The interpretative decision "Notes on the use of external ratings and on own credit risk assessments", published in German on BaFin's website on 23 October 2013, is amended as follows:

On 20 June 2013, Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies (the CRA Regulation) and Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision [...] in respect of over-reliance on credit ratings entered into force.

I. Use of external ratings and own credit risk assessments by insurance undertakings and institutions for occupational retirement provision

Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies introduced, among others, the following Article in the CRA Regulation:

Article 5a
Over-reliance on credit ratings by financial institutions

1. The entities [insurance and reinsurance undertakings, institutions for occupational retirement provision] referred to in the first subparagraph of Article 4(1) shall make their own credit risk assessment and shall not solely or mechanistically rely on credit ratings for assessing the creditworthiness of an entity or financial instrument.

2. Sectoral competent authorities in charge of supervising the entities referred to in the first subparagraph of Article 4(1) shall, taking into account the nature, scale and complexity of their activities, monitor the adequacy of their credit risk assessment processes, assess the use of contractual references to credit ratings and, where appropriate, encourage them to mitigate the impact of such references, with a view to reducing sole and mechanistic reliance on credit ratings, in line with specific sectoral legislation.

Directive 2013/14/EC of the European Parliament and of the Council of 21 May 2013 introduced the following Article 18 in Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision in respect of over-reliance on credit ratings:

1a. Taking into account the nature, scale and complexity of the activities of the institutions supervised, Member States shall ensure that the competent authorities monitor the adequacy of the institutions’ credit assessment processes, assess the use of references to credit ratings issued by credit rating agencies as defined in Article 3(1)(b) of Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies in their investment policies and, where appropriate, encourage mitigation of the impact of such references, with a view to reducing sole and mechanistic reliance on such credit ratings.

Current insurance supervisory practice with regard to external credit ratings and own credit risk assessments by insurance undertakings and institutions for occupational retirement provision is thus brought into line with Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies that has entered into force on 20 June 2013, and with Directive 2013/14/EU of the European Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision [...] in respect of over-reliance on credit ratings.

BaFin points out that the aforementioned European rules go beyond current supervisory practice with regard to making own risk assessments. According to current supervisory practice, insurance undertakings could make their own assessment of credit risks in order to avoid depending on rating agencies. Sections B.2.3.c.ii and B.3.1.c of Circular 4/2011 (VA) and the pronouncement on the use of ratings, published on BaFin's website on 30 March 2012, stipulate that, as a precondition, the insurance undertaking must have the personnel and technical resources necessary to do so, taking into account the nature of the investment. In accordance with the European rules referred to above, insurance and reinsurance undertakings and institutions for occupational retirement provision must now make their own credit risk assessments and shall not solely or mechanistically rely on credit ratings for assessing the creditworthiness of an entity or financial instrument.

The aforementioned European rules also impact the provisions of Circular 1/2002 (VA) on asset-backed securities. In accordance with section A.I. of Circular 1/2002 (VA), covering credit risks by means of credit derivatives in connection with capital investment is considered to be non-insurance business and is as such in principle not permitted under section 7 (2) sentence 1 of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), unless the cover of credit risk embedded in a cash instrument is of no substantial importance within the contractual relationship entered into for the purpose of the investment. According to the provisions of the Circular, this can as a rule be assumed to be the case if the cash instrument has received at least an external investment-grade rating from a recognised rating agency. This, however, is not sufficient if other circumstances or risks cause the credit-risk assessment to be negative, or if the instrument has received a 'speculative grade' rating from another recognised rating agency (split rating). If no external investment-grade rating has been assigned by a recognised rating agency, the Circular stipulates that the credit rating of the collateral pool and/or the reference asset or pool of reference assets as well as the default risk for the entire investment must be assessed positively and such assessment must be verifiable. According to the aforementioned European rules, the cover of credit risks embedded in a cash instrument is, as a rule, of no substantial importance within a contractual relationship entered into for the purpose of the investment if the insurance undertaking or institution for occupational retirement provision on the basis of its own assessment concludes that the cash instrument is rated at least investment grade. If the insurance undertaking concludes, based on its own assessment and in consideration of the procedure set forth in this interpretative decision (cf. section I.2), that the cash instrument is rated investment grade, it can be included in the restricted assets pursuant to section 2 (1) no. 10 of the Investment Regulation (Anlageverordnung – AnlV). BaFin points out that asset-backed securities may no longer be added to the restricted assets making use of the enabling clause.

The pronouncement "Notes on the use of external ratings", published in German on BaFin's website on 30 March 2012, is hereby repealed. External ratings must still be issued by recognised rating agencies.

1. Scope of application

a. Receivables and investments with standard market ratings

The scope of application of Article 5a of the CRA Regulation shall only extend to receivables and investments that have standard market ratings. Thus, external ratings are an important instrument for assessing the creditworthiness of an entity or financial instrument and may still be used (in addition to other information) for supervisory purposes.
This does not, however, rule out the insurance undertakings' obligation to make their own risk assessments due to existing national investment provisions or risk management requirements. This in particular applies to the investment principles set forth in section 54 (1) of the VAG.

b. Common funds managed by German management companies

Common funds managed by German management companies do not need to be given an additional assessment by insurance undertakings.

Pursuant to section 17 (1) of the Investment Code (Kapitalanlagegesetzbuch – KAGB), a German management company is a company with its registered office or head office in Germany that exclusively manages German investment funds, EU investment funds or foreign alternative investment funds (AIFs).

However, the insurance undertaking must ensure that the German management company complies with all regulatory requirements regarding ratings and credit assessments.

2. Own credit risk assessments according to Article 5a of the CRA Regulation

In addition to external ratings, own credit risk assessments are an important tool for assessing the creditworthiness of an entity or financial instrument.

Initially, BaFin considers making a credit risk assessment in the form of a plausibility check of an external rating assessment to be a practicable and proper way of implementing the provisions of Article 5a (1). For example, such a plausibility check may be made on the basis of the external rating agency's rating report. It must be documented in a clear manner.

If a receivable is given an internal assessment that is better than the external rating, an appropriate quantitative assessment must be made in addition to the qualitative assessment described above.

II. Promotion of the voluntary use of undertakings' internal credit assessments

In order to promote the voluntary dissemination of undertakings' internal credit assessments in accordance with Article 5a (2), BaFin considers it useful to increase the importance attached to own credit risk assessments as compared to external ratings.

At present, according to section B.3.1.c of the Investment Circular 4/2011 (VA) the lower of two ratings must be applied if there are two different ratings. If more ratings leading to different assessments are available to the insurer, the lower of the two best credit ratings must be used. In the case of a split rating, using an own rating may offset the lower rating.

This provision is now repealed and replaced by the following:

• If an external rating exists, an additional quantitative assessment may result in the own credit assessment yielding a better result than the external rating.
• If there are two different external ratings and an insurance undertaking's own credit risk assessment yields a better result than the lower of the two external ratings, the insurance undertaking must make an additional quantitative assessment.
• If there are three external ratings and an insurance undertaking's own assessment yields a better result than the second best of the external ratings, the insurance undertaking must also make an additional quantitative assessment.

III. Article 8b, 8c and 8d of Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies

In addition, BaFin points out the new Articles 8b (Information on structured finance instruments), 8c (Double credit rating of structured finance instruments) and 8d (Use of multiple credit rating agencies) of Regulation (EC) No 1060/2009 on credit rating agencies introduced by Regulation (EU) No 462/2013 of the European Parliament and of the Council of 21 May 2013 amending Regulation (EC) No 1060/2009 on credit rating agencies.

IV. Note

BaFin points out that if the European Securities and Markets Authority (ESMA) publishes any guidelines conflicting with this interpretative decision, these guidelines shall apply.