It seems that Dr Frank Grund has one thing less to worry about. He no longer needs to be concerned that the Federal Administrative Court in Leipzig might reach a verdict that would severely limit the powers of his supervisory sector, insurance supervision, at BaFin. And the decision was announced, of all days, on 21 April, the day of the 10th Annual Conference.

At the conference, which was streamed from a studio due to the pandemic, Grund had expressed his concern that a “key legal basis” for insurance supervision might be lost: section 294 (2) sentence 2 of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), the “general clause in insurance supervision relating to the protection of the insured”. But when the Federal Administrative Court (Bundesverwaltungsgericht) reached its verdict – just a few hours later – his fears were not realised.

The Court decided that BaFin’s supervision of primary insurers as provided for by the VAG extends to ensuring that the interests of the insured are safeguarded during the processing of complaints. In its verdict, the Court stated that insurers’ responsibility to safeguard the interests of the insured was a legal obligation that shaped their relationship with customers and was set out in a number of provisions relating to consumer protection. “Neither Union law nor German constitutional law prevents supervision in this area,” the press release of the court stated.

Lawsuit against BaFin’s collective decree

The background to the proceedings in Leipzig was as follows: BaFin had issued a collective decree ordering all primary insurers authorised to conduct business to submit a complaints report on 1 March every year. Austrian insurers that offer primary insurance in Germany filed a lawsuit against this decree. The oral hearing before the Federal Administrative Court examined BaFin’s appeal against the verdict reached in the lower court regarding this collective decree. The lower courts had declared that this collective decree, which had been justified on the basis of the above-mentioned section 294 (2) sentence 2 of the VAG, was unlawful. The Higher Administrative Court (Verwaltungsgerichtshof) in Kassel had argued that this supervision of violations of consumer protection law fell within the fully harmonised areas under Solvency II. The court was therefore of the opinion that reference could no longer be made to the “adequate safeguarding of the interests of the insured” set down in the German VAG.

Chief Executive Director Dr Grund was cautiously optimistic about the outcome: “We don’t yet know the verdict and the reasoning behind it, but one thing that we probably can say is that the legal basis that has traditionally been the cornerstone of insurance supervision’s powers will not be taken away. We will continue to be flexible in our supervisory practise and will – with collective decrees of this nature, for example – be able to react to new developments. Any other outcome would make no sense in the context of a principles-based framework like Solvency II. Solvency II is the embodiment of this kind of flexibility.”

Pensionskassen and life insurers under pressure

The next of Grund’s concerns cannot be solved by a court decision. It was true that the stock market had settled down quickly following the outbreak of the coronavirus pandemic, he said, and at the end of 2020 policy cancellations with life insurers had gone back down as well. BaFin had not observed any undesirable developments in liquidity either, he stated. Nevertheless, the Chief Executive Director believes it is too early to give the all-clear. “We do not know how the pandemic will develop and how quickly the national and international real economy will recover,” Grund pointed out at the Annual Conference, reminding his audience that COVID-19 had entrenched the biggest challenge that Pensionskassen and life insurers had ever faced: the low interest rate environment. In 2020 around 30 Pensionskassen received financial support from their sponsoring undertakings or shareholders. The number of cases in which support for the future has been pledged or proposed is considerably higher. “But we do not yet know whether the sponsoring undertakings themselves will continue to perform well during the coronavirus crisis,” added Grund. There are now around 40 Pensionskassen under intensive supervision, BaFin Director-General Joachim Kobischke reported.

The dual challenge of Solvency II

While Director-General Dr Kay Schaumlöffel acknowledged that the life insurance industry as a whole was relatively stable, he pointed out that 20 insurers from this segment were under intensive supervision as well. An old problem has been exacerbated by the pandemic: safe assets have low returns. “Life insurers are feeling the effects of this in the financing of their long-term and high guarantees from the past,” explained Schaumlöffel. In comparison with Pensionskassen, life insurers do at least have more flexibility to defend themselves against the consequences of the low interest rate environment, particularly in new business, on the product side. “But products that are gentler on a company’s capital can still only bring about gradual changes to the book of business, of course,” commented Grund.

Something that is increasingly causing concern for Grund and Schaumlöffel is that many insurers – around 25% – currently meet the capital requirements under Solvency II only because they are applying the transitional measures that the framework provides for (see expert article on the BaFin website dated 29 March 2021). These measures will be phased out by the end of 2031. This means that these insurers will need to work hard to meet the requirements of Solvency II without these measures by the time that happens, explained Schaumlöffel. The planned Solvency II review will make this even more challenging, warned Schaumlöffel, addressing another issue that had some problematic aspects.

Differing opinions on review

At the end of last year, the European Insurance and Occupational Pensions Authority, EIOPA, issued a statement regarding the Solvency II review. From the point of view of Chief Executive Director Dr Grund, their proposal is a compromise, but as an overall package a “reasonably acceptable compromise” (see expert article on the BaFin website dated 27 April 2021). Grund and Schaumlöffel are concerned about the proposed changes to the yield curve extrapolation. If interest rates remain at their current low levels, these changes would have painful consequences for German life insurers, with their particularly long contract terms: there would be a significant increase in their capital requirements. While EIOPA is proposing an equalising mechanism, this would be for a limited period of time. This was a point that was still to be debated, explained Grund.

In this regard, Dr Jörg Kukies, State Secretary at the Federal Ministry of Finance, who had joined from Berlin, had already spoken in support of Solvency II. He said that the framework had proven itself to be robust and had contributed to the insurance industry’s ability to play a somewhat stabilising role during the coronavirus crisis. On that basis, he concluded that he did not believe extensive changes to the framework were necessary in the current review.

Evolution not revolution

Jörg Asmussen, executive member of the presidential board and managing director of the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft), spoke in a similar vein. He could see one or two other inherent flaws in EIOPA’s proposal and warned against changing the extrapolation. This would lead to an “increase in the capital requirements that had not been thought through”, he argued.

BaFin Chief Executive Director Frank Grund raised the issue of proportionality, a matter that he considers particularly important. He got straight to the heart of the issue: ”we are hoping for powerful proportionality elements in the Solvency II review.” He argued that the differences between individual EU Member States should be better taken into account, and considers appropriate thresholds to be an important tool to reflect the diversity of Europe’s insurance landscape.

Dr Eva Wimmer, head of the Directorate-General for Financial Markets Policy at the Federal Ministry of Finance, also underlined the significance of proportionality and targeted reporting requirements. She argued that both of these aspects were essential for supervisory efficiency. Wimmer was also broadly supportive of Solvency II, stating that its risk-based approach had proved successful and the insurance industry as a whole had adjusted well to it. The industry had proven this during the COVID-19 pandemic in particular, she said, and had helped to stabilise the economic system. Wimmer therefore emphasised that insurers needed to be in a position to continue to perform this stabilising role in periods of stress in the future. In her view, this meant that Solvency II needed targeted development rather than a fundamental revision.

Didier Millerot from the European Commission expressed his support for an evolution of the framework, too. He explained that EIOPA’s proposals were not yet set in stone, and promised that the Commission would continue to listen to the views of all stakeholders. However, he did add that the proposals from EIOPA would be “of particular relevance” in the process moving forward.

A question of reputation

Against the background of the coronavirus pandemic, Chief Executive Director Dr Grund gave some advice to providers of business closure insurance: “do not focus solely on the legal clarification of contractual claims; keep in mind your own reputation as well.” The debate over insurance coverage for restaurant owners who had to close their premises due to the pandemic was not yet over, he said. While a small number of individual verdicts had been delivered, there was not yet a clear trend, he pointed out, and the highest courts had yet to reach a decision. State Secretary Kukies was also clear: the discussion about business closure insurance “does not help the reputation of the industry.”

Still under debate: the commission cap

One issue that State Secretary Kukies – and others – felt strongly about was the cap on commission. He argued that the proposal to introduce a cap on the excessive acquisition commission on residual debt insurance was important for the protection of consumers. In some cases, acquisition commission on residual debt insurance amounted to over 50%, and at its peak even over 70%, of the insurance premiums, he said. This was discovered during investigations carried out by BaFin. Kukies pointed to current proceedings in the Bundestag, where regulation to stop excessive commission for residual debt insurance was currently under discussion. The plan is to cap commission at a maximum of 2.5% of the insured loan amount in order to protect consumers. “Regulation to this effect would be good news,” commented Kukies. Good news for anyone who purchases a home of their own and wants protection for their credit, for example. Those affected are often young families who need every penny, Kukies explained. “The cap on commission for residual debt insurance will significantly reduce costs for consumers,” summarised Kukies. The good news he was hoping for has now arrived: the Bundestag has adopted the new regulation.
But for Kukies, the cap for residual debt insurance is just the first important step. At the BaFin conference, he said that he would work to ensure that more would follow. In his sights, among other things, was the commission cap on life insurance, which had been put on hold for the time being, he said.

Another way

“The issue of commission payments for life insurance continues to be on BaFin’s agenda”, explained Director-General Axel Oster. Appeals to companies to keep commission low had been ignored, he said. But Oster pointed out another way of looking at the issue: aside from the incentive effect, the sales fee also represented a cost factor, and as such affected the value for money of the products. “We see it as the insurers’ responsibility to examine whether an insurance product meets the needs of the target market throughout its lifetime.” Oster makes one thing very clear: this should not be interpreted as an infringement of a provider’s freedom to set premiums or as a price control mechanism.

The financial situation of reinsurers

Director-General Elke Washausen-Richter set out BaFin’s key areas of focus in the supervision of reinsurers for 2021: for around two years, BaFin has been examining the trends in premiums specifically in non-life reinsurers. “We try not only to analyse the German insurance market but also to look at the global cycles,” explained Washausen-Richter, adding: “we are keen to see how reinsurers behave in the future and whether they maintain a disciplined approach to underwriting.” However, Washausen-Richter said that the financial situation of German reinsurers could still be described as stable, in spite of the coronavirus pandemic. Reinsurers were able to absorb the losses caused by the pandemic through other underwriting results and through investment income.