In the International Monetary Fund's (IMF) 2003 Financial System Stability Assessment, insurance supervisory practices in Germany were benchmarked against the Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Germany had a high level of observance with ICPs, in line with international best practices. However, the insurance industry has continued to suffer from both increased claims and historically low returns on investments, which has put pressure on capital ratios and risk-bearing capacity. Furthermore, the supervision of reinsurers was less stringent than in the case of insurance companies. In its 2003 assessment, the IMF recommended using a more sophisticated risk-based assessment of capital adequacy in the conduct of insurance supervision. It also advised transposing the European Union (EU) Reinsurance Directive into German legislation. The supervisory regime for the insurance industry in Germany is mainly based on the 1992 Insurance Supervision Act (VAG) and European Union Directives. As a follow-up to the IMF's 2003 report, the EU Reinsurance Directive was transposed into German law through the 2006 amendment to the VAG. Furthermore, the Insurance Mediation Act, which was enacted in 2007, transposed the EU Insurance Mediation Directive into German law. Draft legislation to reform the Insurance Contract Act was adopted in October 2006 and entered into force on January 1, 2008. However, given the revision in October 2003 by the IAIS of the ICPs and Methodology and the above-mentioned developments, there is insufficient information publicly available regarding Germany's compliance with the new, more stringent principles.

General Overview

In a 2003 Financial System Stability Assessment (FSSA), the International Monetary Fund (IMF) benchmarked insurance supervisory practices in Germany against the Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Germany had a high level of observance with ICPs, in line with international best practices. Nonetheless, the insurance industry continued to suffer from both increased claims and historically low returns on investments, which put pressure on capital ratios and risk-bearing capacity. Furthermore, the supervision of reinsurers was less stringent than in the case of insurance companies. In its 2003 assessment, the IMF recommended transposing the European Union (EU) Reinsurance Directive into German legislation to ensure full supervision of reinsurance companies. It also advised using a more sophisticated risk-based assessment of capital adequacy in the conduct of insurance supervision, and suggested requiring insurance companies to raise capital or restrict new business when deemed necessary.

The 2003 IMF FSSA noted that the supervisory regime for the insurance industry in Germany was based on the 1992 Insurance Supervision Act (Versicherungsaufsichtsgesetz, or VAG), EU Directives, and various ordinances, codes, and circulars. Following this IMF report, the European Reinsurance Directive was transposed into German legislation through the 2006 amendment to the VAG with the aim of harmonizing the reinsurance legal framework in the European Economic Area (EEA). Furthermore, the Insurance Mediation Act (Versicherungsvermittlungsverordnung, or VersVermV), which entered into force in 2007, transposed the EU Insurance Mediation Directive into German law. The Act seeks to harmonize the activities of insurance intermediaries and enhance consumer protection. Draft legislation to reform the Insurance Contract Act (Versicherungsvertragsgesetz, or VVG) was adopted in October 2006. The revised VVG entered into force on January 1, 2008, according to the 2006 Annual Report of the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin).

The BaFin was established within the Federal Ministry of Finance (Bundesministerium der Finanzen, or MoF) on May 1, 2002, as an integrated financial supervisory authority, consolidating the supervisory agencies for insurance (Bundesaufsichtsamt für das Versicherungswesen, or BAV), banking (Bundesaufsichtsamt für das Kreditwesen, or BAKred), and securities (Bundesaufsichtsamt für den Wertpapierhandel, or BAWe). In 2006, the BaFin, according to its 2006 Annual Report, modernized the structure of its insurance supervision division to improve the organizational framework for expanding supervision of international groups. Given these changes and the IAIS's October 2003 revision of the ICPs and Methodology, there is insufficient information publicly available regarding Germany's compliance with the new, more stringent principles.

At the time of the IMF's 2003 assessment, the insurance and reinsurance sector in Germany was large and internationally important, with total assets amounting to about two-thirds of GDP. Furthermore, Germany ranked fourth worldwide in terms of total premiums, and sixteenth with regards to premiums per capita. In 2002, per the same report, the BaFin supervised 690 insurance companies, including 46 reinsurance companies. Other small insurance companies were supervised by the German states (Länder), but only accounted for about 2 percent of the industry. As of 2006, the BaFin Annual Report noted that the number of insurance entities under its supervision had declined to 636, reflecting the ongoing consolidation process in the sector.

The Principles

ICP 1 Conditions for effective insurance supervision

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The 2003 IMF report noted that although the German insurance industry "benefited from a generally very stable macroeconomic environment" (p. 35), overall economic growth had been weak over the past decade. The IMF report added that the supervisory regime for the insurance industry in Germany was mainly based on the 1992 VAG and EU Directives. The auditing and accounting framework was well developed and in line with international best practices. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 2 Supervisory objectives

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The main objectives of the Insurance Supervision Directorate within the BaFin consist of "protecting the interests of the insured and in making sure that insurers are able to meet their future liabilities at all times" (p. 4), as noted in the 2003 BaFin report. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 3 Supervisory authority

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The BaFin was established within the MoF on May 1, 2002, as an integrated financial supervisory authority, consolidating the supervisory agencies for banking (BAKred), insurance (BAV), and securities (BAWe). The Insurance Supervision Directorate within the BaFin is responsible for supervising insurance companies in accordance with the 1992 VAG. However, according to the IMF's 2003 assessment, the BaFin was understaffed and lacked full independence for the drafting and promulgation of regulations. Hence additional resources were needed to increase and train qualified and experienced staff, to improve risk-based supervision and to put more emphasis on the evaluation of underlying processes. Per the same report, the BaFin should be given more responsibilities in issuing regulations. In its 2006 Annual Report, the BaFin stated that it had modernized the structure of its Insurance Supervision Directorate to improve the organizational framework for expanding supervision of international groups. Despite all this information, however, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 4 Supervisory process

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According to the IMF's 2003 assessment, the supervisory process in Germany was characterized by "a rule-based system that enforces a significant amount of conservatism and legal requirements" (p. 36). Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 5 Supervisory cooperation and information sharing

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In 2006, the BaFin Annual Report stated that BaFin had concluded a cross-sector Memorandum of Understanding (MoU) with the Dubai Financial Services Authority that included cooperation arrangements for insurance supervision. It further extended its MoU with the Korean Financial Supervisory Commission. During the same period, the BaFin joined an MoU concluded by the Swiss Federal Office of Private Insurance (FOPI) and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) with 28 members of the EU and the EEA. The MoU addresses issues related to cooperation, exchange of information, and protection of confidential information. Despite the information provided above, there is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 6 Licensing

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 7 Suitability of persons

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 8 Changes in control and portfolio transfers

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 9 Corporate governance

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According to a 2007 U.S. Department of Commerce (DoC) Country Commercial Guide report, the Government Commission of the German Corporate Governance Code (Cromme Commission) established in 2002 a Corporate Governance Code for listed companies. The Code is voluntary but based on the comply-or-explain principle. The Code was last amended in June 2007. According to the IMF's 2003 assessment, the BaFin should be given more powers to issue specific corporate governance provisions for all insurance entities. The IMF report recommended extending "the scope of the Corporate Governance Code to mutual insurance companies under BaFin's jurisdiction" (p. 37). Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 10 Internal control

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Insurance companies have been improving their internal procedures in line with BaFin's requirements regarding internal controls and risk management systems, as noted in the 2003 IMF assessment. The IMF report recommended giving more powers to the BaFin in issuing specific internal controls provisions. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 11 Market analysis

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 12 Reporting to supervisors and off-site monitoring

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According to the IMF's 2003 assessment, the auditing and accounting framework was well developed in Germany and in line with international best practices. The BaFin, as noted in its 2003 report, monitors annual accounts to assure they are in line with accounting standards. In its 2003 assessment, the IMF advised speeding up the process for the "preparation and publication of annual accounts and aggregate statistics for the insurance sector" (p. 7). Nevertheless, there is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 13 On-site inspection

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The BaFin, as noted in its 2003 report, conducted regular on-site inspections of insurance companies. In its 2003 assessment, the IMF recommended ensuring the timely implementation of on-site inspections for all insurance entities. It further advised developing a system of risk-based supervision. Nevertheless, there is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 14 Preventive and corrective measures

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Under the 1992 VAG, the BaFin, as noted in its 2003 report, is able "to intervene in an insurer's operations for the purpose of preventing or eliminating irregularities or dangers" (p. 4). Nevertheless, there is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 15 Enforcement or sanctions

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 16 Winding-up & exit from the market

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 17 Group-wide supervision

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In its 2003 assessment, the IMF noted that the major insurance groups in Germany "face challenges arising from the systemic importance of reinsurers in conglomerates" (p. 24). In 2006, the BaFin's Annual Report noted that the BaFin had modernized the structure of its insurance supervision division to improve the organizational framework for expanding supervision of international groups. Nevertheless, there is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 18 Risk assessment and management

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Insurance companies have been improving their internal procedures in line with BaFin's requirements regarding internal controls and risk management systems, as noted in the 2003 IMF assessment. The IMF added that the BaFin and the insurance industry had yet to fully implement international best practices regarding risk assessment and management. However, the information provided above does not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 19 Insurance activity

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According to the IMF's 2003 assessment, the supervision of reinsurers by the BaFin was less stringent than in the case of insurance companies. Per the IMF report, the BaFin intended to conduct full supervision of reinsurance companies following the transposition of the EU Reinsurance Directive. At the time of the IMF assessment, the IAIS was planning to develop a standard for the supervision of reinsurers through the new, more stringent Methodology and ICPs of October 2003. The IMF report recommended implementing a system of risk-based supervision for all reinsurance companies in anticipation of the EU Reinsurance Directive and the IAIS standard on reinsurance supervision. Following the IMF's 2003 report, the European Reinsurance Directive was transposed into German legislation through the 2006 amendment to the VAG, as stated in BaFin's 2006 Annual Report. The goal of this action was to harmonize the reinsurance legal framework in the EEA. Nevertheless, publicly available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 20 Liabilities

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 21 Investments

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Total investments of insurance companies increased by 4.9% from 2005 to 2006, as noted in BaFin's 2006 Annual Report. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 22 Derivatives and similar commitments

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 23 Capital adequacy and solvency

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According to the IMF's 2003 report, while capital ratios remained relatively constant, risks increased through a rise in the volume of equity investments and equity price volatility. The insurance industry also continued to suffer from both increased claims and historically low returns on investments, which put pressure on capital ratios and risk-bearing capacity. In its 2003 assessment, the IMF recommended establishing a more sophisticated risk-based assessment of capital adequacy in the conduct of insurance supervision. The IMF report further advised requiring insurance companies to raise capital or restrict new business when necessary. Following the IMF's 2003 report, the BaFin, according to its 2006 Annual Report, stated that primary insurance companies were in line with minimum capital requirements. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 24 Intermediaries

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In its 2003 assessment, the IMF recommended ensuring "adequate supervision of market conduct issues at point of sale and beyond" (p. 37). This particularly applied to unit-linked policies (i.e. policies where returns are linked to the performance of the units in the unit trust), which were not suitable for all policyholders. The Insurance Mediation Act (VersVermV), which entered into force in 2007, transposed the EU Insurance Mediation Directive into German law, as stated in BaFin's 2006 Annual Report. The Act seeks to harmonize activities of insurance intermediaries, as well as enhance consumer protection. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 25 Consumer protection

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The 2007 VersVermV transposed the EU Insurance Mediation Directive into German law, as stated in BaFin's 2006 Annual Report, with the aim of improving "consumer protection by introducing uniform rules on areas such as the advice given to insurance policyholders" (p. 83). Furthermore, the revised VVG, which entered into force on January 1, 2008, also seeks to enhance consumer protection. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.

ICP 26 Information, disclosure & transparency towards the market

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 27 Fraud

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There is insufficient information publicly available directly addressing Germany's compliance with this principle as revised by the IAIS in 2003.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

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According to a 2004 Report on the Observance of Standards and Codes by the IMF, which is based on the Financial Action Task Force (FATF) Recommendations, Germany has adopted a very comprehensive set of laws and enforcement measures that meet the general anti-money laundering obligations of the FATF 40 Recommendations. Furthermore, Germany has taken steps toward meeting the FATF Eight Special Recommendations on combating the financing of terrorism. Germany is a member of the FATF and a party to the 1988 United Nations (UN) Drug Convention, the 1999 UN International Convention for the Suppression of the Financing of Terrorism, and the 2000 UN Convention against Transnational Organized Crime. As stated in a 2007 U.S. Department of State International Narcotics Control Strategy report, the Money Laundering Act, as amended by the 2002 Act on the Improvement of the Suppression of Money Laundering and Combating the Financing of Terrorism (Geldwäschegesetz), criminalizes activities related to money laundering. Furthermore, credit institutions, including insurance companies, are required to report money laundering to the Central Office for Suspicious Transaction Reports (Zentralstelle für Verdachtsanzeigen) within the Federal Criminal Police Office (Bundeskriminalamt, BKA), as well as to the State Attorney. During 2006, insurance companies filed 35 suspicious transaction reports, according to the 2006 BKA Annual Report. Nevertheless, the available sources do not directly address Germany's compliance with this principle as revised in 2003 by the IAIS.