Anyone who wishes to use their resources efficiently and effectively and be transparent about doing so should know their own priorities, and ideally make them public. In 2018, BaFin’s insurance supervision sector therefore decided to publish its supervisory programme for the first time.

To determine its priorities, BaFin identified, assessed and prioritised all issues relevant to risk-based supervision that arose in its routine work. In addition, it included aspects that were of particular regulatory or strategic importance for the industry as a whole. Changes in framework conditions were taken into account over the course of the year.

After the end of 2018, BaFin analysed the status of implementation of the seven priorities that had been set for the year.

More intensive monitoring of premiums and trends in claims and underwriting performance in property/casualty insurance

The competition in property/casualty insurance, which escalates every year leading up to the changeover date for motor vehicle insurance on 30 November, means that end customers can enjoy low premiums. On the other hand, it is conceivable that the competitive position or weak financial basis of some insurers will make it difficult for them to deal with this pressure – they may get into difficulties because of inadequate margins generated from their insurance business.

BaFin’s insurance supervision therefore implemented analysis software (business intelligence software) last year which enables a more intensive and comprehensive analysis of the incoming business data and is able to deal with older time series. The open software architecture links the existing reporting system, which is based on German accounting standards, with reporting in accordance with the European supervisory regime Solvency II .

In 2018, BaFin mainly used the software for its year-to-year analysis of premium development, loss experience and underwriting results. It did not identify any acute problematic situations at property/casualty insurers to which it would have had to react under supervisory law. However, at the sectoral level, the software provided a valuable overview of an insurance segment that requires particular supervisory attention. It will therefore be used again in 2019.

Enhanced review of claims provisions at selected property/casualty insurers

Under Solvency II, property/casualty insurers must recognise their technical provisions at transfer value, made up of the best estimate and the risk margin. The transfer value has a significant impact on the calculation of own funds and the solvency capital requirement (SCR). The review and analysis of its derivation is therefore highly relevant for BaFin, with its risk-based approach.

Since 2017, BaFin has therefore been using a special software tool that assists its examiners in their reserve risk analysis. After the introductory phase in 2017, BaFin decided in its 2018 supervisory programme to use this tool more frequently for on-site inspections in order to check the calculation of technical provisions and make sure the results were correctly reported in the solvency statement. The use of the tool enabled the examiners to carry out an increasing number of independent supervisory control and sensitivity calculations in 2018. In addition, the extensive graphical evaluation options made it possible to quickly identify anomalies in the underlying data.

In the 2018 financial year, BaFin focused on analysing the Solvency II claims provisions during 21 onsite-inspections. A key finding was that the insurers were not able to provide sufficient evidence of the appropriateness, accuracy and completeness of the relevant data and their segmentation. In addition, the examiners often found the validation of the best estimate, for example through variation and change analyses, to be in need of improvement.

The technical provisions calculated and reported under the requirements of Solvency II will remain a supervisory priority in 2019.

Examination of cyber security at selected insurance undertakings

BaFin is aware of the importance of IT security in the financial sector. It therefore intends to increase the number of IT inspections at insurance undertakings. At the beginning of 2018, BaFin set up the IT Supervision Directorate in order to link the necessary specialist knowledge across all BaFin sectors. This Directorate assists the examiners of banking, insurance and securities supervision in all supervisory IT issues. As regards the insurance supervision sector, the new Directorate carried out the first IT examinations at insurance undertakings immediately after it was set up in 2018. These examinations mainly focused on verifying that the undertakings were effectively and appropriately implementing the requirements set out in BaFin Circular 10/2018 – Supervisory requirements for IT in insurance undertakings (Versicherungsaufsichtliche Anforderungen an die IT – VAIT) (see July 2018 edition of the BaFinJournal – only available in German). Initial results showed that the undertakings should work to improve their IT governance (see BaFin Expert Article from September 2018).

Over the next few years, BaFin will increase the number of supervisory IT examinations in the insurance sector, also drawing on the expertise of external audit firms. If necessary, it will also obtain knowledge about the IT of insurance undertakings by requesting appropriate status information.

Sustainability in capital investments of insurance undertakings and Pensionsfonds

As providers of insurance products, insurers are directly and increasingly affected by the effects of climate change in the form of extreme weather events. In addition to such physical risks, transition risks, i.e. the indirect effects of climate change, are also important for insurers. Examples include established technologies being supplanted by new innovations, short-term changes in political and economic framework conditions and social and ethical transformations. These events can lead to significant losses in the value of insurers' investments (stranded assets). As insurers are investors in the capital market, their investment decisions are also of great importance for social and economic efforts such as the energy transition.

BaFin carried out a series of projects in 2018 in order to build up expertise and be able to help undertakings in integrating environmental, social and governance (ESG) criteria into their risk management. It conducted supervisory interviews with selected insurers and institutions for occupational retirement provision, conducted an industry survey on ESG integration (see July 2018 edition of the BaFinJournal – only available in German), participated in selected external events, exchanged information with supervisors from other European supervisory authorities and organised two workshops with companies and the German Insurance Association (GDV)) and the Association of Company Pension Funds (aba). The outputs of these activities will have an influence on the design of future supervisory practice.

Analysis of changes in the behaviour of insurers and Pensionsfonds towards new investments

Due to the low level of interest rates, new investment or reinvestment of financial assets is of particular interest to insurance supervisors. Here again, insurers must carefully weigh the potential returns against the associated risks.

During its onsite inspections in 2018, BaFin took a closer look at the behaviour of insurers towards new investments and found that, on average, 12 percent of the investment portfolio was newly invested. The majority of undertakings were expanding their fund portfolios.

As in previous years, the investments mainly focused on corporate bonds and government bonds. BaFin also found that all undertakings were building up their own competences in certain alternative investment types – smaller undertakings, for example, in private equity or private debt. By contrast, infrastructure investments were of particular interest to larger undertakings. However, these investments continue to account for only a relatively small proportion of investments, partly because there were relatively few infrastructure projects in which insurers could invest. BaFin noted that insurers were also moderately expanding their property portfolios. The proportion of illiquid assets rose slightly as a result of the investment alternatives described above.

Rating requirements were slightly lower across all undertakings. On average, the undertakings accepted investments with a slightly poorer rating in order to achieve a higher return, although these were still in the investment grade range overall. Investments with high interest rates and high risk (high-yield investments) continued to account for only a small proportion, and increases in these investment alternatives were only found at some undertakings. BaFin will continue its analysis of possible ‘search for yield’ behaviour in 2019.

Analysis of the regular supervisory report

In 2018, BaFin focused closely on the quality of the regular supervisory report (RSR). Depending on their risk profile insurance undertakings submit their RSR annually, every two years or even every three years. The RSR contains information on business activities and results, the governance system, the risk profile, the valuation for solvency purposes and capital management.

BaFin analysed about half of the RSRs in more detail. It wanted to know to what extent the reports met the quality requirements in terms of content since numerous RSRs had still been incomplete in the first reporting year of 2017 and had not provided sufficiently detailed information. The reports examined showed significantly fewer shortcomings in terms of completeness. In addition, the information content had improved. Some undertakings had even been able to considerably improve the quality of their RSR. Despite these positive findings, there is still room for further improvement. The quality of the reports will therefore continue to be a priority for BaFin in 2019.

BaFin informed the undertakings whose RSRs needed improvement about the specific shortcomings of their reporting and required them to make appropriate improvements. BaFin will continue to provide this feedback in 2019 and, if necessary, be even clearer in its criticism. In order to further assist the undertakings, BaFin recently updated its “Guidance on reporting for primary insurers, reinsurers and insurance groups" (Hinweise zum Berichtswesen für Erst- und Rückversicherer und Versicherungsgruppen“ – only available in German). The document addresses common weaknesses and thus provides the undertakings with the opportunity to improve the quality of their RSR.

In-depth examination of how insurers that use the standard formula deal with economic scenario generators when valuing their technical provisions

The valuation of technical provisions under Solvency II requires knowledge of future cash flows. In life insurance business, these strongly depend on how the surplus on investment income will change in the future.

Insurers therefore simulate several thousand economic/capital market scenarios and their impact on future investment income. Future corporate decisions (management rules) must also be taken into account, as undertakings would react to certain developments by reallocating capital, which in turn would influence the investment income.

In a survey in 2018, BaFin specifically examined economic scenario generators (ESGs). The survey showed that there are issues of details that are not covered by the regulatory framework. However, the initial findings suggest that details such as how well ESGs are able to deal with negative interest rates or how closely they can reflect market values may lead to material differences.

In 2019, BaFin will extend its examinations to the entire life insurance industry. It will analyse the capital market scenarios the undertakings used in their 2018 solvency balance sheet. Since the information BaFin requires consists only of existing files and documentation, there will be hardly any burden on the industry. BaFin will request the necessary information from the undertakings in the course of 2019.

Priorities in 2019

At the beginning of the year, BaFin’s insurance supervision sector published its priorities for 2019 (see January 2019 edition of the BaFinJournal – only available in German). The priorities of the BaFin sectors banking supervision, securities supervision and resolution can also be found on www.bafin.de.