Solvency II, magnum opus of European insurance supervision, came into force at the beginning of 2016. Insurers have entered a new risk-sensitive world and are managing to navigate it quite well. That was good news, considering how complex the new regime was, said BaFin President Hufeld.

BaFin sees room for improvement

For 2018, however, BaFin expects the undertakings to deepen their understanding of the new regime. "There are some areas where we have identified room for improvement, such as the ORSA and the SFCR¹, which is still lacking a bit of depth", explains Hufeld.

As BaFin had anticipated, the undertakings are still having problems with the principle of proportionality, which is explicitly anchored in the Directive. In Solvency II, regulation has made a departure from the traditional rules-based approach, and BaFin now practises forward-looking and principles-based supervision. First of all, it is for the undertakings to map and – keeping the future in mind as well – adequately mitigate their own risks. BaFin will examine the results and assess them on an individual basis. It is a demanding task for both sides.

First financial year

German insurance undertakings had to report to BaFin on the first financial year under the new regime, publish their Solvency and Financial Condition Reports and submit their Regular Supervisory Reports (RSRs) on single entities by 22 May 2017. The group-level reports had to be submitted by 3 July 2017.

In-depth analysis of the first set of annual figures has shown that all single entities subject to the reporting obligation are meeting the new requirements. The solvency capital requirement (SCR) cover ratio amounted to approximately 330 percent on average across all insurance classes. That was good news, said Grund, although he warned that we should not read too much into these ratios: "Even though it is basically possible to compare the figures, they are not suitable for compiling a ranking. Taken in isolation, the information they provide is limited", he explained.

For example, if insurer A had a solvency ratio of 140 compared with insurer B's 120 that did not immediately tell us anything about the nature of the portfolios of the two, Grund clarified. It might be that A's business was much more volatile than B's. Solvency II is very sensitive to market changes; B with its 120 percent ratio may well, therefore, have the more stable portfolio. What is more, insurance undertakings may adopt different approaches to risk measurement, and they can use transitional measures. "You have to know and understand all that and more to interpret the figures", said Grund.

Commenting on the Solvency and Financial Condition Reports, Grund remarked: "Solvency II aims to create greater transparency in the insurance sector. We are satisfied with the first round of SFCRs. The results are positive, although there are still a few shortcomings, of course, that will need to be addressed. BaFin and the undertakings are working together to find a solution."

Review of the regulatory framework

With Solvency II now in its third year, some parts of it are now undergoing review. "The fact that we are re-examining the framework critically at such an early stage is envisaged in the Directive, and it also makes sense", said Dr Frank Grund, Chief Executive Director of Insurance and Pension Funds Supervision. Initial experiences had now been gathered and the general environment had changed, he explained.

Grund emphasised that the market value-based approach was not negotiable. "But we want to adjust and improve it", he added. One example is the standard formula, which BaFin considers to be too complex and is working to simplify. Another factor is that, in some respects, the standard formula is no longer up-to-date. Unlike the internal models, it does not take into account the possibility of negative interest rates, and this may cause undertakings to underestimate their interest rate risk. "Not a good solution in times of persistently low interest rates", said Grund.