Introduction

Pursuant to Circular 30/2002 (VA) part D section I, insurance undertakings subject to the supervision of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) are required to submit a stress test in line with the parameters set out in part C of the same circular.

As changes in these parameters are published by announcement, part A of the present circular therefore replaces part C of Circular 30/2002 (VA).

In addition, the splitting of the previous two scenarios into three and the resulting additional descriptions means that the reporting obligations relating to the stress test also need to be amended. Therefore, part B of this circular replaces part D section I of Circular 30/2002 (VA).

Part C of the present circular adds various simplifications for small insurance undertakings in the preparation and submission of forms 670 and 671 to part A of Circular 30/2002 (VA).

In addition to part G of Circular 30/2002 (VA), part D of this circular clarifies a technical requirement relating to the submission of information on derivative financial instruments, pre-emptive purchases and structured products.

A. Guidance on parameters and on the model for conducting a stress test

The model to be used when conducting a stress test for the purposes of fulfilling the reporting obligation to BaFin is the stress test model which is made available online for the individual classes of insurance. The web address, login and password will be communicated to insurance undertakings in a separate mailing.

In line with this model, stress tests will be conducted using the following parameters untilfurther notice:

Stress test scenario R 10:

Fall in bond prices

-10%

Stress test scenario A 35:

Fall in equity prices

-35%

Stress test scenario RA 25:
´

Fall in bond prices

-5%

Fall in equity prices

-20%

In all stress test scenarios, credit risks in fixed-income securities and loans (including fixed-income investments in securities funds) are incorporated by applying the following discounts:

Investment grade

AAA-BBB

0%

Non-investment grade

BB-B

-10%

Non-investment grade

CCC-D

-30%

No rating

-10%

Any changes to these parameters will be communicated by BaFin via an announcement.

B. Order in respect of reporting obligations on the completion of stress test and the submission of the results to the Supervisory Authority pursuant to section 54 (1) and section 54d of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) in conjunction with section 6 of the Regulation on the Investment of Restricted Assets of Insurance Undertakings Verordnung über die Anlage des gebundenen Vermögens von Versicherungsunternehmen – AnlV)

Pursuant to section 81 (1) sentences 2 and 5 and (2) sentences 1 and 2 in conjunction with section 54 (1) and section 54d VAG and section 6 AnlV, I hereby issue the following order:

A full report is to be provided on the stress tests that have been conducted. The report shall comprise the data input into the model, the calculation of asset and liability positions and the stress scenarios and the overview of the results of the stress tests in all prescribed scenarios including any auxiliary calculations.

Modifications of the stress test model are not permitted within the context of annual reporting on the results of the stress tests. Specific features of an insurance undertaking which are not taken into account in the stress test model, and the effects of such characteristics on the result, may be commented on separately if necessary.

If all stress test scenarios show a positive result, no further action need be taken.

If one or more stress test scenarios produce a negative result, confirmation has to be sent to the Supervisory Authority that the entire management board and supervisory board have been informed. Furthermore BaFin must be informed of the measures (e.g. restructuring the portfolio) that are planned or have already been implemented to restore the undertaking's risk-bearing capacity (amended version of Annex 5). If no action is intended or required (e.g. because of hidden reserves in registered securities which can be set against the result of the stress test), reasons need to be given for this. BaFin will request further information on a case-by-case basis and reserves the right to demand additional measures or to impose restrictions (e.g. pursuant to section 2 (5) AnlV).

The stress test must be submitted no later than three months after the financial yearend. A printout of all calculation tables including any auxiliary calculations must be provided for each class. In addition, the file with the completed calculation tables is to be sent to the e-mail address notified in the separate mailing or posted on a floppy disk to BaFin's postal address.

Pursuant to Circular 29/2002 (VA) part A section IX 3 b), an insurance undertaking's risk management "must assess whether the internal investment limits are appropriate and the undertaking is able to meet its obligations under the insurance contracts at all times in the light of its current risk-bearing capacity and the risk parameters (e.g. maximum write-downs)" and for this purpose "a stress test must be conducted at least quarterly."

These internal stress tests must be of equivalent quality to recognised standards and must not lead to any materially relevant or systematic underestimation of risk. In the case of a model which is the same as or similar to the BaFin model, for example, this would mean that at a minimum the parameters listed in part A of this circular would be applied. In the case of other model methodologies (e.g. overall VAR, RBC) the undertaking needs to ensure that at a minimum the risks included in the BaFin model are incorporated in a corresponding format. Compliance with these points will be reviewed by BaFin as required at regular intervals.

If the results of these internal stress tests indicate that the investment policy planned for the current financial year needs to be amended within the same year (see Circular 29/2002 (VA) part B no. 1), then BaFin must be informed of this without delay. The reporting obligations set out in part A section IX 3 e) of Circular 29/2002 (VA) also apply.

With the consent of BaFin small insurance undertakings may be exempted from conducting the stress tests altogether on a case-by-case basis depending on the type and scale of their investments (e.g. if they hold no equities directly or indirectly) and their insurance operations (e.g. personal insurance where the technical interest rate applied to the premium reserve is backed by net investment income or other reserves on the liability side). BaFin may also exempt life insurance undertakings from stress testing if their insurance portfolio is predominantly or exclusively made up of term life or unitlinked contracts.

Exemptions from conducting and/or submitting stress tests which have already been granted will retain their validity in accordance with the applicable exemption letter until further notice.

C. Simplified procedures for small insurance undertakings in the preparation and submission of forms 670 and 671

1. Exemption for certain small mutual associations
   
   Small mutual associations within the meaning of section 53 (1) sentence 1 VAG which are exempt from preparing and submitting form 600 pursuant to section 28 no. 4 of the Regulation on Reporting by Insurance Undertakings to the Federal Financial Supervisory Authority (Versicherungsberichterstattungs-Verordnung – BerVersV) in conjunction with section 27 BerVersV are also exempted for the first, second and third quarters of a financial year from preparing and submitting forms 670 and 671 as per Circular 30/2002 (VA).
   
   Therefore these insurance undertakings need only draw up and submit Annex 10 to Circular 30/2002 (VA) for all four quarters. Forms 670 and 671 are additionally required for the fourth quarter of a financial year.
   
   No further simplification can be granted for the fourth quarter because form 102 from the BerVersV has been abolished and replaced by form 670. Form 671 is intended to provide information on coverage and current values of investments shortly after the end of the financial year on the basis of the criteria of the AnlV.
   
   These simplifications for small mutual associations are therefore based on the same criteria of gross premiums and total assets contained in section 27 BerVersV and investments pursuant to section 28 no. 4 BerVersV which apply to the other forms.
   

2. Exemption on request
   

   Small insurance undertakings, usually small mutual associations within the meaning of section 53 (1) sentence 1 VAG which do not meet the requirements set out in section 28 no. 4 in conjunction with section 27 BerVersV, may be exempted by the Supervisory Authority on request from the preparation and submission of forms 670 and 671 as per Circular 30/2002 (VA) for the first, second and third quarters of a financial year until further notice if submission of these forms is not considered to be necessary on the basis of the undertaking's investment structure and strategy and its coverage situation.
   
   Therefore these insurance undertakings need only draw up and submit Annex 10 to Circular 30/2002 (VA) for all four quarters. Forms 670 and 671 are additionally required for the fourth quarter of a financial year.^[1]
   
   No further simplification can be granted for the fourth quarter, even on request, because form 102 from the BerVersV has been abolished and replaced by form 670. Form 671 is intended to provide information on coverage and current values of investments shortly after the end of the financial year on the basis of the criteria of the AnlV.
   
   These simplifications for small insurance undertakings co-ordinate with the provisions of the BerVersV. Decisions on exemption by BaFin will be guided by the different information needs fulfilled by the individual forms.
   
   The option also exists of reducing the frequency of the submission of forms, e.g. only requiring submission every six months.

D. Submission of forms

For all insurance undertakings that submit forms in accordance with BerVersV or other circulars in electronic form (floppy disk), the rules of BerVersV, Annex 2, section C shall also apply with immediate effect to the notification of items 1-6 pursuant to Circular 3/2000 (Derivatives Circular). That means that in future all undertakings which submit forms electronically must also submit forms 661 ff. electronically.

E. Entry into force and transitional rules

This circular shall enter into force when it is received by the insurance undertakings.

The stress test pursuant to this circular is to be submitted by 31 March 2004 on the basis of the balance sheet for the 2003 financial year. In the case of undertakings with a financial year other than the calendar year, the submission deadline is extended accordingly.

The Act to Implement Supervisory Provisions on the Restructuring and Liquidation of Insurance Undertakings and Credit Institutions (Gesetz zur Umsetzung aufsichtsrechtlicher Bestimmungen zur Sanierung und Liquidation von Versicherungsunternehmen und Kreditinstituten - KredSanG) obliges all insurance undertakings to create guarantee assets. In this connection, the German terms "Deckungsstockvermögen" and "übriges gebundenes Vermögen" have been replaced by "Sicherungsvermögen" (guarantee assets) und "sonstiges gebundenes Vermögen" (other restricted assets). When using the forms attached to Circular 30/2002 (VA), the terms "Deckungsstockvermögen" and "übriges gebundenes Vermögen", together with the abbreviations "D" and "V", may be retained in German until further notice. Circular 30/2002 (VA) will not be adjusted for this change until such time as AnlV is amended.

F. Circulars to be rescinded

Part C, part D section I, and Annex 5 of Circular 30/2002 (VA) shall be rescinded with immediate effect.

G. Advice on legal remedies

Objections may be lodged against the decree contained in part B within one month of its announcement. Objections should be submitted to the Federal Financial Supervisory Authority, Graurheindorfer Str. 108, 53117 Bonn, or Lurgiallee 12, 60439 Frankfurt am Main, in writing or to be recorded in writing.

The objection must include a specific request, the points at issue and the facts and evidence on which the objection is based.

^[1] In the case of insurance undertakings whose year-end date is not the same as a reporting date for the forms, the reporting date following the year-end shall be deemed to be the fourth quarter of a financial year.