Between 2017 and 2022, BaFin has granted authorisation to seven insurtech companies, which it supervises according to the principle “same business, same risk, same rules”, i.e. in the same way as traditional insurers that have been in the market for a long time. In doing so, BaFin observes the principle of proportionality.
BaFin’s experience so far in supervising the start-up phase of insurtech companies has shown that supervisory practice needs to be adapted. The adaptations required include, for example, strengthening the “organisation fund” and the technical provisions.
Strengthening the organisation fun
One aspect relates to the organisation fund, which insurers must set up in order to obtain authorisation. As digitalisation has changed the framework conditions that apply for the first authorisation and during the start-up phase of insurance companies, it is necessary to strengthen the organisation fund and adapt it to the actual business models of the companies in question. With regard to newly established companies, BaFin will ensure that the level of the organisation fund reflects the increasingly important role of IT in the distribution of insurance products. This is because, for young digital insurers, setting up a successful and sustainable business model often depends on whether the IT set-up costs are adequately financed in the long term. The organisation fund should be set at a level that covers all losses that can be expected, on the basis of realistic projections, from the time the company is established until its first profits are generated.
Higher technical provisions
Under the foundational European framework Solvency II, insurance companies are required to include IT set-up costs in the calculation of their technical provisions. This includes not only any overhead expenses incurred to develop software solutions and apps for insurance operations, but also the salaries of the relevant IT employees.
When calculating their technical provisions, all companies in the start-up phase should allocate most of their expenses to existing business. This is because projected new business in the start-up phase is subject to too many uncertainties; companies cannot, with a clear conscience, allocate the majority of their expenses to this part. This would also contradict the principles of Solvency II, which require insurance companies to value their technical provisions in a prudent and reliable manner. All in all, predominantly allocating expenses to existing business will result in higher technical provisions.
In addition to insurtech companies, there are a number of start-ups that are not authorised by BaFin, that see themselves as insurance intermediaries or service providers for the insurance industry and offer technical solutions to authorised insurance companies. From the point of view of the insurance companies, this might be deemed outsourcing and therefore trigger a notification requirement. But BaFin can also apply measures to the third-party service providers if this is required to protect policyholders and those entitled to insurance benefits.
Background: Insurance intermediaries
What is an insurance intermediary?
The term insurance intermediary is defined in section 59 of the Insurance Contract Act (Versicherungsvertragsgesetz – VVG). Insurance intermediaries within the meaning of the VVG are insurance agents and insurance brokers. The most important distinguishing criteria are as follows:
An insurance agent is anyone contracted by an insurance undertaking or another insurance agent to mediate insurance contracts on a commercial basis;
An insurance broker is anyone who mediates or concludes insurance contracts for a client on a commercial basis without having been contracted to do so by an insurance undertaking or insurance agent. Insurance brokers operate exclusively in the interests of their clients.
The following are not insurance intermediaries:
Insurance consultants; these require separate authorisation from the chamber of industry and commerce. An insurance consultant is anyone that advises third parties on a commercial basis in respect of concluding, changing or reviewing insurance contracts or making claims under insurance contracts, or anyone that represents the policyholder out of court vis-à-vis the insurer without receiving an economic benefit from an insurer or being dependent on the insurer in any other way;
Does an insurance intermediary need authorisation?
The German Industrial Code (Gewerbeordnung – GewO) regulates whether insurance intermediaries need authorisation for their activities (section 34d of the GewO). The responsible body is the local chamber of industry and commerce. The GewO essentially distinguishes between activities that require authorisation and those that do not.
But BaFin can also apply measures to the third-party service providers if this is required to protect policyholders and those entitled to insurance benefits.
Frequently Asked Questions
Business models
There is a wide variety of possible business models for insurtech companies along the value chains of insurance products. To describe the various business models of insurtech companies, many different terms are used (e.g. on-demand insurance, peer-to-peer insurance, open insurance etc.). Insurtech companies can also provide support to insurers during the technical transformation of particular points in the value chain (e.g. product design, claims processing) or bring about new trends on the market. The use of innovative technologies is often in the foreground here , including big data and artificial intelligence as well as distributed ledger technology, e.g. in the context of smart contracts.
If insurtech companies wish to bear the risks inherent in an insurance contract themselves, they require authorisation from BaFin to carry on insurance business under section 8 (1) of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG). Applicants may also find it helpful to refer, early on in the process, to the information provided in the expert article "Starting out is always expensive", published on the BaFin website on 12 February 2021. Insurtech companies that wish to apply for such authorisation are subject to the same legal requirements as other insurance companies. In BaFin’s day-to-day supervision, it does not differentiate between traditional insurers and insurtech companies. However, its experience supervising insurtech companies has shown that uncertain forecasts for the future represent a particular risk factor, which in part requires supervisors to define particular areas of focus.
Authorisation requirements
Insurtech companies fall within the remit of insurance supervision if they carry on insurance business. When such companies have their registered offices in Germany, they require authorisation from the German supervisory authority, which is usually BaFin. The legal basis for this is in sections 8 to 11 and sections 23 to 33 of the VAG. Under section 8 (2) of the VAG, authorisation to carry on insurance business may only be granted to stock corporations, mutual societies and corporations and institutions governed by public law. The requirements for authorisation depend on the class of insurance. Furthermore, certain classes of insurance cannot be grouped together under one company (section 8 (4) sentence 2 of the VAG). Section 9 of the VAG sets out the documents to be provided when applying for authorisation to carry on insurance business. One key document is the business plan (section 9 (1), (2) and (3) of the VAG). For newly established companies in particular, the calculations contained in the business plan should be carried out conservatively. Other essential requirements that, under section 9 (4) of the VAG, are to be observed right from the application stage, relate to the company’s business organisation (section 23 et seq. of the VAG), the requirements for persons who effectively run the company or assume responsibility for other key tasks (section 24 of the VAG), and the company’s financial resources, which must be sufficient to safeguard the interests of the policyholders (section 9 (2) no. 4 in conjunction with section 9 (3) of the VAG and sections 89 to 95 of the VAG).
In the application process, the rules stipulated in section 15 of the VAG regarding non-insurance business must also be observed.
The requirements associated with the day-to-day supervision of the pursuit of insurance business are set down in the VAG, as well as in regulations, circulars and interpretative decisions issued by BaFin, which should also be taken into consideration. In addition to the VAG, it also important to mention in particular Commission Delegated Regulation (EU) 2015/35 and the subject-specific technical standards produced by EIOPA, as well as the supervisory guidelines and recommendations produced by EIOPA.
Under section 34d of the German Industrial Code (Gewerbeordnung – GewO), insurance intermediaries requiring authorisation should apply for authorisation from the local chamber of industry and commerce.
Companies wishing to apply for authorisation to carry on insurance business should check the relevant requirements in advance. Our experts are available at short notice to discuss specific details regarding preparation for the authorisation procedure and BaFin’s expectations. Legal services such as advice or contract-writing as offered by lawyers to protect companies’ interests do not fall within BaFin’s remit or sphere of responsibility.
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