Insurers and pension funds need to have suitable systems in place to enable them to identify a deterioration in their financial position. They are also required to inform BaFin without delay of any deterioration in their financial position that could jeopardise their ability to fulfil their obligations under insurance contracts or represent a risk to their ability to pay. These requirements are set down in section 132 of the VAG.

The consequence of this legal provision is that companies have an obligation to establish an early warning system. This system must put the company in a position to take countermeasures early enough that it is able to put an end to any imminent threat. When BaFin receives a notification of this type, it is able to monitor how the affected company is working to improve its financial position. If necessary, BaFin can make sure that the company pursues this objective with even more urgency.

Back in 2019 BaFin carried out a pilot survey among selected life insurers and Pensionskassen on the implementation of section 132 of the VAG (see expert article on the BaFin website dated 15 January 2020). The question, “Are insurers able to identify their risks at an early stage?” was the focus of this survey, the goal of which was to raise awareness of the topic among companies and give some initial advice on how to better fulfil the requirements of section 132 of the VAG. BaFin conducted another survey on this legal provision in spring 2021. A total of 48 companies were selected to take part in the survey, and all classes of insurance were represented.

The results of this survey were heterogeneous. Overall, BaFin came to the conclusion that the industry had made progress in the implementation of section 132 of the VAG. For example, companies now include governance aspects in their implementation of section 132 of the VAG to a greater extent than they did in 2019. In doing so, they ensure that the early warning system that they are required to implement is a top-level issue and works smoothly even in challenging situations. From BaFin’s point of view, this is a positive sign: it shows that companies are developing a greater awareness of the issues they might encounter when implementing section 132 of the VAG. The article linked to below includes detailed advice on the governance aspects, which BaFin considers to be particularly important.

But the survey did also highlight that there was more work to be done. One example is the distinction that needs to be drawn between section 132 of the VAG and other legal provisions relating to the identification of risks – such as ORSA, the Own Risk and Solvency Assessment: while these provisions certainly do overlap to some degree, they also have some key differences. Insurers and pension funds therefore need to distinguish between the provisions even more clearly and take a targeted approach in order to precisely implement the aspects that are specific to each of these provisions. BaFin has provided some guidance to help companies achieve this. For example, a practical overview of the aspects specific to the various requirements can be found in a series of tables in the expert article linked to below.

Related to this, BaFin sees another challenge that companies need to overcome: how should insurers and pension funds operationalise metrics to inform BaFin early enough, but not too early, about any possible difficulties? As every company has a different risk profile, there can be no universal solution. But there can be guidance on the points that should be considered when determining appropriate metrics for an early warning system under section 132 of the VAG. This is another aspect on which the expert article below provides insurers and pension funds with practical advice.

Read the full article here (in German).