Investment Circular

On 12 December 2017, BaFin published Investment Circular 11/2017 (VA) for Solvency I undertakings.¹ It contains guidance on investing the guarantee assets and is aimed at all undertakings authorised to engage in primary insurance business and which are subject to the provisions for small insurance undertakings (sections 212 to 217 of the Insurance Supervision Act), as well as at German Pensionskassen and Pensionsfonds.

The Investment Circular sets out the provisions of the Investment Regulation and chapter 4 of the Regulation on the Supervision of Pensionsfonds in detail. Among other items, it contains a new provision for the treatment of debt instruments eligible for bail-ins and stresses the undertaking's own responsibility for checking that investments meet the qualification criteria for guarantee assets. The Circular also contains separate guidance on the investment of Pensionsfonds' guarantee assets for the first time.

Circular 11/2017 (VA) replaces Circular 4/2011 (VA) on the investment of restricted assets held by insurance undertakings. BaFin has incorporated interpretative decisions on Circular 4/2011 (VA) published in the meantime into the new Investment Circular. It has withdrawn Circular 1/2002 (VA) on investments in asset-backed securities and credit-linked notes as well as Circular 7/2004 (VA) on investments in hedge funds. The guidance contained in these Circulars that is still applicable has also been integrated into the new investment Circular. This has resulted in a reduction in the number of circulars applying to Solvency I undertakings.

Derivative financial instruments and structured products

BaFin has revised Circulars 3/2000 (VA) and 3/1999 (VA) and combined them in a new Circular 8/2017 (VA) "Derivative financial instruments and structured products"² for Solvency I undertakings. It is aimed at all primary insurance undertakings that are subject to the provisions for small insurance undertakings (sections 212 to 217 of the Insurance Supervision Act) as well as at German Pensionskassen and Pensionsfonds. The Circular contains guidance for the use of derivatives and for investments in structured products.

The revision was necessary because since the publication of the preceding circulars, BaFin had extended the scope of section 15 (1) sentence 2 of the Insurance Supervision Act by means of a number of interpretative decisions. This had resulted in significantly tighter requirements for the risk management system. In addition, insurance undertakings and institutions for occupational retirement provision fall within the scope of the European Market Infrastructure Regulation.³ The new Circular 8/2017 (VA) reflects the new provisions of European law. BaFin has also included revised terminology and products.

Changes to internal models

On 27 April 2017, BaFin published its Circular 4/2017 (VA), which is directed at all insurance groups as well as primary insurers and reinsurers that have been authorised to use an internal model for the purpose of calculating their solvency capital requirements.⁴

Specific provisions

The Circular sets out the specific provisions for the interaction of the undertakings with BaFin when applying for major changes to the model and reporting minor changes to the model and their accumulation. BaFin provided more detail for the guidance on accumulating minor changes in an additional publication on 10 October 2017.⁵ The Circular also provides guidance on the difference between changes to the model and model extensions, on changes to the policy and to the internal model as well as on simultaneous applications.

Guarantee assets (Sicherungsvermögen)

On 13 June 2017, BaFin published the recast of its Circular on the establishment and maintenance of the register of assets and on the safe custody of the guarantee assets. The new Circular 6/2017 (VA)⁶ is directed solely at Solvency II undertakings and came into effect on 1 January 2018. The provisions of the Circular comply with the prudent person principle in accordance with section 124 (1) of the Insurance Supervision Act.

The predecessor Circular was in need of revision, because the investment rules had changed when the new Insurance Supervision Act came into force on 1 January 2016. The Insurance Supervision Act now makes a distinction between Solvency I and Solvency II undertakings in relation to the investment of the guarantee assets. BaFin had published the guarantee assets Circular for Solvency I undertakings on 1 December 2016.⁷ This Circular also entered into force on 1 January 2018.

Minimum bonus (Mindestbeitragsrückerstattung)

In 2017, BaFin also replaced Circular 12/2009 (VA) with Circular 7/2017 (VA). The new Circular contains guidance on how life insurers have to inform BaFin about the amounts used to calculate the minimum bonus.

At the same time, BaFin has provided a new template for the purpose of calculating the minimum allocation to the provision for bonuses.⁸ The new template also reflects the collective portions which life insurers may establish within the provision for bonuses. In addition, it records the disclosures on the participation of the insureds in the returns for the respective financial year, which the undertakings are required to publish in electronic form on the basis of section 15 (1) of the German Minimum Allocation Regulation (Mindestzuführungsverordnung).

Guidance on the conduct of kidnap and ransom insurance

Circular 3/1998 (VA)⁹ contains guidance on offering kidnap and ransom insurance. Among other things, it provides that the latter may not be bundled together with other insurance contracts and that insurance cover may not be provided in combination with other classes and types of insurance.

New decision by BaFin

BaFin has now decided to accept the bundling of kidnap and ransom insurance with cyber risk insurance in one contract in the future.¹⁰ The rest of the preconditions for offering kidnap and ransom insurance set out in Circular 3/1998 (VA) continue to apply. Cyber risk insurance may, therefore, be promoted as such, while the kidnap and ransom insurance component may not be.

Offering kidnap and ransom insurance was not permitted in Germany for a long time, because this business model was considered to be incompatible with essential principles of German law. However, the Federal Insurance Supervisory Office (Bundesaufsichtsamt für das Versicherungswesen) abandoned this strict position in 1998. Since then, insurance against product extortion and ransom demands has been allowed subject to certain preconditions.

BaFin has already amended the Circular on three occasions since it was issued. In 2000, the requirement for separate authorisation was dropped¹¹ and BaFin has permitted automatic renewals subject to certain preconditions since 2008.¹² In 2014, it gave its approval, as an exception, for more than three persons at commercial policyholders to have knowledge that kidnap and ransom insurance has been taken out.¹³

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