Solvency II, the regulatory framework for insurance supervision, entered into force at the beginning of 2016. Its aim is to make risks more transparent and thus easier to manage. The system got off to a successful start and insurers are gradually learning how to deal with it. But despite the extensive preparations, the framework continues to pose challenges for both undertakings and BaFin. "Additional factors are the difficult market conditions – 'low interest rate environment' is a key term here – and the requirements of the additional interest provision, the 'Zinszusatzreserve' (ZZR)", explains Dr Frank Grund, Chief Executive Director of Insurance and Pension Funds Supervision. "BaFin is keeping a close watch on this difficult situation and will intervene if necessary."

In the summer of 2016, BaFin presented initial figures on the respective insurance classes the undertakings had reported under the new reporting system. Pursuant to section 89 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz), which implements Solvency II in Germany, insurers must at all times have eligible own funds equivalent, as a minimum, to their solvency capital requirement (SCR).

The analysis of the day 1 reporting revealed that – with few exceptions in property and casualty insurance – all insurers were able to meet the new solvency capital requirements adequately. Among life insurers, the SCR ratios varied widely due to the difficult capital market environment, but reached their highest levels at the end of the fourth quarter. By contrast, the SCR coverage ratios for providers of private health insurance remained largely stable for the whole of 2016. After a decline in the second quarter, the SCR ratio again approached its starting level towards the end of the fourth quarter. The ratios in the property and casualty insurance and the reinsurance business proved relatively steady. Because of high volatility levels attributable to changing market conditions, a simple comparison of the SCR coverage ratios should be considered with caution.

With Solvency II, supervision moves away from purely rules-based towards more principles-based supervision – with all the challenges this kind of supervision entails, including for the undertakings. The interpretative decisions BaFin has taken to date have provided the necessary guidance to insurers. The insurance supervisors intend to continue this process.