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Insurance supervision in Germany
Insurance supervision is based on the Insurance Supervision Act, the VAG. In Germany, the federal government and the federal states share insurance supervision.
Tasks and objectives of insurance supervision
Insurance is based on trust: customers expect an insurer to be able to provide the contractually agreed services consistently and often over a very long period of time. With its supervision of insurance companies, BaFin therefore fulfills important social and economic tasks and contributes to the long-term stability of the entire financial sector. The statutory basis for insurance supervision is the VAG. According to Section 294 of the Insurance Supervision Act, the main objective of insurance supervision is to protect policyholders and beneficiaries of insurance benefits. She pays attention to the
- adequate safeguarding of the interests of the insured,
- permanent fulfillment of the obligations from the insurance and
- Proper conduct of business operations and compliance with the law.
Solvency supervision is of particular importance. In particular, the insurers have to set up sufficient technical provisions, invest the assets according to the principle of entrepreneurial prudence and comply with commercial principles.
Division of tasks between the federal government and the states
Insurance supervision is divided between the federal and state governments - in accordance with the federal system of the Federal Republic of Germany.
On behalf of the federal government, BaFin oversees the private insurance companies operating in Germany that are of considerable economic importance and the public-law competition insurers that operate beyond the borders of a federal state. The supervisory authorities of the federal states primarily supervise the public-law insurers, whose activities are limited to the respective federal state, and those private-law insurers that are economically less important.
Scope of insurance supervision
All private and public insurance companies that operate private insurance within the scope of the VAG and are based in Germany are therefore either under the supervision of BaFin or the state supervisory authorities. Since the beginning of 2002, pension funds and, since December 2004, domestic reinsurers have also been subject to unrestricted insurance supervision under the VAG, which is carried out by BaFin. Insurance companies with their registered office in another EU country or a signatory to the EEA that conduct business in Germany by way of the provision of services are primarily subject to supervision by their country of origin. However, in consultation with the foreign supervisory authority, BaFin intervenes if it detects violations of general German legal principles.
The social insurance carriers - that is, the statutory health insurances, statutory pension insurance, professional associations and unemployment insurance - are not subject to supervision under the VAG. They are controlled by other government agencies, such as the Federal Insurance Office.
Granting of permits and ongoing supervision
Before the actual supervision of an insurance company by ongoing supervision is the issue of a license.
The permit and its requirements
In principle, insurance business may only be carried out if the company has received permission from BaFin. If an insurer based in Germany wants to be licensed to operate the insurance business, it must meet various requirements. Here are some examples:
- The company must have a certain legal form - that of a stock corporation (including the SE), a mutual insurance association or an institution under public law.
- The insurer may only conduct insurance business and the directly related business, but not non-insurance business. In addition, the principle of segregation applies: For example, a life insurer may not be a health or non-life insurer at the same time.
- The company must present a business plan in which it describes the risks it intends to cover.
It has to present the main features of its reinsurance policy.
- The company must prove that it has sufficient own funds. The absolute lower limit of the minimum capital requirement depends on the insurance line that is to be operated. In addition, the company must prove that it has the means to set up the business and the sales organization (organization fund). In addition, the insurer must prove that it has at least two managers (four-eyes principle) who are reliable and professionally qualified. The managers must have sufficient knowledge of the respective insurance business and sufficient management experience.
- In addition, the insurer must also name the people who are to be responsible for key tasks and ensure their reliability and professional qualification at all times.
- The insurer must also name the natural or legal persons who hold a significant stake in the company - i.e. at least 10% of the nominal capital or the foundation fund. The owners of significant investments also have certain requirements to meet in order to guarantee the sound and prudent management of the company.
The insurance supervisory authority continuously monitors companies that it has given permission. It collects information, evaluates it and observes the business operations of the insurer in order to prevent grievances or to identify them in good time. If grievances occur, the supervisory authority intervenes in order to restore orderly conditions as quickly as possible.
In its ongoing supervision, BaFin pays particular attention to the following points:
- The insurance company must conduct its business properly and comply with all legal and regulatory requirements. The statutory framework is primarily provided by the Insurance Supervision Act (VAG), the Insurance Contract Act (VVG) and the German Civil Code (BGB).
- In the case of life insurance, for example, the insurance supervisory staff must ensure that the profit sharing is appropriate and that the benefits are being provided correctly.
- The insurance company must charge appropriate premiums for the expected benefits and set up sufficient technical provisions.
- The capital investment must be based on the principle of entrepreneurial prudence. The debit of the guarantee assets must be covered with suitable investments. In addition, the company must have enough free funds to cope with unexpected losses.
- The insurance company must comply with commercial principles. For example, bookkeeping and accounting have to be correct. Balance sheets and income statements must reflect the actual asset, financial and earnings position of the company. In addition, the insurance company must install an appropriate internal control system for planning, management and control.
- According to § 24 VAG, the insurance company must ensure that all persons who run the company or have other key tasks are personally and professionally suitable.
- The insurance company's own funds (solvency) must be sufficient, otherwise the insurer must submit a restructuring plan to the supervisory authority if the solvency capital requirement is not met and a financing plan if the minimum capital requirement is not met.
- In addition, insurance companies must reinsure themselves appropriately.
The supervisory authority receives important information from the company's accounting. Insurers not only have to invoice the public, but above all to the supervisory authority and provide the information that is required to determine the economic and financial situation of the company. These include the audit reports on the annual financial statements, the business reports and the narrative and quantitative reporting obligations of the insurer.
At certain intervals or when necessary, the supervisory authority also obtains in-depth insights into the company's situation through on-site inspections at the company's headquarters. Under certain circumstances, the supervisory staff may also visit the offices or branches in other EU and EEA countries. Upon request, all documents must be presented to you and all information requested must be given.
BaFin has various means of intervening against insurance companies. According to the VAG, it can take all orders that are "suitable and necessary" in order to avoid or eliminate grievances that endanger the interests of the insured. Above all, one speaks of maladministration when a company does not observe the legal and regulatory requirements applicable to the operation of the insurance business.
In addition to this general clause, the VAG gives BaFin a number of special powers to prevent certain typical dangers. These special powers are far-reaching. The supervisory authority can appoint a special representative for the management board, the supervisory board or other organs of the company. It can even revoke permission to do business. BaFin can also carry out event-related surveys, for example on the effects of falling share prices on the guarantee assets (e.g. as part of forecast calculations).
History of Insurance Supervision
The uniform, state insurance supervision in Germany can look back on more than a hundred years of history: Its origin goes back to the Reich Law on Private Insurance Companies, which was enacted on May 12, 1901 and came into force on January 1, 1902. With him, the Imperial Supervisory Office for Private Insurance was created in Berlin, which began its work on July 1st. The Imperial Supervisory Office first set out to develop supervisory principles and to record all insurance companies subject to supervision for the first time. On May 30, 1908, the legislature passed the Insurance Contract Act, which came into force on January 1, 1910.
The development of uniform insurance supervision was interrupted by the First World War. Under the impression of the subsequent economic collapse - and above all the galloping inflation - the legislature expanded the powers of intervention of the insurance supervision. In the early years of the Weimar Republic, the authorities tried to establish that from 1918 "Reich Supervisory Office for Private Insurance"was called to return to regulated supervision. In the summer of 1929 the Frankfurter Allgemeine Versicherungsaktiengesellschaft (FAVAG) collapsed and there was a call for a tightening of supervision Law on private insurance companies was redesigned. The "material state supervision" was expanded and deepened, and the building society supervision introduced. The supervisory authority called itself from then on "Reichsaufsichtsamt für das Versicherung und Bausparwesen", while the reformed supervisory law was now called the Insurance Supervision Act (VAG).
The takeover of power by the National Socialists in 1933 also brought about far-reaching changes for insurance supervision. In 1939 the supervisory authority came completely under National Socialist influence. In 1943 the office was given the supervision of all private insurance companies and the technical supervision of the public insurance companies. From then on the authority was named "Reich Supervisory Office for Insurance".
With the end of the Second World War, uniform insurance supervision collapsed. The Reichsaufsichtsamt no longer existed, and the occupying powers took over responsibility for insurance supervision. But as early as the end of 1945, the rebuilding of insurance supervision began. Even if the occupying powers followed different concepts, the supervisory offices of the western occupation zones were anxious to help the insurance industry to eliminate the greatest emergencies. The basis of the supervision was the now outdated Insurance Supervision Act. Life insurers were hardest hit by the aftermath of the war and the associated destruction of property. The property insurers struggled with the war damage. Above all, the supervisory authorities made a stabilizing contribution to the situation, including by sending special representatives to those insurance companies that were no longer functioning properly due to the relocation of their headquarters and the loss of their employees.
The next deep cut in the economy as a whole came with the currency reform on June 20, 1948. After the inflation of 1922/23 had already destroyed the livelihoods of a large part of the population, members of the same generation once again lost almost all of their savings. All claims on insurance companies denominated in Reichsmarks were devalued at a ratio of 1:10. The remaining assets of the insurers were still far from sufficient to cover all obligations from the converted insurance contracts. The military governments therefore legally granted the insurers compensation claims against the federal states - totaling DM 3.1 billion. Without these demands, the ruin of almost all insurers would have been sealed.
The fragmentation of insurance supervision in post-war Germany was perceived as a nuisance. In the discussion about the new regulation it was undisputed that the VAG should continue to apply; However, there was disagreement as to whether public-law insurers should also be subject to supervision. On August 4, 1951, the law finally came into force on the establishment of a Federal Supervisory Office for Insurance and Building Societies (BAV) in force. The FOT began its work in Berlin on April 1, 1952 - incidentally, it was the first federal authority based in this state. It was responsible for the supervision of the private insurance companies and the public law competition insurance companies that are active beyond the area of a federal state.
The first two decades after the foundation of the BAV were a quiet time compared to the first post-war years. The basic concept of insurance supervision was retained: its primary goal remained the protection of the insured. In addition, the smooth functioning of the industry and, accordingly, an adequate capitalization of the insurers moved further into the focus of the supervision.
The legislation of the 1950s and 1960s brought few really meaningful changes to insurance supervision. Only the law against restraints of competition that came into force in January 1958, which transferred responsibility for cartel agreements with insurers to the cartel authorities, had a lasting effect on the work of the BAV.
At the beginning of 1973, when the law on building societies came into force, the building societies moved under the umbrella of what was then the Federal Banking Supervisory Office. This not only shrunk the responsibility, but also the name of the authority - namely to "Federal Insurance Supervisory Office".
Today's supervisory law is largely based on developments at European level that have shaped German standards and thus also the tasks and working methods of the FOT since the mid-1970s.
In the 1970s and early 1980s, two fundamental changes were made by the EC Non-Life Insurance Directive and the EC Life Insurance Directive. In the course of partial harmonization of the national supervisory regulations, the requirements for the establishment of branches and finally also for the insurance activity in the so-called service traffic have been made easier for companies based in the member states. With the insurance balance sheet directive from 1991 and the third directives for property and life insurance from 1992, supervisory law was almost standardized at European level. In 1994 this led to a single market in insurance.
The most important change is the introduction of the country of domicile principle. A company based in a member state of the EU or another signatory state of the EEA is supervised for all its business activities in the EEA mainly by the home authority, which grants approval and also carries out ongoing financial supervision under its sole responsibility. However, it shares legal supervision with the authorities of the respective state.
As part of the deregulation in 1994, further milestones in the redesign of the VAG were resolved with the abolition of any prior approval of the General Insurance Conditions (AVB) and the tariffs; In addition, the obligation to monitor shareholders of insurance companies was established.
With the Bonn-Berlin Act of 1994, it was decided to move the BAV from the new capital to Bonn. The FOT took its first steps in the direction of Bonn in August 1999 when it opened its branch office there. At the end of October 2000, the authority finally relocated its headquarters to the Rhine.
In order to bundle the supervisory activities in a single financial supervisory authority, the BAV was merged with the Federal Supervisory Offices for the Credit System (BAKred) and Securities Trading (BAWe) to form the Federal Financial Supervisory Authority (BaFin) based in Bonn on May 1, 2002.
After intensive preparatory work that spanned more than ten years, Solvency II, a Europe-wide uniform supervisory system, came into effect on January 1, 2016. It is thus at the end of a harmonization process that was set in motion after the European Economic Community was founded in 1956. The Solvency II Directive (Directive 2009/138 / EC) introduces further developed solvency requirements for insurers, which are based on a holistic risk assessment, and lays down market value-oriented valuation rules for assets and liabilities. This is intended to reduce the risk of an insurer going bankrupt.
A central characteristic of the new supervisory regime is the principle-based approach. In a principle-based system, the legislature largely does not provide any specific rules, but rather formulates principles that each pursue a specific goal. These principles initially have a general character that is generally applicable to all companies, which leaves them room for maneuver. The application of the principles requires an individual examination of the individual case.
Another key feature of Solvency II is the principle of proportionality as an expression of the general principle of proportionality. The principle of proportionality is intended to take more appropriate account of the individual characteristics of the insurance company, so that it can make things easier for medium-sized and smaller insurance companies in particular.
Both direct insurers and reinsurers, regardless of their legal form, fall within the scope of the Solvency II Directive. Institutions for company pension schemes and death benefit funds are excluded. Small insurers whose annual gross premium income posted is less than five million euros or whose gross technical provisions are less than 25 million euros are also generally not required to apply the rules of Solvency II.
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