supervisory reporting requirements under review and continue developing BaFin’s internal assessment and monitoring in view of Solvency II.
- Derivatives and similar commitments. LO Regulatory policy for derivatives by primary insurers aligned with international best practice; provisions for reinsurers more general and reporting less stringent.

### Capital Adequacy, Intermediaries, Consumer Protection, Disclosure, Fraud, AML/CFT — Findings
- Capital adequacy and solvency. O Regime based on EU directives (Solvency I). Solvency II implementation from January 2013 will create a more risk-sensitive regime.
- Intermediaries. LO BaFin not responsible for direct supervision of intermediaries; implementation of EU directive major step but effectiveness of market conduct control by competent supervisors needs assessment.
- Consumer Protection. O Tools exist for consumers (complaints to BaFin, consumers’ associations, ombudsman).
- Information, disclosure and transparency. O Room for improvement in BaFin publications of market data and analysis; consider enhancement of disclosure requirements under Solvency II.
- Fraud. O Core requirements in place.
- AML/CFT. LO BaFin addressing weaknesses identified in FATF; no evidence remedial actions systematically taken by Länder with regard to intermediaries they supervise.

### Observance Summary — Exact counts
- Observed (O) 23
- Largely observed (LO) 5
- Partly observed (PO) 0
- Not Observed (NO) 0
- Total 28

### Recommended Action Plan — Key Recommendations (by ICP)
- ICP 3 Supervisory authority:
  - Strengthen regulatory resources for supervision of internationally active insurance groups and implementation of Solvency II.
  - Public disclosure of the reasons for removal of board members should be envisaged.
- ICP 4 Supervisory process:
  - Continue developing a risk-based supervisory approach by enlarging the risk model to take into account group-wide supervision.
  - Ensure stress testing and other quantitative techniques strongly influence supervisory prioritization.
- ICP 7 Suitability of persons:
  - Consider power to extend suitability requirements to other high level managers who determine day-to-day policies.
  - Require insurers to report to BaFin as they become aware of circumstances relevant for fitness and propriety of key functionaries.
- ICP 9 Corporate governance:
  - Continue to check that mutual insurers follow procedures equivalent to the corporate governance code and adapt as Solvency II is introduced.
- ICP 11 Market analysis:
  - Continue to develop stress testing capacity, especially regarding larger insurers and financial groups, and longer-term effects.
- ICP 12 Reporting to supervisors:
  - Introduce explicit obligation for prompt notification by insurers and auditors of material changes affecting current or foreseeable financial condition.
  - Keep reporting requirements up to date while containing regulatory burden, for example by harmonizing and centralizing reporting requirements where possible.
- ICP 13 On-site inspection:
  - Increase frequency of regular on-site inspections for medium and low impact insurers to bring it closer to international best practice, without sacrificing risk-based principles.
- ICP 14 Preventive and corrective measures:
  - Keep the level of sanctions under review to ensure they remain effective deterrents.
- ICP 17 Group-wide supervision:
  - Increase adequacy of resources for effective supervision of internationally active groups and financial conglomerates.
  - Develop risk classification tool to include group-wide supervision.
  - Harmonize supervisory approach for group capital adequacy calculation by issuing more detailed rules on treatment of participation in credit institutions and valuation criteria.
  - Regularly address group-wide effects in stress tests.
- ICP 20 Liabilities:
  - Increase number of staff with actuarial expertise and related quantitative skills; enhance advisory function.
  - Refine and conduct stress tests for liability-side risks more frequently to assess sensitivity to actuarial assumptions and discount rates.
- ICP 21 Investments:
  - Keep supervisory reporting requirements under review and continue developing BaFin’s internal assessment and monitoring in view of Solvency II valuation complexity.
- ICP 22 Derivatives and similar commitments:
  - Complement “prudent person principle” for reinsurers with reinforced off-site and on-site monitoring of such activities.
- ICP 24 Intermediaries:
  - Carry out analysis of the impact of the relevant EU directive and take appropriate actions to improve protection of policyholders at point of sale.
- ICP 26 Information, disclosure and transparency:
  - Shorten time lags in publication of aggregate insurance data.
  - Consider availability of preliminary data—perhaps when over 90 percent of input data have been compiled—on a more timely basis.
- ICP 28 AML/CFT:
  - Authorities should continue to address the weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.

### Authorities' Response
- The authorities broadly agree with the assessment.

### Detailed Assessment — Selected Highlights
- Conditions for Effective Insurance Supervision (ICP 1): Observed. VAG principal legislation; laws and administrative guidance publicly available; BaFin publishes statistics and annual reports.
- Supervisory Objectives (ICP 2): Observed. VAG objectives focused on protection of policyholders; recommendation to consider explicitly mentioning systemic stability.
- Supervisory Authority (ICP 3): Largely Observed. BaFin operationally independent; funding from levies and fees; staff in insurance and pension fund supervision at end-2010: 257 (215 at end-2009; 186 at end-2004; 70 at end-2002). Training in 2009: 1,145 staff (71 percent of all employees, 1,829); 470 training events; average 4 days per employee.
- Supervisory Process (ICP 4): Observed. Risk-based allocation to market-impact classes (low, medium, high). Recommendation to further develop risk model for groups and ensure stress testing influences prioritization.
- Supervisory Cooperation (ICP 5): Observed. BaFin signatory to EU/EEA Protocols, IAIS MMoU, and various bilateral MoUs; empowered to exchange confidential information under safeguards.
- Licensing (ICP 6): Observed. License required; qualified participation threshold at least 10 percent; three-month administrative principle for license decision once BaFin has all necessary information.
- Suitability (ICP 7): Largely Observed. Suitability checks include knowledge, experience, screening for financial problems and criminal convictions; conflicts of interest rules on mandates; recommendation to extend requirements to other high-level managers and reporting obligations.
- On-site Inspection (ICP 13): Observed. Periodicity by market-impact: High (any time); Medium represent 19 percent of total and inspected not earlier than 8 years after last inspection (not later than 10); Low represent 70 percent of total and inspected not earlier than 10 years after last inspection (not later than 12). On-site inspections in 2010: 63; plan for 2011: 69.
- Market Analysis (ICP 11): Observed. All (approximately 600) German insurers have been running stress tests since 2004; BaFin requires scenario analysis reported twice a year.
- Reporting (ICP 12): Observed. Regular financial reports and quarterly reporting for investments and coverage of technical liabilities; external audit required annually (except small insurers audited at least every three years). No explicit prompt notification obligation currently.
- Group-wide Supervision (ICP 17): Observed. Top 5 insurance groups hold 49 percent of market share as at end-2009; supervisory colleges used; recommendation to increase resources and perform group-wide stress tests.
- Risk Management (ICP 18): Observed. Requirements for comprehensive risk management and quarterly stress tests for investment risk and asset/liability.
- Liabilities (ICP 20): Observed. Adequate technical provisions required; Federal ministry fixes maximum technical interest rate and actuarial principles; recommendation to increase actuarial staff in BaFin.
- Investments (ICP 21): Observed. Quantitative thresholds on exposure types; valuation principle lower-of-cost-or-market; quarterly reporting of book and current values required; reinsurers follow “prudent person principle.”
- Derivatives (ICP 22): Largely Observed. Permitted for hedging and efficient portfolio management under conditions; quarterly reporting required; reinsurer provisions more general.
- Capital Adequacy (ICP 23): Observed. Solvency I in force; Solvency II (2009/138/EC) implementation planned to start in 2013; BaFin launched interest rate stress test for life insurers with scenarios including medium-term until 2018 (three subscenarios) and long-term until 2027.
- Intermediaries (ICP 24): Largely Observed. About 300,000 insurance intermediaries registered following Insurance Mediation Directive (2002/92/EC); IHK responsible for registration and supervision.
- Consumer Protection (ICP 25): Observed. Required information to policyholders extensive; complaints unit outcomes favorable in about 33 percent of cases; complaints in 2009: 14,274.
- Information, Disclosure & Transparency (ICP 26): Observed. Public disclosure of annual accounts required; recommendation to shorten publication lags and provide higher-frequency preliminary data when over 90 percent of input compiled.
- Fraud (ICP 27): Observed. Insurers obliged to report fraud (~250 per year); GDV manages fraud prevention and database.
- AML/CFT (ICP 28): Largely Observed. Legal framework includes Anti-Money Laundering Act (GwG); GwG CDD threshold €15,000; record retention five years; BaFin cross-sectoral Money Laundering Prevention Department about 90 people, 14 relevant for insurance sector; reinsurers not subject to GwG; gaps remained in supervision of intermediaries at time of assessment.

*Source: Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles (extracts from the IMF FSAP Update assessment).*

### 1. Summary of Main Findings of Assessment of Observance of the IAIS Insurance

### 1. Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles

### Introduction and Methodology
- Assessment carried out as part of the 2011 Financial Sector Assessment Program (FSAP) Update. Main mission: January–February 2011.
- Assessor: Fausto Parente of the Italian Insurance Supervisory Authority (ISVAP).
- Assessment based on review of relevant laws and regulations in force at the time; discussions with supervisors, other government bodies, and market participants; and additional material provided by the authorities.
- Access to inspection reports and institution-specific information was limited due to strong legal restrictions on information sharing.
- Level of observance for each Principle reflects assessments of the essential criteria only; principles graded as observed (O), largely observed (LO), partly observed, or not observed per the guidance in the assessment.

### Institutional and Market Structure — Overview
- Insurance supervisor: Federal Financial Supervisory Authority (BaFin). Federal Ministry of Finance (BMF) has legal and supervisory control over BaFin.
- Legal base for supervision: Insurance Supervision Act (VAG); insurers also subject to other acts, codes, ordinances and circulars.
- Insurance sector structure and size:
  - Total number of companies at end-2010: 621.
  - Composition: 98 life insurers, 265 nonlife insurers (including 48 health insurers), 152 Pensionskassen, 36 reinsurers, others including 40 death benefit funds and 30 Pensionsfonds.
  - The 20 largest groups conduct the bulk of business; the five largest insurance groups alone receive about half of all premiums.
  - Total sector assets: roughly €1.4 trillion (end-2009).
  - Life insurers: €804 billion in total assets (end-2009).
  - Pensionskassen and Pensionsfonds: roughly €133 billion in total assets (end-2009).
- Market developments:
  - Sales of traditional life insurance products (endowment policies) have recently declined due to tax law changes; certain types of annuities increased.
  - Life insurance sector trend to single premium contracts, attributed in part to the low interest rate environment.
  - Despite the global financial crisis, soundness indicators have remained generally healthy across the insurance sector.
- Accounting and audit:
  - German listed companies apply IFRS since 2005 as required.
  - Legislative framework requires external auditors to be independent in fact and appearance.
- Macro-financial context:
  - Monetary policy conducted within the European System of Central Banks framework.
  - Budgetary policy within a fiscal framework based on predefined rules and the European Stability Pact.
  - Germany was hit hard by the global crisis but at the time of assessment a strong recovery was under way; trend growth in potential output is relatively slow and interest rates are unusually low.

### Main Findings
- Overall observance of IAIS Insurance Core Principles (ICPs) is very high.
- Many enhancements suggested in the 2003 assessment have been implemented, including new rules improving corporate governance, risk management and internal control requirements for insurance undertakings.
- Reinsurers are now subject to more extensive regulation and supervision, with regulatory treatment reflecting differences between reinsurers and primary insurers.
- New regulations anticipate some Pillar 2 requirements to be implemented with Solvency II, facilitating transition to a new risk-based solvency regime starting in 2013.
- A new risk-based system for selecting supervisory priorities and allocating supervisory resources has been implemented.
- Authorities acknowledge need to continue to develop supervisory capacity, particularly in preparation for Solvency II:
  - Enhancement of BaFin supervisory resources (quantity and quality) will be required.
  - Frequency of on-site inspection should be increased, especially for insurers with medium-sized market impact (current practice: on-site inspection at least every eight years).
  - Group-wide supervision needs enhancement given presence of large, cross-border insurance groups; level of supervisory cooperation should also be improved.
  - Further refinement of stress testing techniques and improved group-wide stability analysis would be helpful.
- Market conduct and intermediaries:
  - Implementation of the EU directive on insurance intermediaries is a major step towards ensuring adequate supervision of market conduct issues.
  - The split of competences between BaFin and the local Chambers of Industry and Commerce should be reviewed to ensure effective market conduct supervision and consumer protection.
- Investment regulation for reinsurers:
  - Most supervisory requirements and tools applied to primary insurers are also applied to reinsurers.
  - Exception: investment activity for reinsurers is regulated on the basis of the “prudent person principle” to account for specific features of reinsurance activity; vigilance is required in its application.

### Key Statistics and Exact Figures Cited
- Main mission: January–February 2011.
- Assessment part of: 2011 Financial Sector Assessment Program (FSAP) Update.
- Assessor: Fausto Parente.
- Number of insurance companies at end-2010: 621.
  - Life insurers: 98.
  - Nonlife insurers (including health): 265 (including 48 health insurers).
  - Pensionskassen: 152.
  - Reinsurers: 36.
  - Others including death benefit funds: 40.
  - Pensionsfonds: 30.
- Largest groups: 20 largest groups conduct bulk of business; five largest insurance groups receive about half of all premiums.
- Sector assets (end-2009): roughly €1.4 trillion.
  - Life insurers: €804 billion (end-2009).
  - Pensionskassen and Pensionsfonds: roughly €133 billion (end-2009).
- Current practice for on-site inspections: at least every eight years.
- Solvency II transition start: 2013.

### Table 1 — Select ICP Gradings and Comments (extract)
- ICP 1. Conditions for effective insurance supervision — O
  - Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure.
- ICP 2. Supervisory objectives — O
  - Objectives fixed under the law mainly focused on protection of policyholders. Consideration could be given to explicitly mention systemic stability.
- ICP 3. Supervisory authority — LO
  - BaFin operationally independent and subject to clear accountability mechanisms; staff experienced and qualified.
  - Recommendation: Public disclosure of reasons for dismissal of board members should be required; review guidance for control of BaFin by Federal Ministry of Finance to reduce reporting burden.
  - Scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
- ICP 4. Supervisory process — O
  - BaFin moving toward a more risk-based supervisory approach; risk model to select and prioritize supervisory analysis is operational and should be further developed to better take into account supervision of insurance groups.
- ICP 5. Supervisory cooperation and information sharing — O
  - BaFin empowered to and does regularly exchange information with other supervisors within and beyond the EU.
  - Signatory to EU/EEA Protocols on supervisory cooperation, IAIS MoU, and a number of bilateral MoUs.
  - Recommendation: Monitor concrete application of confidentiality rules to avoid becoming an obstacle to full information sharing among supervisors.

*Source: Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles (extracts from the IMF FSAP Update assessment).*

### 6.     Licensing. O The licensing regime, based on the EU directives,

### _cr11272 - 6.     Licensing. O The licensing regime, based on the EU directives,

### Licensing, Suitability, and Changes in Control — Findings
- Licensing. O The licensing regime, based on the EU directives, is clear and transparent.
- Suitability of persons. LO BaFin performs robust due diligence on any proposed significant owner, board members, trustees and appointed actuaries prior to licensing and after by also monitoring subsequent changes. Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies. Moreover, it is suggested that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
- Changes in control and portfolio transfers. O The conditions under which a qualified holding in an insurance undertaking can be assumed are clear and in line with the relevant EU directives. Portfolio transfers must be approved by BaFin.

### Corporate Governance, Internal Controls, and Market Analysis — Findings
- Corporate governance. O BaFin has recently introduced new requirements for insurers, which strengthened the robustness of its assessment of insurers’ corporate governance. Those measures can be seen as an anticipation of the Pillar 2 requirements, which will come into force in 2013 under Solvency II.
- Internal controls. O BaFin has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls tailored to the nature, scale and complexity of their operations. Measures were introduced to enhance the insurers’ internal controls systems in view of the incoming implementation of Solvency II.
- Market analysis. O BaFin performs market analysis and stress tests to identify, assess, and mitigate risks to the insurance sector. Quantitative analysis will need to be enhanced and kept up to date, for example, through more comprehensive stress testing for larger insurers.

### Reporting, On-site Inspection, and Supervisory Measures — Findings
- Reporting to supervisors. O BaFin has a systematic process to review regulatory returns and information provided by insurers as part of its offsite surveillance. The supervisory returns take advantage of the auditor assessment performed on the financial statement. It is advisable to introduce an explicit obligation on auditors as well as on the insurer itself to inform the supervisor promptly of any material changes which affect the current or foreseeable financial condition of an institution.
- On-site inspection. O BaFin conducts on-site inspections, which are prioritized based on an analysis of insurers’ risk profiles and its market impact. It also has recently conducted joint on-site inspections with other supervisors to address specific issues. However, the frequency of regular on-site inspection for the medium- and low- impact insurers should be increased. While resources allocation should be prioritized according to assessed risks, the chance of detecting emerging difficulties would be importantly increased if at least brief inspection visits were conducted every three or four years for medium-sized insurers.
- Preventive and corrective measures. O In line with the EU directives, BaFin is empowered to take a range of preventative measures, which allows a progressive escalation of supervisory actions to respond to emerging concerns. The implementation of Solvency II will imply further increase of flexibility in the possible supervisory actions by introducing a more specific intervention ladder based on the solvency ratios.
- Enforcement or sanction. O BaFin takes a proportionate approach in exercising its enforcement powers under the VAG. The use of administrative fines is considered to be rarely necessary due to the fact that insurers in general comply even with initial informal requests from the authorities.
- Winding-up or exit from the market. O Legislation provides for orderly exits of insurers and a high degree of protection for policyholders in the event of insolvency.

### Group-wide Supervision and Risk Management — Findings
- Group-wide supervision. O The German regulatory frameworks for insurance groups and financial conglomerates are broadly in line with EU directives. The impending implementation of Solvency II will strengthen BaFin’s supervision of insurance groups, subject to the adequacy of regulatory resources.
- Risk assessment and management. O The VAG has established high-level requirements relating to insurers’ risk management, supplemented by BaFin circular and supervisory expectation. The effectiveness of insurers’ risk management system is assessed by BaFin under its supervisory review process. The risk management requirements can be seen as an anticipation of Solvency II which will come into force in 2013.

### Insurance Activity, Liabilities, Investments, and Derivatives — Findings
- Insurance activity. O BaFin directly reviews premium pricing for some classes of business and monitors insurance risks through its assessment of insurers’ risk management system and technical provisions.
- Liabilities. O There are clear, legal principles and regulatory guidelines for insurers to estimate their insurance liabilities. Audit reports of external auditors as well as appointed actuaries for certain lines of business can also be used. BaFin monitors insurers’ technical provisions by off-site examinations as well as on on-site inspections, and has the power to require insurers to remedy any shortfall. It is recommended that, in view of the increasing complexity of the valuation criteria to be used under Solvency II as well as their differences with the current ones, BaFin should increase the number of its staff equipped with actuarial expertise and related quantitative skills. Its current advisory role in this field could be enhanced.
- Investments. O Regulatory requirements are in place for insurers to manage their investment risks in a manner proportionate to the nature, scale and complexity of their operations. A number of specific quantitative limits are applicable on the investment activity of the primary insurer in order to ensure an adequate spread of the risks. For the reinsurance activity, the regulation follows the “prudent person principle.” In view of the increasing complexity of the valuation criteria to be used under Solvency II, it is advisable to keep the supervisory reporting requirements under review and to continue developing BaFin’s internal assessment and monitoring.
- Derivatives and similar commitments. LO The regulatory policy and requirements for the use of derivatives by primary insurers are aligned with international best practice. Quarterly reporting is also defined. However, the provisions for reinsurance activity are more general and the reporting requirements are less stringent.

### Capital Adequacy, Intermediaries, Consumer Protection, Disclosure, Fraud, AML/CFT — Findings
- Capital adequacy and solvency. O The capital adequacy regime is based on the EU directives (Solvency I). The implementation of Solvency II with effect from January 2013 will result in a more risk-sensitive regime that will enhance risk-based supervision.
- Intermediaries. LO BaFin is not responsible for the direct supervision of the intermediaries. The implementation of the relevant EU directive has been a major step in enhancing the supervision of intermediaries, but it is difficult to assess the effectiveness of market conduct control performed by the competent supervisors. It is advisable to carry out such an analysis and take appropriate actions to continue improving the protection of policyholders at the point of sale.
- Consumer Protection. O There are various tools which enable the consumers to solve possible issues ranging from the complaints to BaFin, the help of consumers’ associations and the ombudsman.
- Information, disclosure and transparency towards markets. O There is room for improvement in the BaFin publications of market data and analysis, including key data of individual insurers and the timeliness of publication. Moreover, in view of the incoming Solvency II regime, consideration should be given to the enhancement of the disclosure requirements applied to the insurers.
- Fraud. O The core requirements are in place.
- Anti-money-laundering, combating the financing of terrorism (AML/CFT). LO While BaFin is in the process of addressing the weaknesses identified in the FATF, especially when dealing with the increased control of the insurers’ activity, there is no evidence that remedial actions are systematically taken by the Länder with regard to insurance intermediaries that they supervise.

### Observance Summary — Exact counts
- Observed (O) 23
- Largely observed (LO) 5
- Partly observed (PO) 0
- Not Observed (NO) 0
- Total  28

### Recommended Action Plan — Key Recommendations
- ICP 3 Supervisory authority:
  - Strengthen regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
  - Public disclosure of the reasons for removal of board members should be envisaged.
- ICP 4 Supervisory process:
  - Continue to develop a risk-based supervisory approach by enlarging the risk model to take into account group-wide supervision.
  - Ensure stress testing and other quantitative techniques strongly influence supervisory prioritization.
- ICP 7 Suitability of persons:
  - Consider power to extend suitability requirements to other high level managers who determine day-to-day policies.
  - Require insurers to report to BaFin as they become aware of circumstances relevant for fitness and propriety of key functionaries.
- ICP 9 Corporate governance:
  - Continue to check that mutual insurers follow procedures equivalent to the corporate governance code and adapt as Solvency II is introduced.
- ICP 11 Market analysis:
  - Continue to develop stress testing capacity, especially regarding larger insurers and financial groups, and longer-term effects.
- ICP 12 Reporting to supervisors:
  - Introduce an explicit obligation for prompt notification by insurers and auditors of material changes affecting current or foreseeable financial condition.
  - Keep reporting requirements up to date while containing regulatory burden, for example by harmonizing and centralizing reporting requirements where possible.
- ICP 13 On-site inspection:
  - Increase the frequency of regular on-site inspections for medium and low impact insurers to bring it closer to international best practice, without sacrificing risk-based principles.
- ICP 14 Preventive and corrective measures:
  - Keep the level of sanctions under review to ensure they remain effective deterrents.
- ICP 17 Group-wide supervision:
  - Increase adequacy of resources for effective supervision of internationally active groups and financial conglomerates.
  - Develop the risk classification tool (see ICP 4) to include group-wide supervision.
  - Harmonize supervisory approach for group capital adequacy calculation by issuing more detailed rules on treatment of participation in credit institutions and valuation criteria.
  - Regularly address group-wide effects in stress tests.
- ICP 20 Liabilities:
  - Increase number of staff with actuarial expertise and related quantitative skills; enhance advisory function.
  - Refine and conduct stress tests for liability-side risks more frequently to assess sensitivity to actuarial assumptions and discount rates.
- ICP 21 Investments:
  - Keep supervisory reporting requirements under review and continue developing BaFin’s internal assessment and monitoring in view of Solvency II valuation complexity.
- ICP 22 Derivatives and similar commitments:
  - Complement “prudent person principle” for reinsurers with reinforced off-site and on-site monitoring of such activities.
- ICP 24 Intermediaries:
  - Carry out analysis of the impact of the relevant EU directive and take appropriate actions to improve protection of policyholders at point of sale.
- ICP 26 Information, disclosure and transparency:
  - Shorten time lags in publication of aggregate insurance data.
  - Consider availability of preliminary data—perhaps when over 90 percent of input data have been compiled—on a more timely basis.
- ICP 28 AML/CFT:
  - Authorities should continue to address the weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.

* _cr11272 - 6.     Licensing. O The licensing regime, based on the EU directives,_

### 18.      The authorities broadly agree with the assessment.

### _cr11272 - 18.      The authorities broadly agree with the assessment.

### Detailed Assessment — Conditions for Effective Insurance Supervision
- Assessment: Observed.
- Findings:
  - The Federal Ministry of Finance bears political responsibility for proper functioning of the German insurance system.
  - BaFin cooperates closely with supervisory authorities of other EU member states and takes due account of harmonized European supervisory practice.
  - Principal legislation for insurance supervision is the VAG.
  - German legal system is codified; laws and administrative guidance are publicly available (including BaFin’s website).
  - Germany has a well developed, reliable, effective, and efficient legal and court system; decisions by BaFin are administrative acts subject to preliminary proceedings.
  - Auditing and actuarial standards: German accounting principles in the Commercial Code; Institute of German Certified Public Accountants and German Accounting Standards Committee issue statements that companies and auditors generally observe.
  - BaFin publishes an annual special report concerning statistics in the field of supervised insurance undertakings.
  - Germany has well-functioning money and securities markets.

### The Supervisory System — Objectives, Authority, Process, Cooperation
- Principle 2 (Supervisory objectives)
  - Assessment: Observed.
  - Findings:
    - Objectives in VAG: provide adequate safeguards of interests of policyholders and ensure obligations under insurance and reinsurance contracts can be met at all times.
    - BaFin’s mission: limit risks to the German financial system nationally and internationally; ensure Germany as a financial center functions properly and its integrity is preserved.
    - Recommendation: Consider explicitly mentioning systemic stability in VAG, in keeping with BaFin’s overall mandate.
- Principle 3 (Supervisory authority)
  - Assessment: Largely Observed.
  - Findings:
    - Insurance supervision divided between federal government and Länder; BaFin supervises private insurers of material economic significance and public insurers operating across Länder.
    - Federal supervisory authorities handle public insurers limited to a Land and private insurers with lesser economic significance (2 percent in terms of market share).
    - BaFin is operationally independent; oversight by BMF is ex post. No evidence of ex ante involvement in individual supervisory decisions.
    - BaFin may issue orders, appoint special commissioners, revoke licenses, conduct ad hoc surveys.
    - Administrative structure: president, executive board (president + four chief executive directors, one vice-president), administrative council (members from federal ministries, German Federal Parliament, financial sector representatives).
    - Internal audit and data protection office report directly to the president.
    - Funding: entirely from levies and fees paid by supervised undertakings; BaFin receives no federal budget funding. Funding based on FinDAG sections (section 13 (1), section 14, section 15, section 16) and FinDAGKostV.
    - Public consultation occurs before issuing new regulation.
    - Reporting: most objections against BaFin measures do not have suspensory effect.
    - Transparency: BaFin publishes budget plan audited by the German Federal Court of Auditors and an external auditor.
    - Staff levels: at end-2010 BaFin employed 257 staff in insurance and pension fund supervision department (215 at end-2009; 186 at end-2004; 70 at end-2002). Also at end-2010: 35 staff on cross-sectoral modeling, 62 on integrity of the financial system, and 87 on prevention of money laundering.
    - Training: In 2009, 1,145 members of staff took part in professional development courses — corresponding to 71 percent of all employees (1,829). In 2009, 470 training events were held. Each employee participated in an average of 4 days of professional development in 2009.
  - Comments / Recommendations:
    - Public disclosure of reasons for dismissal of board members should be required.
    - Review guidance for the control of BaFin by BMF to reduce reporting burden and grant more operational autonomy.
    - Strengthen regulatory resources for supervision of internationally active insurance groups and implementation of Solvency II.
- Principle 4 (Supervisory process)
  - Assessment: Observed.
  - Findings:
    - BaFin publishes supervisory processes via circulars, guidelines, announcements on its website.
    - BaFin uses a risk-based approach and allocates insurers to risk classes using key performance indicators; risk classification accounts for market impact (low, medium, high).
    - BaFin can immediately issue enforceable administrative acts and objections without suspensory effects.
    - BaFin annually publishes information on supervised insurance undertakings and sector observations; legal/administrative principles regularly published.
    - Appeals process via the Code of Administrative Court Procedures.
  - Comments / Recommendations:
    - BaFin is moving toward a more risk-based approach to be fully in place with Solvency II.
    - Further develop risk model to better account for insurance groups.
    - Ensure stress testing and quantitative techniques influence supervisory prioritization.
- Principle 5 (Supervisory cooperation and information sharing)
  - Assessment: Observed.
  - Findings:
    - BaFin empowered to share confidential information with other supervisors if they have equivalent professional secrecy obligations; breach of secrecy is penalized.
    - BaFin is signatory of EU/EEA Protocols and has bilateral MoUs with Australia, China, Dubai, some U.S. states; signed IAIS multilateral MoU (MMoU).
    - Pre-conditions for information exchange: supervisory purpose, confidentiality protection; recipient may only pass on information to extent BaFin would permit.
    - BaFin may ask for undertaking’s consent before passing information in case of doubts.
    - Before taking actions affecting another EU state’s supervisory duties, BaFin consults relevant supervisor(s) or lead supervisor; obliged to provide adequate information for group supervision.
  - Comments / Recommendation:
    - Monitor concrete application of confidentiality rules to avoid obstacles to full information sharing.

### The Supervised Entity — Licensing, Suitability, Changes in Control, Corporate Governance, Internal Controls
- Principle 6 (Licensing)
  - Assessment: Observed.
  - Findings:
    - License required from BaFin to perform insurance activity in Germany; conditions defined in VAG, ordinances, circulars; aligned with EU directives.
    - Life and nonlife separation: Life insurers not allowed to conduct nonlife business and vice versa.
    - Bicameral board system: supervisory board (nonexecutive) and management board (executive); suitability requirements for both.
    - Applicants must demonstrate fit and proper for management and supervisory board members and appointed actuary where required.
    - Qualified participation threshold: at least 10 percent of nominal capital or initial fund.
    - Minimum own funds (minimum guarantee fund) laid down in EU regulations and depend on class of insurance.
    - Business plan must include articles of association, reinsurance arrangement, outsourcing agreements, affiliates information, agreements with other companies, risk management system description, internal control system, and projections for at least three years by class.
    - Three-month administrative principle for license decision once BaFin has all necessary information.
    - Reinsurers: licensing system in VAG aligned with primary insurer standards; mutual recognition under Reinsurance Directive (2005/68/EC); supervision of third-country reinsurance companies introduced in 2008.
    - There were no cases of license refusal; one complex request delayed due to scarce initial information and third-country shareholder problems.
- Principle 7 (Suitability of persons)
  - Assessment: Largely Observed.
  - Findings:
    - Suitability requirements for supervisory and management board members, qualified participations, and appointed actuaries.
    - Qualification and reliability checks include theoretical and practical knowledge, management experience, screening for financial problems, bankruptcy, unpaid debts, criminal convictions, previous sanctions.
    - Conflicts of interest rules: limits on mandates (e.g., two for managing board, five for supervisory board except within same group; BaFin may grant exceptions), composition rules, cooling-off periods.
    - BaFin consults Federal Central Register of previous convictions and Federal Central Register of Trade and Industrial Offences.
    - BaFin can impose measures on qualifying holders (prohibit voting rights, require approval for disposition of shares).
    - Trustees in life insurance (section 11b VAG) and trustees for health premium changes (section 12b VAG) have independent and qualification requirements.
  - Comments / Recommendations:
    - Consider extending similar requirements to other high-level managers who determine day-to-day policies.
    - Suggest insurers be required to report to BaFin when they become aware of circumstances relevant to fitness and propriety of key functionaries.
- Principle 8 (Changes in control and portfolio transfers)
  - Assessment: Observed.
  - Findings:
    - Any acquisition or increase in qualifying holding requires BaFin authorization. Qualified participation defined at least 10 percent of nominal capital or voting rights or decisive influence.
    - Notification thresholds: 20 percent, 30 percent, 50 percent, or minimum 10 percent qualified participation.
    - BaFin given at least 60 working days to assess intended acquisition.
    - BaFin may prohibit transactions that jeopardize sound/prudent operations or impede effective supervision.
    - Portfolio transfers of insurance contracts require supervisor approval; transferee must meet solvency margin and coverage of technical provisions post-transfer.
  - Comments:
    - Conditions align with EU directives; special attention to policyholder protection in life sector regarding profit and bonuses recognition.
- Principle 9 (Corporate governance)
  - Assessment: Observed.
  - Findings:
    - Roles/responsibilities of management and supervisory boards defined by law.
    - Listed insurers expected to observe Corporate Governance Code (comply or explain); nonlisted invited to follow recommendations.
    - Specific requirements for proper business organization including risk strategy and risk management applicable from 2007 (VAG). Risk report and audit report submitted annually to supervisor.
    - In 2009 BaFin issued circular on good remuneration practices based on FSB Principles and European Commission recommendations.
    - July 2010: FSB requirements on remuneration transposed into specific law requiring a remuneration committee and annual remuneration report.
    - Appointed actuary position, tasks, responsibilities defined with direct access to management board.
  - Comments:
    - BaFin measures strengthen corporate governance in anticipation of Pillar 2 (Solvency II) requirements effective in 2013.
    - Continue monitoring mutuals to ensure equivalent procedures to Corporate Governance Code.
- Principle 10 (Internal controls)
  - Assessment: Observed.
  - Findings:
    - Minimum requirements for risk management in insurance undertakings set out (MaRisk Circular 3/2009).
    - Insurers must align internal controls with nature, size, and complexity of activities; BaFin can review documents and carry out on-site inspections.
    - Statutory audit report must contain information on internal audit unit and internal control procedures for accounting and derivatives use.
    - Larger insurance companies required to have internal audit function with direct access to management board.
    - Outsourcing agreements must form part of risk management and important outsourcing agreements must be submitted to BaFin.
    - Insurers submit risk report and audit report annually; appointed actuary’s report for life insurance forwarded to BaFin.
  - Comments:
    - BaFin has clearly articulated supervisory expectations for internal controls and introduced measures anticipating Solvency II.

### Ongoing Supervision — Market Analysis, Reporting, On-site Inspection, Preventive Measures, Enforcement, Winding-up, Group-wide Supervision
- Principle 11 (Market analysis)
  - Assessment: Observed.
  - Findings:
    - BaFin performs regular market analysis; publishes results in annual reports and BaFin Journal.
    - Ad hoc office in insurance directorate provides reports to executive board; insurers required to conduct scenario analysis and report results to BaFin twice a year.
    - Stress tests used to assess insurers’ ability to meet obligations under crisis scenarios; all (approximately 600) German insurers have been running stress tests since 2004 based on BaFin guidance.
    - Microprudential stress tests regularly carried out under BaFin guidance; Bundesbank conducts top-down sector analysis from time to time.
    - Recent analyses: impact of low interest rate scenario published in 2010 Bundesbank Financial Stability Review; analyses on sovereign risk exposure, low interest rates, “toxic assets,” hedge funds, private equity, asset-based securities.
  - Comments / Recommendations:
    - Stress tests should be regularly revised and adopted to Solvency II.
    - Complement current tests with more sophisticated tests for larger insurers as envisaged by EIOPA (press release of 13 January, 2011).
    - Consider multi-period tests regularly and improve analysis of group-wide stability and linkages to banking sector.
- Principle 12 (Reporting to supervisors and off-site monitoring)
  - Assessment: Observed.
  - Findings:
    - Regular financial reports required: financial statements, annual reports, actuary's report, solvency notifications (solo and group), auditors' reports, notifications on investment portfolio, intragroup transaction reports.
    - Life insurers must submit actuarial basis for premium rating and technical provisions for new products.
    - Circulars regulate reporting for structured products, derivatives, ABS, credit-linked notes; companies must report coverage of technical liabilities with eligible investments based on book and market values.
    - Reporting frequency: majority annually; some quarterly (investments and coverage of technical liabilities); forward-looking pro forma reports (stress tests, scenario reports) also required.
    - External audit required annually (except small insurers audited at least every three years).
    - BaFin requires book and market values in supervisory reporting and can enforce submission of reports; sanctions/fines exist though hardly used.
    - No direct obligation to promptly communicate material changes unless already insolvent.
  - Comments / Recommendations:
    - Introduce explicit obligation for prompt notification to supervisor by insurers and auditors of material changes affecting current/foreseeable financial condition.
    - Keep reporting requirements up to date for Solvency II; contain regulatory burden via harmonization and centralization where possible.
- Principle 13 (On-site inspection)
  - Assessment: Observed.
  - Findings:
    - Sections 83 and 121a (1) VAG authorize BaFin inspections without particular reason.
    - Annual confidential inspection plan established each November/December.
    - On-site inspection periodicity by market-impact: High market-impact insurers can be inspected any time; Medium market-impact insurers (representing 19 percent of total) inspected not earlier than 8 years after last inspection (not later than 10); Low market-impact insurers (70 percent of total) inspected not earlier than 10 years after last inspection (not later than 12).
    - On-site inspection period typically two weeks; insurer notified at least four weeks in advance unless short-notice due to supervisory concern.
    - In 2010 there were 63 on-site inspections; plan for 69 in 2011.
    - On-site inspections can extend to service providers, intermediaries, outsourced companies.
  - Comments / Recommendations:
    - Frequency of regular on-site inspection for medium- and low-impact insurers is low and should be increased.
    - Consider brief inspection visits every three or four years for medium-sized insurers to improve detection of emerging difficulties.
- Principle 14 (Preventive and Corrective Measures)
  - Assessment: Observed.
  - Findings:
    - BaFin uses informal measures first (guidance notes, informal requests, meetings).
    - Under sections 81 (2), 81b, 121a, 104h, 104t VAG, BaFin entitled to take progressive measures to prevent or remedy irregularities.
    - Example measures: require dismissal of management board members (section 87 (6) VAG), appoint special representative (section 83a VAG), revoke license, require restructuring scheme if minimum solvency margin not met.
  - Comments:
    - Implementation of Solvency II will introduce a more specific intervention ladder based on solvency ratios.
    - Level of sanctions should be kept under review to ensure deterrent effect.
- Principle 15 (Enforcement or sanctions)
  - Assessment: Observed.
  - Findings:
    - Enforcement measures include prohibiting payments to shareholders/policyholders if insolvency risk exists; prohibiting asset transfers and buybacks; impose restrictions on asset disposal; require dismissal of management board members; appoint special commissioner; withdraw license; report criminal offences; apply for opening of insolvency proceeding.
    - Instructions issued by BaFin are immediately enforceable and may be compulsorily enforced even if contested.
    - BaFin may impose administrative fines (rarely used).
  - Comments:
    - BaFin takes proportionate approach; administrative fines rarely necessary as insurers generally comply with informal requests.
- Principle 16 (Winding-up and exit from the market)
  - Assessment: Observed.
  - Findings:
    - BaFin may apply to court for opening of insolvency proceeding when insurer is insolvent or imminently illiquid.
    - Insolvency criteria and procedures established by VAG, Insurance Contract Act (VVG), and general Insolvency Statute (InsO).
    - BaFin supervises voluntary liquidation and run-off in case of license revocation or prohibition to underwrite new business.
    - Insurance-related claims protected by guarantee assets and rank prior to claims of remaining insolvency creditors up to share of guarantee assets (priority not applicable to reinsurers).
    - Statutory insolvency protection schemes in place: protektor, medicator for life and substitutive health insurance; BaFin empowered to transfer life/health portfolio of insolvent primary insurer to these schemes.
    - Default fund for motor vehicle third-party liability insurance exists in conformance with EU Directives.
- Principle 17 (Group-wide supervision)
  - Assessment: Observed.
  - Findings:
    - Legislation defines undertakings subject to group-wide supervision for insurance groups and financial conglomerates; BaFin holds the list of such groups.
    - Top 5 insurance groups hold 49 percent of market share as at end-2009.
    - Use of supervisory colleges has increased; BaFin has internal guideline for group-wide supervision and a center of expertise for group-wide supervision.
    - Reporting on intragroup transactions, adjusted solvency requirements to avoid multiple gearing, internal controls and risk management processes required.
    - BaFin may take enforcement action against entities in a financial conglomerate if solvency or intragroup risks threaten the regulated entity.
  - Comments / Recommendations:
    - Increase adequacy of resources for effective supervision of internationally active groups/conglomerates.
    - Develop risk classification tool to include group-wide supervision.
    - Harmonize supervisory approach for group capital adequacy calculations (e.g., treatment of participation in credit institutions, valuation criteria).
    - Perform group-wide stress tests more regularly, including linkages to other financial institutions.

### Prudential Requirements — Risk Assessment, Insurance Activity, Liabilities, Investments, Derivatives, Capital Adequacy
- Principle 18 (Risk assessment and management)
  - Assessment: Observed.
  - Findings:
    - Insurers required to have proper business organization with risk strategy and risk management system; submit risk and audit reports annually (sections 55c and 64a VAG).
    - BaFin requires systems to identify, measure, assess, report, and control risks with tolerance levels; risk management must cover underwriting, market, credit, country, concentration, liquidity, operational, strategic, reputational risks.
    - Stress tests required at least quarterly for investment risk and asset/liability assessment.
    - Specific rules for direct and indirect investments in hedge funds.
  - Comments:
    - Requirements anticipate Solvency II; BaFin assesses effectiveness via supervisory review.
- Principle 19 (Insurance activity)
  - Assessment: Observed.
  - Findings:
    - BaFin expects strategic underwriting and pricing policies, diversified risks, adequate premium levels, appropriate reinsurance cover.
    - Monitoring via internal reporting, ad hoc information requests, on-site inspections including review of risk management, rates, reserves, claims handling, provisions, investments.
    - Legal base for premium review exists for primary life insurance and accident insurance with return of premium; health insurance premium changes require independent trustee approval.
    - BaFin empowered to adjust value of reinsurance recoverables or disqualify assets covering technical provisions if appropriate.
  - Comments:
    - BaFin directly reviews premium pricing for some classes and monitors others via assessment of technical provisions.
- Principle 20 (Liabilities)
  - Assessment: Observed.
  - Findings:
    - Insurer required to establish adequate technical provisions; provisions included in insurance accounting rules and ordinances on mathematical provisions; BaFin consulted in legislative process.
    - BaFin empowered to assess and require increases in technical provisions.
    - Federal ministry of finance fixes maximum technical interest rate, maximum rate of zillmerization, and actuarial principles for mathematical provision calculation.
    - Nonlife technical provisions must cover unearned premiums, outstanding claims, incurred but not reported claims; discounting of nonlife technical provision not allowed.
    - Appointed actuary certifies adequacy of bases for mathematical provision for primary insurance companies where required.
  - Comments / Recommendations:
    - Increase BaFin staff with actuarial expertise and quantitative skills in view of Solvency II valuation complexity.
    - Refine and conduct liability-side stress tests more frequently; assess sensitivity to actuarial assumption variations and discount rates.
- Principle 21 (Investments)
  - Assessment: Observed.
  - Findings:
    - Insurers expected to have strategic investment and investment risk management proportional to operations.
    - Investment of guarantee and restricted assets must ensure maximum security and profitability while maintaining liquidity; list of admissible assets and quantitative thresholds defined to limit exposures to equity, sovereign, property, currency risks and single counterparties.
    - Specific limits on ABS, hedge funds, high-yield bonds; investments in other assets may be permitted by BaFin under strict conditions.
    - Trustee supervises guarantee assets for life and health insurance; trustee must be independent and confirmed by BaFin.
    - Valuation principle: lower-of-cost-or-market; exception for fixed assets serving business operations permanently allowing write-down only in event of lasting depreciation.
    - BaFin requests quarterly reporting of book and current values of investments.
    - Stress tests for investments at least quarterly; insurers must apply BaFin model and notify results.
    - Reinsurers follow “prudent person principle” allowing more flexibility with qualitative rules applied.
  - Comments:
    - Keep supervisory reporting requirements under review in light of Solvency II valuation changes and continue developing BaFin’s internal assessment and monitoring.
- Principle 22 (Derivatives and similar commitments)
  - Assessment: Largely Observed.
  - Findings:
    - Derivatives permitted under EU directives if used to limit investment risk or enable efficient portfolio management; in Germany, specific provisions defined for primary insurers.
    - Use of derivatives allowed to hedge FX or interest rate risks, prepare later securities purchase, or enhance yields without impairing restricted assets; arbitrage/trading positions or operations without underlying securities not permitted.
    - Quarterly reports to BaFin and disclosure requirements under accounting rules.
    - Staff using instruments must be adequately qualified; management board must be informed regularly.
    - Provisions largely applicable to structured products as well.
    - For reinsurers, derivatives permitted if they reduce investment risks or facilitate portfolio management; more general treatment and less stringent reporting.
  - Comments / Recommendations:
    - Complement prudent person approach for reinsurers with reinforced off-site and on-site monitoring; consider thematic inspections on group integration of derivatives risk management.
- Principle 23 (Capital adequacy and solvency)
  - Assessment: Observed.
  - Findings:
    - Current capital adequacy regime based on EU directives (Solvency I).
    - Solvency II directive adopted in 2009 (2009/138/EC) with full implementation planned to start in 2013.
    - Solvency II will be more risk based with improvements in matching assets/liabilities, capital requirements, and explicit liability valuation regulations.
    - BaFin can intervene if reinsurance contracts show little transfer of risk and valuation criteria may differ at solo vs consolidated level depending on accounting regimes.
    - Insurers must carry out stress tests regularly; scenarios adjustable by BaFin. Presently stress tests focus on asset side; liability-side tests may follow.
    - BaFin launched interest rate stress test for life insurers with scenarios: (a) medium-term until 2018 with three subscenarios (subscenario 1 - current economic conditions; subscenario 2 - decreasing interest rates; subscenario 3 - subscenario 2 and decreasing equity prices); and (b) a long-term scenario until 2027 to analyze liabilities side.
  - Comments:
    - Solvency II implementation from January 2013 will enhance risk-sensitive solvency regime and risk-based supervision.

### Markets and Consumers — Intermediaries, Consumer Protection, Disclosure, Fraud
- Principle 24 (Intermediaries)
  - Assessment: Largely Observed.
  - Findings:
    - Implementation of Insurance Mediation Directive (2002/92/EC) led to registration of about 300,000 insurance intermediaries.
    - German Chambers of Industry and Commerce (IHK) in Länder are responsible for registration, licensing, and direct supervision of intermediaries; BaFin has indirect supervisory role controlling insurer cooperation with intermediaries.
    - Licensing criteria, professional/repute, and financial capacity requirements based on EU directive.
    - Sanctions for criminal/administrative offences can be imposed by IHK; last resort is license withdrawal.
  - Comments / Recommendation:
    - Given large intermediary numbers and federal structure, assess effectiveness of market conduct control by competent supervisors and take actions to improve policyholder protection at point of sale.
- Principle 25 (Consumer protection)
  - Assessment: Observed.
  - Findings:
    - Required information to policyholders is extensive: costs, existence of guarantee fund or compensation schemes, general policy conditions, main features, right of cancellation and termination conditions.
    - For certain life insurance and when policyholder is consumer, primary insurer must provide product information sheet with key information including type of contract, risk description, excluded risks, premium details in euros.
    - BaFin consumer complaints unit handles complaints; about 33 percent had favorable results.
    - Number of complaints in 2009 was 14,274 (slightly decreasing).
    - Most primary insurers recognize an ombudsman able to assume binding decisions up to €10,000; free for policyholders.
    - Federal Data Protection Act (BDSG) lays down privacy rules for insurers and intermediaries.
  - Comments / Recommendations:
    - Consider enhancing disclosure requirements in view of Solvency II.
    - Shorten time lags in publication of aggregate financial sector data and provide higher-frequency and more timely preliminary data where over 90 percent of input compiled.
    - Greater provision of sectoral data and analysis by BaFin would benefit stakeholders.
- Principle 26 (Information, disclosure & transparency)
  - Assessment: Observed.
  - Findings:
    - Insurers required to publicly disclose annual accounts, management reports, group accounts, and group management reports.
    - Policyholders entitled on request to receive annual accounts and status report in the financial year following the review year.
  - Comments:
    - Enhance disclosure requirements for Solvency II; shorten publication lags and provide higher-frequency data.
- Principle 27 (Fraud)
  - Assessment: Observed.
  - Findings:
    - Legislation allows BaFin to supervise internal organization and internal control and to cooperate with criminal prosecution authorities.
    - Insurers obliged to report any case of fraud or possible fraud they detect (about 250 per year).
    - Criminal Code (StGB) punishes obtaining insurance benefits by false pretences and abuse of insurance; VVG relieves insurer of liability if false information provided to deceive.
    - German Insurance Association (GDV) provides fraud prevention training, exchange of experience, and manages a database to combat fraud.
  - Comments:
    - Core requirements to prevent, detect, and remedy insurance fraud are in place.

### AML/CFT
- Principle 28 (AML/CFT)
  - Assessment: Largely Observed.
  - Findings:
    - AML/CFT legal framework includes Anti-Money Laundering Act (GwG) and sector-specific provisions in VAG; laws implement FATF Recommendations.
    - 2010 IMF assessment (Detailed Assessment Report-DAR, 2010) found weaknesses in general legal framework and sanctioning for noncompliance; criticisms in supervision of intermediaries assigned to Länder authorities.
    - GwG applies to life primary insurers and insurers offering accident insurance with returns of premium, and to domestic branches of such companies; reinsurers not subject to GwG.
    - Insurance intermediaries subject to GwG when acting in respect of life insurance.
    - Obligations under GwG: customer due diligence (CDD), internal safeguarding systems, AML-compliance officers, monitor unusual transactions, record and maintain identification data, report suspicious transactions.
    - BaFin can impose administrative fines up to €100,000 on supervised entities for AML/CFT breaches; fines seldom used.
    - BaFin has cross-sectoral Money Laundering Prevention Department composed of about 90 people, 14 of which are relevant for the insurance sector.
    - GwG CDD threshold: identification obligations in case of business relationship or incidental transaction above €15,000; identification of beneficial owners generally required except limited low-risk cases.
    - Record retention: GwG requires keeping identification data for five years.
    - VAG requires procedures to detect unusual or suspicious transactions (section 80d.1. VAG) and reporting without delay to law enforcement and (in copy) to FIU; in 2010 primary insurers reported just a few suspicious transactions.
    - Primary insurers must appoint AML compliance officers and provide employee training; parent insurers must ensure branches/subsidiaries observe GwG requirements or take additional measures if local law does not permit.
  - Comments:
    - Germany is addressing weaknesses from IMF/FATF February 2010 assessment; amendments in law implementing second EU E-money directive due early March 2011 will affect primary insurers; AML-Act amendments affecting intermediaries due later in 2011.
    - At time of assessment, gaps remained and remedial action evidence for intermediaries was lacking.

*Source: _cr11272 - 18.      The authorities broadly agree with the assessment.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11272.pdf_