1. REGULATION
1.1 Regulation of Insurers and Reinsurers
European Level: Solvency II
On 1 January 2016, a major new prudential and supervisory regime called Solvency II came into force across the whole of the European Economic Area (EEA), consolidating and amending the previous life, non-life, reinsurance and insurance group directives as well as widely substituting previous national regulations. The aim of Solvency II is to create a single market for insurance in the EEA, thus providing a single set of key prudential requirements that apply consistently to insurance and reinsurance entities operating within the EEA, and enhance policyholder protection through establishing prudential requirements better matched to the true risks of the business.
The Solvency II framework is made up of three levels of legislation/guidelines: at level 1, there is the Solvency II Directive (2009/138/EC); level 2 consists of delegated acts, implementing acts and binding technical standards (together, the "Delegated Acts"); and level 3 takes the form of guidelines.
The Solvency II Directive follows a "three-pillar" approach that means it sets out a number of requirements for insurers and reinsurers in the EEA broadly in the following three categories:
- capital (ie, holding sufficient assets and qualifying capital to cover insurance liabilities and risk exposure);
- governance (ie, developing and embedding systems to identify, measure and proactively manage risk); and
- transparency (ie, making sufficient reporting and disclosure publicly to the market and privately to the relevant regulators so that they have the information they need to undertake effective, risk-based and proportionate supervision).
The Delegated Acts address issues that are more technical in nature and contain details on the valuation of assets and liabilities, eligibility of capital (own funds), equivalence, the internal model and rules related to insurance groups. They are directly applicable across the EEA without the need to be transposed into national regulation. There are also guidelines released by the European Insurance and Occupational Pensions Authority (EIOPA) that, despite not being legally binding, firms and regulatory supervisors are expected to comply with.
Insurance Supervision in Germany
The relevant supervisory authority for insurance undertakings, reinsurance undertakings and pension funds in Germany is the Federal Financial Supervisory Authority (Bundes anstalt für Finanzdienstleistungsaufsicht, or BaFin). Foreign insurers and reinsurers that intend to conduct business in Germany are also subject to supervision by BaFin.
Insurance supervision in Germany is mainly governed by the German Insurance Supervisory Act (Versicherungsaufs ichtsgesetz, or VAG). The Insurance Supervisory Act has more recently been revised, transforming the Solvency II Directive into domestic law as of 1 January 2016. According to the Insurance Supervisory Act, the primary objective of supervision by BaFin is to protect policyholders and beneficiaries. To fulfil this objective, BaFin monitors all business operations of (re)insurers within the framework of legal supervision in general and financial supervision in particular. Subject to the prerequisites set out in the Insurance Supervisory Act, BaFin may take measures against insurance undertakings that are appropriate and necessary to prevent or eliminate undesirable developments that threaten to harm the interests of policyholders; for example, if a (re)insurer did not comply with the statutory and supervisory requirements for conducting (re)insurance business. In addition to this general authorisation, BaFin is entitled to take certain special measures against a wide range of particular threats, ranging from appointing a special commissioner to replace the management board, supervisory board or other governing bodies of the company to revoking a (re)insurer's authority to carry out business. BaFin may also conduct ad hoc surveys, so-called stress tests or scenario analyses.
Besides BaFin, there are supervisory authorities at state level that are mainly responsible for supervising public insurers whose activities are restricted to the particular state in question and those private insurance undertakings that are of lesser economic and financial significance.
As mentioned, the Solvency II regime described above has been adopted in Germany by an extensive revision of the German Insurance Supervisory Act, which applies to insurers and reinsurers in Germany. In addition to the German Insurance Supervisory Act, there are certain regulations (delegated legislation) by which, based on respective authorisation in the German Insurance Supervisory Act, the German Federal Ministry of Finance concretises certain statutory provisions.
In order to provide guidance on its supervisory practice, BaFin issues Interpretative Decisions (Auslegungsentscheidungen), Guidance Notices (Merkblätter) or Circular Letters (Rundschreiben) on several topics. Even though not technically legally binding, the Circular Letters in particular are usually deemed as a clear indication of the regulator's expectations. Moreover, the publications will usually constitute a self-commitment of BaFin with the effect that BaFin has to treat similar cases alike. An important example for
such publications is the Circular on Minimum Governance Requirements dated 25 January 2017 (Aufsichtsrechtliche Mindestanforderungen an die Geschäftsorganisation von Versicherungsunternehmen, or MaGo). With the MaGo, BaFin has summarised the requirements and its expectations regarding the major areas of corporate governance of (re)insurers by bundling overarching aspects and explaining key terms such as "proportionality" or "administrative, management or supervisory body."
Besides, in individual cases, BaFin can issue Collective Decrees (Sammelverfügungen) and the orders contained therein are binding on all insurers addressed (for example, all primary insurers authorised to conduct business in Germany).
In addition to the provisions of the German Insurance Supervisory Act, (re)insurance undertakings have to adhere to a wide range of provisions of German law, for example, under Civil Law, Company Law and Data Protection Law. On its website, based on Article 146 of the Solvency II Directive, BaFin publishes a list of General Good Requirements, indicating the provisions EU/EEA insurers have to adhere to when conducting business in Germany on a freedom of services or freedom of establishment basis.
BaFin is also involved in international insurance supervision matters. In addition to contributing to the creation of a single European financial market, BaFin is represented in international bodies such as the International Association of Insurance Supervisors (IAIS) and is therefore involved in shaping international supervisory standards. By its IAIS membership and being a voting member in the IAIS Executive Committee as well as an active member of various IAIS committees and sub-committees, BaFin represents the interests of Germany as a core financial marketplace. BaFin deems the principles and standards developed by the IAIS as being of key importance for national supervisory practices.
A different supervisory regime applies to insurance intermediaries. The relevant authorisation requirements are set out in the German Commercial Code (Gewerbeordnung, or GewO). Insurance intermediaries are subject not to the supervision of BaFin, but of the competent local Chamber of Industry and Commerce (Industrie- und Handelskammer, or IHK) of their registered seat. International matters, such as the notification relating to an EU/EEA intermediary's intention to conduct business in Germany, are handled by the Association of German Chambers of Industry and Commerce (Deutscher Industrie- und Handelskammertag, or DIHK), which is the central organisation for all chambers of industry and commerce in Germany. A bundling of all supervisory aspects with BaFin has been occasionally discussed — ie, including insurance intermediaries — but, at least so far, this is not to be expected.
In Germany, a differentiation is made between insurance brokers (Versicherungsmakler) acting for and representing the interests of the policyholder, and insurance agents (Versicherungsvertreter) acting on behalf of the insurer. A licence may only be obtained as an insurance broker or insurance agent. This general differentiation is also strengthened by the German courts. According to settled case law of the German Federal Court of Justice, the insurance broker has to safeguard the policyholder's interests and provide best advice. On this basis, the Federal Court of Justice has recently further ruled that insurance brokers must not conduct claims handling services for the insurer.
2. DISTRIBUTION
2.1 Insurance and Reinsurance Products
Currently, the Insurance Mediation Directive (2002/92/EC) (IMD) governs the distribution of insurance products by insurance intermediaries. However, as of 23 February 2018, the existing directive will be repealed and replaced by the Insurance Distribution Directive (EU/2016/97) (IDD), which is wider in scope and will introduce a wide range of requirements in respect of a distributer's registration, passporting, organisational structure, conduct of business, insurance-based investment products, sanctions and data protection.
The IDD, as published on 20 January 2016, is the result of a controversial debate, including a name change from the envisaged IMD 2 to IDD. The Directive aims, overall, to afford greater protection to customers and to achieve further harmonisation in insurance distribution throughout the EU Member States. It now explicitly also refers to the distribution of reinsurance.
The Directive only provides minimum standards, meaning that the member states may implement stricter rules where they consider it necessary for consumer protection reasons, a flexibility that may in the end turn out to be contrary to the goal to achieve a broad level of harmonisation and market integration in insurance distribution.
The Directive's cornerstones are, in particular, as follows:
- The IDD does not only apply to insurance intermediaries in the strict sense, but to insurance distributors in general. The provisions are intended to apply in cases where a customer obtains insurance coverage via an intermediary and where insurance coverage is taken out with the insurer directly or via comparison portals (except, for example, websites hosted by public authorities or consumer organisations that do not aim at insurance to be taken out).
The publication of prices and costs shall become more transparent. Insurance intermediaries have to state the nature of their remuneration. They have to disclose whether
they are to receive a financial incentive for the sale of a product. There is, however, no obligation to disclose the amount of a commission payment. Similar rules apply for insurers that have to state which remuneration is granted to employees for insurance distribution. The Directive does not provide for a general ban on commission payments. Pursuant to the Directive, it may rather be chosen whether there shall be a commission (paid by the insurer) or fee (paid by the insured) as remuneration. However, the nature of remuneration must not be in conflict with the objective to obtain suitable insurance coverage for the customer.
- New provisions on transparency and business conduct aim to ensure that the customers take out insurance coverage that is really needed. Further, besides general status information, insurance distributors need to advise whether consultation is offered as well. A product information sheet tailored to the relevant insurance shall be used for all insurance products.
- In cases where products are sold accompanied by an insurance policy (cross-selling), the customers shall be able to choose whether they wish to purchase the main product with or without insurance.
- The requirements for the qualification of insurance intermediaries are raised and specified. Insurance intermediaries will be obliged to undergo further and regular training. Insurers shall offer training for their distribution staff.
- New rules on product oversight and governance (POG) are installed. Insurers and intermediaries that manufacture insurance products for sale to customers shall maintain, operate and review a process for the internal approval of each insurance product, or significant adaptations of an existing insurance product, before it is marketed or distributed to customers. This does not apply to large-risk insurance products.
While this does not constitute a formal external authorisation requirement for products, meaning basically General Insurance Terms and Conditions, it does lead to enormous administrative burdens for the affected insurers and intermediaries in the conception of insurance products. There is now a tougher sanctions regime, including, for example, personal liability of directors and officers of legal entities. Special rules are provided for insurance-based investment products.
In the course of the implementation on a European level, the EC is to provide technical advice on four subjects to specify the Directive (for example, a standardised format for the product information sheet). This Commission Delegated Regulation will be directly applicable in the member states and will be based on EIOPA preparations in the form of technical advice submitted to the Commission in February 2017 following public consultation. It is striking that the EIOPA paper provides detailed regulation proposals whereas the IDD is only intended to define general minimum standards.
On a German national level, on 21 November 2016, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published a first draft of an IDD Implementation Act that has been much discussed since. On 29 June 2017, the German Parliament finally approved the German IDD Implementation Act in an updated version and the final step in the IDD implementation process was taken by decision of the Federal Council on 7 July 2017.
The implementation mainly affects the German Commercial Code (Handelsgesetzbuch, or HGB) as law governing insurance intermediation but also the German Insurance Supervisory Act (Versicherungsaufsichtsgesetz) and the Insurance Contract Act (Versicherungsvertragsgesetz, or VVG) to the extent there is insurance distribution by insurers. Some of the corresponding issues are described as follows.
In Germany there will continue to be a differentiation between two types of insurance intermediaries: insurance agents, acting on the side of the insurer, and insurance brokers, acting on the side of the insured. In addition to that, a new concept of honorary insurance consultants (Honorar-Versicherungsberater) will be implemented. Authorisation may still only be granted as an insurance agent, insurance broker or honorary insurance consultant.
Much debated is the issue of a ban of the current prohibition to pass on commissions. According to the IDD Implementation Act, insurance intermediaries must not grant or promise insureds or beneficiaries a special compensation in relation to an insurance contract, meaning in particular that they may not pass on the commission received in whole or in part (Provisionsabgabeverbot). This is a rather surprising development because it had been widely expected that the ban on special compensations — previous provisions on that were highly controversial and subject to court decisions — would be dropped in the course of the IDD implementation. It is argued that granting or promising compensations would set the customer's focus on short-term cash incentives rather than on satisfying the customer's long-term needs. Further, the fear is that not having a ban would have a negative impact on consultation quality. It remains to be seen what the implications for the practice are; for example, how models of Fintechs where commission is not forwarded to the customer but donated to a good cause will be treated in the light of such a ban or how they will change.
- Further details will be provided in a Regulation by the Federal Ministry of Economics, which will, for example, provide additional guidance on the training requirements. For that purpose, the existing Insurance Intermediation Regulation (Versicherungsvermittlungsverordnung) will be updated. Re markably, one of the last-minute changes in the parliamentary process was to include a parliamentary reservation with regard to the Insurance Intermediation Regulation, which means that prior to a decision of the Federal Council, the German Parliament will have three weeks to consider the regulation and amend or reject it; an uncommon requirement with regard to ministerial regulations.
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Previously published by Chambers & Partners
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