A. Introduction

2. This assessment of Germany’s observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) was carried out as part of the 2011 Financial Sector Assessment Program (FSAP) Update. The main mission took place in January–February 2011. The assessor was Fausto Parente of the Italian Insurance Supervisory Authority (ISVAP).

B. Information and Methodology Used

3. The assessment of Germany’s observance of the ICPs was based on a review of the relevant laws and regulations in force at the time; discussions with the supervisors, other government bodies, and market participants; and additional material provided by the authorities. Because of strong legal restrictions on the sharing of institution-specific information, access to inspection reports and similar documents was limited. The authorities and market participants were uniformly cooperative.

4. The level of observance for each Principle reflects the assessments of the essential criteria only. Assessment of advanced criteria should not be included in assessing observance with principles. Subject to the caveat given below, a principle will be considered observed whenever all the essential criteria are considered to be observed or when all the essential criteria are observed except for a number that are considered not applicable. A principle will be considered to be not applicable when the essential criteria are considered to be not applicable.

5. With respect to an assessment of the principle that is other than observed or not applicable, similar guidance is to be used as applies to the criteria themselves. So, for a principle to be considered largely observed, it is necessary that only minor shortcomings exist which do not raise any concerns about the authority’s ability to achieve full observance with the principle. A principle will be considered partly observed whenever, despite progress, the shortcomings are sufficient to raise doubts about the authority’s ability to achieve observance. A principle will be considered not observed whenever no substantive progress toward observance has been achieved.

6. While it is generally expected that full observance of a principle would be achieved through the observance of the essential criteria, there may be instances where a member can demonstrate that observance with a principle has been achieved through different means. Conversely, due to specific conditions in a jurisdiction, meeting the essential criteria may not be sufficient to achieve observance of the objective of a principle. In these cases, additional measures are needed in order for observance of the particular principle to be considered effective.

7. The criteria should normally apply to all sectors of the insurance market. Where there are material differences between the levels of observance of a criterion between sectors that may lead different ratings being assigned to the sectors had the assessment been carried out separately (say, where a jurisdiction supervises primary insurers and not reinsurers), one may opt to present such differing ratings in this self-assessment program.

C. Institutional and Market Structure—Overview

8. The German Federal Financial Supervisory Authority (BaFin) is the insurance supervisor. The Federal Ministry of Finance (BMF) has legal and supervisory control over BaFin.

9. The supervision of insurance companies in Germany is based on the Insurance Supervision Act (VAG). Furthermore, insurers have to comply with other acts, codes, ordinances and circulars.

10. The insurance sector consisted of 621 companies at end-2010, comprising 98 life insurers, 265 nonlife insurers (including 48 health insurers), 152 Pensionskassen, 36 reinsurers, others including 40 death benefit funds and 30 Pensionsfonds. The 20 largest groups conduct the bulk of business; the five largest insurance groups alone receive about half of all premiums. The sector includes many small companies but also several of the world’s largest primary insurers and reinsurers, some of whom receive less than half their profits from domestic operations. Of the sectors’ roughly €1.4 trillion in total assets, €804 billion was held in life insurers at end-2009. The Pensionskassen and Pensionsfonds held roughly €133 billion in total assets at end-2009. Due to tax law changes, sales of traditional life insurance products (endowment policies) have recently declined, while those of certain types of annuities increased. The life insurance sector witnesses a pronounced trend to single premium contracts. This is attributed in part to the low interest rate environment and therefore low returns on many traditional investments. Despite the global financial crisis, soundness indicators have remained generally healthy across the insurance sector.

11. The auditing and accounting rules applicable to financial institutions generally comply with international standards. German listed companies apply as required the International Financial Reporting Standards (IFRS) since 2005. The German legislative framework with regard to the audit profession requires external auditors to be independent in both fact and appearance. The judicial system, including that for bankruptcy and the enforcement of property rights, is well developed. The payment and settlement system is reliable and efficient.

12. Germany has a solid institutional framework supporting the conduct of sound macroeconomic policies. Monetary policy is conducted within the European System of Central Banks framework. Budgetary policy is conducted within a fiscal framework based on predefined rules and within the requirements of the European Stability Pact. Germany was hit hard by the global crisis, mainly because of the economy’s international connections, but at the time of the assessment a strong recovery was under way. Nonetheless, trend growth in potential output is relatively slow, and currently interest rates are unusually low.

D. Main Findings

13. The level of observance of these standards is very high. The authorities are aware that the size and sophistication of the German financial system demand that the supervision go beyond the standards, and they are working to make further improvements, especially those needed to implement the regulatory and financial policy initiatives that have been occasioned by the global crisis

14. Insurance regulation and supervision is generally of a high standard, and most of the enhancements suggested in the 2003 assessment have been put in place. For example, new rules have been issued to improve qualitative requirements posed on all the insurance undertakings in the area of corporate governance, risk management and internal control. Reinsurance companies are now subject to more extensive regulation and supervision, which, however, allow for the differences between them and primary insurers. The new regulations aims at anticipating some of the Pillar 2 requirements which will be implemented with Solvency II, paving the way for a smooth transition to the new risk-based solvency regime starting in 2013. A new risk-based system to select the priorities for the supervision as well as the efficient allocation of supervisory resources has been implemented.

15. The authorities acknowledge the need to continue to develop supervisory capacity. The incoming prudential regime under Solvency II will require enhancement of BaFin supervisory resources (both in terms of quantity and quality). To these ends, the frequency of on-site inspection should be increased especially for insurers that are deemed to have a medium-sized market impact (current practice is to have an on-site inspection at least every eight years). Given the presence of large, cross-border insurance groups, group-wide supervision needs to be enhanced, as should the level of supervisory cooperation. In many of these areas, the further refinement of stress testing techniques would be helpful. The implementation of the European Union (EU) directive on insurance intermediaries is a major step towards ensuring adequate supervision of market conduct issues. However, the split of competences between BaFin and the local Chambers of Industry and Commerce should be reviewed to ensure against an effective market conduct supervision and consumer protection.

16. Most of the requirements and supervisory tools which are in use for the supervision of primary insurers are also applied to the reinsures. The most relevant exception is the investment activity, which is regulated on the basis of the “prudent person principle” to take into account the specific features of the reinsurance activity. This approach may have merit, but experience elsewhere suggests that vigilance is required in its application.

Table 1.

Germany: Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles

Table 1.

Germany: Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles

ICP		Grading	Comments
1.	Conditions for effective insurance supervision.	O	Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure.
2.	Supervisory objectives.	O	The objectives fixed under the law are mainly focused on the protection of the policyholders. Consideration could be given to explicitly mention systemic stability.
3.	Supervisory authority.	LO	BaFin is operationally independent and subject to clear accountability mechanisms; its staff is experienced and qualified. Public disclosure of the reasons for dismissal of board members should be required, although it is recognized that in practice reasons would be given. It is recommended, moreover, that the guidance for the control of BaFin by the Federal Ministry of Finance be reviewed to reduce the reporting burden. There is also scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
4.	Supervisory process.	O	BaFin is moving toward a more risk-based supervisory approach, which will be fully in place once Solvency II is implemented. For the time being a risk model to select and prioritize the supervisory analysis has been made operational. It is recommended that it is further developed to better take into account the supervision of insurance groups.
5.	Supervisory cooperation and information sharing.	O	BaFin is empowered to, and does regularly exchange information with other supervisors, both within and beyond the EU. It’s a signatory to the EU/European Economic Area (EEA) Protocols on supervisory cooperation, the IAIS multilateral Memorandum of Understanding (MoU) as well as of a number of bilateral MoUs. It is recommended that the concrete application of the confidentiality rules be monitored in order to avoid that it can become an obstacle for full information sharing among supervisors.
6.	Licensing.	O	The licensing regime, based on the EU directives, is clear and transparent.
7.	Suitability of persons.	LO	BaFin performs robust due diligence on any proposed significant owner, board members, trustees and appointed actuaries prior to licensing and after by also monitoring subsequent changes. Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies. Moreover, it is suggested that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
8.	Changes in control and portfolio transfers.	O	The conditions under which a qualified holding in an insurance undertaking can be assumed are clear and in line with the relevant EU directives. Portfolio transfers must be approved by BaFin.
9.	Corporate governance.	O	BaFin has recently introduced new requirements for insurers, which strengthened the robustness of its assessment of insurers’ corporate governance. Those measures can be seen as an anticipation of the Pillar 2 requirements, which will come into force in 2013 under Solvency II.
10.	Internal controls.	O	BaFin has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls tailored to the nature, scale and complexity of their operations. As for other areas of the supervision, measures were introduced to enhance the insurers’ internal controls systems in view of the incoming implementation of Solvency II.
11.	Market analysis.	O	BaFin performs market analysis and stress tests to identify, assess, and mitigate risks to the insurance sector. Quantitative analysis will need to be enhanced and kept up to date, for example, through more comprehensive stress testing for larger insurers.
12.	Reporting to supervisors.	O	BaFin has a systematic process to review regulatory returns and information provided by insurers as part of its offsite surveillance. The supervisory returns take advantage of the auditor assessment performed on the financial statement. It is advisable to introduce an explicit obligation on auditors as well as on the insurer itself to inform the supervisor promptly of any material changes which affect the current or foreseeable financial condition of an institution.
13.	On-site inspection.	O	BaFin conducts on-site inspections, which are prioritized based on an analysis of insurers’ risk profiles and its market impact. It also has recently conducted joint on-site inspections with other supervisors to address specific issues. However, the frequency of regular on-site inspection for the medium- and low- impact insurers should be increased. While resources allocation should be prioritized according to assessed risks, the chance of detecting emerging difficulties would be importantly increased if at least brief inspection visits were conducted every three or four years for medium-sized insurers.
14.	Preventive and corrective measures.	O	In line with the EU directives, BaFin is empowered to take a range of preventative measures, which allows a progressive escalation of supervisory actions to respond to emerging concerns. The implementation of Solvency II will imply further increase of flexibility in the possible supervisory actions by introducing a more specific intervention ladder based on the solvency ratios.
15.	Enforcement or sanction.	O	BaFin takes a proportionate approach in exercising its enforcement powers under the VAG. The use of administrative fines is considered to be rarely necessary due to the fact that insurers in general comply even with initial informal requests from the authorities.
16.	Winding-up or exit from the market.	O	Legislation provides for orderly exits of insurers and a high degree of protection for policyholders in the event of insolvency.
17.	Group-wide supervision.	O	The German regulatory frameworks for insurance groups and financial conglomerates are broadly in line with EU directives. The impending implementation of Solvency II will strengthen BaFin’s supervision of insurance groups, subject to the adequacy of regulatory resources. In this regard it is advisable to consider: Increasing the adequacy of resources, particularly for the effective supervision of international active groups/conglomerates. Developing the risk classification tool (see ICP 4) to include the group-wide supervision. Harmonizing the supervisory approach in the area of group capital adequacy calculation by issuing more detailed rules on, inter alia, the treatment of participation in credit institutions, the valuation criteria to be used.
18.	Risk assessment and management.	O	The VAG has established high-level requirements relating to insurers’ risk management, supplemented by BaFin circular and supervisory expectation. The effectiveness of insurers’ risk management system is assessed by BaFin under its supervisory review process. The risk management requirements can be seen as an anticipation of Solvency II which will come into force in 2013.
19.	Insurance activity.	O	BaFin directly reviews premium pricing for some classes of business and monitors insurance risks through its assessment of insurers’ risk management system and technical provisions.
20.	Liabilities.	O	There are clear, legal principles and regulatory guidelines for insurers to estimate their insurance liabilities. In addition, the audit reports of external auditors as well as appointed actuaries for certain line of businesses can also be used. BaFin monitors insurers’ technical provisions by off-site examinations as well as on on-site inspections, and has the power to require insurers to remedy any shortfall. It is recommended that, in view of the increasing complexity of the valuation criteria to be used under Solvency II as well as their differences with the current ones, BaFin should increase the number of its staff equipped with actuarial expertise and related quantitative skills. Its current advisory role in this field could be enhanced.
21.	Investments.	O	Regulatory requirements are in place for insurers to manage their investment risks in a manner proportionate to the nature, scale and complexity of their operations. In addition, a number of specific quantitative limits are applicable on the investment activity of the primary insurer in order to ensure an adequate spread of the risks. For the reinsurance activity, the regulation follows the “prudent person principle.” In view of the increasing complexity of the valuation criteria to be used under Solvency II, it is advisable to keep the supervisory reporting requirements under review and to continue developing BaFin’s internal assessment and monitoring.
22.	Derivatives and similar commitments.	LO	The regulatory policy and requirements for the use of derivatives by primary insurers are aligned with international best practice. Quarterly reporting is also defined. However, the provisions for reinsurance activity are more general and the reporting requirements are less stringent.
23.	Capital adequacy and solvency.	O	The capital adequacy regime is based on the EU directives (Solvency I). The implementation of Solvency II with effect from January 2013 will result in a more risk-sensitive regime that will enhance risk-based supervision.
24.	Intermediaries.	LO	BaFin is not responsible for the direct supervision of the intermediaries. The implementation of the relevant EU directive has been a major step in enhancing the supervision of intermediaries, but it is difficult to assess the effectiveness of market conduct control performed by the competent supervisors. It is advisable to carry out such an analysis and take appropriate actions to continue improving the protection of policyholders at the point of sale.
25.	Consumer Protection.	O	There are various tools which enable the consumers to solve possible issues ranging from the complaints to BaFin, the help of consumers’ associations and the ombudsman.
26.	Information, disclosure and transparency towards markets.	O	There is room for improvement in the BaFin publications of market data and analysis, including key data of individual insurers and the timeliness of publication. Moreover, in view of the incoming Solvency II regime, consideration should be given to the enhancement of the disclosure requirements applied to the insurers.
27.	Fraud.	O	The core requirements are in place.
28.	Anti-money-laundering, combating the financing of terrorism (AML/CFT).	LO	While BaFin is in the process of addressing the weaknesses identified in the FATF, especially when dealing with the increased control of the insurers’ activity, there is no evidence that remedial actions are systematically taken by the Länder with regard to insurance intermediaries that they supervise.

Observed (O)	23
Largely observed (LO)	5
Partly observed (PO)	0
Not Observed (NO)	0
Total	28

View Table

Table 1.

Germany: Summary of Main Findings of Assessment of Observance of the IAIS Insurance Supervisory Principles

ICP		Grading	Comments
1.	Conditions for effective insurance supervision.	O	Insurance supervision in Germany is facilitated by sound and progressive financial sector policy framework and financial market infrastructure.
2.	Supervisory objectives.	O	The objectives fixed under the law are mainly focused on the protection of the policyholders. Consideration could be given to explicitly mention systemic stability.
3.	Supervisory authority.	LO	BaFin is operationally independent and subject to clear accountability mechanisms; its staff is experienced and qualified. Public disclosure of the reasons for dismissal of board members should be required, although it is recognized that in practice reasons would be given. It is recommended, moreover, that the guidance for the control of BaFin by the Federal Ministry of Finance be reviewed to reduce the reporting burden. There is also scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II.
4.	Supervisory process.	O	BaFin is moving toward a more risk-based supervisory approach, which will be fully in place once Solvency II is implemented. For the time being a risk model to select and prioritize the supervisory analysis has been made operational. It is recommended that it is further developed to better take into account the supervision of insurance groups.
5.	Supervisory cooperation and information sharing.	O	BaFin is empowered to, and does regularly exchange information with other supervisors, both within and beyond the EU. It’s a signatory to the EU/European Economic Area (EEA) Protocols on supervisory cooperation, the IAIS multilateral Memorandum of Understanding (MoU) as well as of a number of bilateral MoUs. It is recommended that the concrete application of the confidentiality rules be monitored in order to avoid that it can become an obstacle for full information sharing among supervisors.
6.	Licensing.	O	The licensing regime, based on the EU directives, is clear and transparent.
7.	Suitability of persons.	LO	BaFin performs robust due diligence on any proposed significant owner, board members, trustees and appointed actuaries prior to licensing and after by also monitoring subsequent changes. Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies. Moreover, it is suggested that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
8.	Changes in control and portfolio transfers.	O	The conditions under which a qualified holding in an insurance undertaking can be assumed are clear and in line with the relevant EU directives. Portfolio transfers must be approved by BaFin.
9.	Corporate governance.	O	BaFin has recently introduced new requirements for insurers, which strengthened the robustness of its assessment of insurers’ corporate governance. Those measures can be seen as an anticipation of the Pillar 2 requirements, which will come into force in 2013 under Solvency II.
10.	Internal controls.	O	BaFin has articulated clearly its supervisory expectation of insurers in implementing appropriate internal controls tailored to the nature, scale and complexity of their operations. As for other areas of the supervision, measures were introduced to enhance the insurers’ internal controls systems in view of the incoming implementation of Solvency II.
11.	Market analysis.	O	BaFin performs market analysis and stress tests to identify, assess, and mitigate risks to the insurance sector. Quantitative analysis will need to be enhanced and kept up to date, for example, through more comprehensive stress testing for larger insurers.
12.	Reporting to supervisors.	O	BaFin has a systematic process to review regulatory returns and information provided by insurers as part of its offsite surveillance. The supervisory returns take advantage of the auditor assessment performed on the financial statement. It is advisable to introduce an explicit obligation on auditors as well as on the insurer itself to inform the supervisor promptly of any material changes which affect the current or foreseeable financial condition of an institution.
13.	On-site inspection.	O	BaFin conducts on-site inspections, which are prioritized based on an analysis of insurers’ risk profiles and its market impact. It also has recently conducted joint on-site inspections with other supervisors to address specific issues. However, the frequency of regular on-site inspection for the medium- and low- impact insurers should be increased. While resources allocation should be prioritized according to assessed risks, the chance of detecting emerging difficulties would be importantly increased if at least brief inspection visits were conducted every three or four years for medium-sized insurers.
14.	Preventive and corrective measures.	O	In line with the EU directives, BaFin is empowered to take a range of preventative measures, which allows a progressive escalation of supervisory actions to respond to emerging concerns. The implementation of Solvency II will imply further increase of flexibility in the possible supervisory actions by introducing a more specific intervention ladder based on the solvency ratios.
15.	Enforcement or sanction.	O	BaFin takes a proportionate approach in exercising its enforcement powers under the VAG. The use of administrative fines is considered to be rarely necessary due to the fact that insurers in general comply even with initial informal requests from the authorities.
16.	Winding-up or exit from the market.	O	Legislation provides for orderly exits of insurers and a high degree of protection for policyholders in the event of insolvency.
17.	Group-wide supervision.	O	The German regulatory frameworks for insurance groups and financial conglomerates are broadly in line with EU directives. The impending implementation of Solvency II will strengthen BaFin’s supervision of insurance groups, subject to the adequacy of regulatory resources. In this regard it is advisable to consider: Increasing the adequacy of resources, particularly for the effective supervision of international active groups/conglomerates. Developing the risk classification tool (see ICP 4) to include the group-wide supervision. Harmonizing the supervisory approach in the area of group capital adequacy calculation by issuing more detailed rules on, inter alia, the treatment of participation in credit institutions, the valuation criteria to be used.
18.	Risk assessment and management.	O	The VAG has established high-level requirements relating to insurers’ risk management, supplemented by BaFin circular and supervisory expectation. The effectiveness of insurers’ risk management system is assessed by BaFin under its supervisory review process. The risk management requirements can be seen as an anticipation of Solvency II which will come into force in 2013.
19.	Insurance activity.	O	BaFin directly reviews premium pricing for some classes of business and monitors insurance risks through its assessment of insurers’ risk management system and technical provisions.
20.	Liabilities.	O	There are clear, legal principles and regulatory guidelines for insurers to estimate their insurance liabilities. In addition, the audit reports of external auditors as well as appointed actuaries for certain line of businesses can also be used. BaFin monitors insurers’ technical provisions by off-site examinations as well as on on-site inspections, and has the power to require insurers to remedy any shortfall. It is recommended that, in view of the increasing complexity of the valuation criteria to be used under Solvency II as well as their differences with the current ones, BaFin should increase the number of its staff equipped with actuarial expertise and related quantitative skills. Its current advisory role in this field could be enhanced.
21.	Investments.	O	Regulatory requirements are in place for insurers to manage their investment risks in a manner proportionate to the nature, scale and complexity of their operations. In addition, a number of specific quantitative limits are applicable on the investment activity of the primary insurer in order to ensure an adequate spread of the risks. For the reinsurance activity, the regulation follows the “prudent person principle.” In view of the increasing complexity of the valuation criteria to be used under Solvency II, it is advisable to keep the supervisory reporting requirements under review and to continue developing BaFin’s internal assessment and monitoring.
22.	Derivatives and similar commitments.	LO	The regulatory policy and requirements for the use of derivatives by primary insurers are aligned with international best practice. Quarterly reporting is also defined. However, the provisions for reinsurance activity are more general and the reporting requirements are less stringent.
23.	Capital adequacy and solvency.	O	The capital adequacy regime is based on the EU directives (Solvency I). The implementation of Solvency II with effect from January 2013 will result in a more risk-sensitive regime that will enhance risk-based supervision.
24.	Intermediaries.	LO	BaFin is not responsible for the direct supervision of the intermediaries. The implementation of the relevant EU directive has been a major step in enhancing the supervision of intermediaries, but it is difficult to assess the effectiveness of market conduct control performed by the competent supervisors. It is advisable to carry out such an analysis and take appropriate actions to continue improving the protection of policyholders at the point of sale.
25.	Consumer Protection.	O	There are various tools which enable the consumers to solve possible issues ranging from the complaints to BaFin, the help of consumers’ associations and the ombudsman.
26.	Information, disclosure and transparency towards markets.	O	There is room for improvement in the BaFin publications of market data and analysis, including key data of individual insurers and the timeliness of publication. Moreover, in view of the incoming Solvency II regime, consideration should be given to the enhancement of the disclosure requirements applied to the insurers.
27.	Fraud.	O	The core requirements are in place.
28.	Anti-money-laundering, combating the financing of terrorism (AML/CFT).	LO	While BaFin is in the process of addressing the weaknesses identified in the FATF, especially when dealing with the increased control of the insurers’ activity, there is no evidence that remedial actions are systematically taken by the Länder with regard to insurance intermediaries that they supervise.

Observed (O)	23
Largely observed (LO)	5
Partly observed (PO)	0
Not Observed (NO)	0
Total	28

A. Recommended Action Plan

17. The following recommendations aim to suggest measures to further improve insurance regulations and supervision. In many areas they go beyond the essential criteria of the ICPs.

Table 2.

Germany: Recommendations to Improve Observance of ICPs

Table 2.

Germany: Recommendations to Improve Observance of ICPs

ICP		Recommendation
3.	Supervisory authority.	There is scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II. Public disclosure of the reasons for removal of board members should be envisaged.
4.	Supervisory process.	It is recommended that BaFin continue to develop a risk-based supervisory approach, by further enlarging the risk model which has been put in place to also take into account the group-wide supervision. As stress testing and other quantitative supervisory techniques are developed, they should strongly influence prioritization in the supervisory process.
7.	Suitability of persons.	Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies. Moreover, it is recommended that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
9.	Corporate governance.	It will be important to continue to check that mutual insurers do in fact follow procedures equivalent to the corporate governance code (from which they are exempt), and adapt those procedures as needed as Solvency II is introduced.
11.	Market analysis.	BaFin should continue to develop stress testing capacity, especially regarding larger insurers and financial groups, and longer-term effects.
12.	Reporting to supervisors.	It is advisable to introduce an explicit obligation for the prompt notification of supervisors by insurers and auditors of any material changes which affect the current or foreseeable financial condition of an institution. Care should continue to be taken to keep reporting requirements up to date, while containing regulatory burden, for example, by harmonizing and centralizing to the extent possible reporting requirements imposed by authorities in different jurisdictions or for different purposes.
13.	On-site inspection.	It is recommended that, without sacrificing the principles of risk based supervision, the frequency of regular on-site inspection for the medium and the low impact insurers be increased to bring it closer to international best practice.
14.	Preventive and corrective measures.	The level of sanctions will need to be kept under review to ensure that they remain effective as deterrents.
17.	Group-wide supervision.	It is advisable to consider: Increasing the adequacy of resources, particularly for the effective supervision of international active groups and financial conglomerates. Developing the risk classification tool (see ICP 4) to include the group-wide supervision. Harmonizing the supervisory approach in the area of group capital adequacy calculation by issuing more detailed rules on, inter alia, the treatment of participation in credit institutions, the valuation criteria to be used. Regularly addressing group-wide effects in stress tests.
20.	Liabilities.	It is recommended that, in view of the increasing complexity of the valuation criteria to be used under Solvency II as well as their differences with the current ones, BaFin should increase the number of its staff equipped with actuarial expertise and related quantitative skills. Its advisory function in this field could be enhanced. Stress tests for liability-side risks should be refined and conducted more frequently to assess the sensitivity of results to variations in actuarial assumptions and discount rates.
21.	Investments.	In view of the increasing complexity of the valuation criteria to be used under Solvency II, it is advisable to keep the supervisory reporting requirement under review, and to continue developing BaFin’s internal assessment and monitoring.
22.	Derivatives and similar commitments.	It is recommended that the “prudent person principle” approach which forms the basis for the supervision of reinsurers’ investment activity and use of derivatives be complemented by reinforced off-site and on-site monitoring of such activities.
24.	Intermediaries.	It is advisable to carry out an analysis of the impact of the relevant EU directive, and take appropriate actions to continue improving the protection of policyholders at the point of sale.
26.	Information, disclosure and transparency towards markets.	Time lags in the publication of aggregate insurance data should be shortened. The availability of preliminary data—perhaps when over 90 percent of input data have been compiled—on a more timely basis would be valuable.
28.	AML/CFT.	The authorities should continue to address the weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.

View Table

Table 2.

Germany: Recommendations to Improve Observance of ICPs

ICP		Recommendation
3.	Supervisory authority.	There is scope for strengthening regulatory resources, particularly for supervision of internationally active insurance groups and implementation of Solvency II. Public disclosure of the reasons for removal of board members should be envisaged.
4.	Supervisory process.	It is recommended that BaFin continue to develop a risk-based supervisory approach, by further enlarging the risk model which has been put in place to also take into account the group-wide supervision. As stress testing and other quantitative supervisory techniques are developed, they should strongly influence prioritization in the supervisory process.
7.	Suitability of persons.	Consideration should be given to having the power to extend similar requirements, as needed, to other high level managers who determine day-to-day policies. Moreover, it is recommended that insurers be required to report to BaFin as they become aware of circumstances that may be relevant for the fitness and propriety of key functionaries.
9.	Corporate governance.	It will be important to continue to check that mutual insurers do in fact follow procedures equivalent to the corporate governance code (from which they are exempt), and adapt those procedures as needed as Solvency II is introduced.
11.	Market analysis.	BaFin should continue to develop stress testing capacity, especially regarding larger insurers and financial groups, and longer-term effects.
12.	Reporting to supervisors.	It is advisable to introduce an explicit obligation for the prompt notification of supervisors by insurers and auditors of any material changes which affect the current or foreseeable financial condition of an institution. Care should continue to be taken to keep reporting requirements up to date, while containing regulatory burden, for example, by harmonizing and centralizing to the extent possible reporting requirements imposed by authorities in different jurisdictions or for different purposes.
13.	On-site inspection.	It is recommended that, without sacrificing the principles of risk based supervision, the frequency of regular on-site inspection for the medium and the low impact insurers be increased to bring it closer to international best practice.
14.	Preventive and corrective measures.	The level of sanctions will need to be kept under review to ensure that they remain effective as deterrents.
17.	Group-wide supervision.	It is advisable to consider: Increasing the adequacy of resources, particularly for the effective supervision of international active groups and financial conglomerates. Developing the risk classification tool (see ICP 4) to include the group-wide supervision. Harmonizing the supervisory approach in the area of group capital adequacy calculation by issuing more detailed rules on, inter alia, the treatment of participation in credit institutions, the valuation criteria to be used. Regularly addressing group-wide effects in stress tests.
20.	Liabilities.	It is recommended that, in view of the increasing complexity of the valuation criteria to be used under Solvency II as well as their differences with the current ones, BaFin should increase the number of its staff equipped with actuarial expertise and related quantitative skills. Its advisory function in this field could be enhanced. Stress tests for liability-side risks should be refined and conducted more frequently to assess the sensitivity of results to variations in actuarial assumptions and discount rates.
21.	Investments.	In view of the increasing complexity of the valuation criteria to be used under Solvency II, it is advisable to keep the supervisory reporting requirement under review, and to continue developing BaFin’s internal assessment and monitoring.
22.	Derivatives and similar commitments.	It is recommended that the “prudent person principle” approach which forms the basis for the supervision of reinsurers’ investment activity and use of derivatives be complemented by reinforced off-site and on-site monitoring of such activities.
24.	Intermediaries.	It is advisable to carry out an analysis of the impact of the relevant EU directive, and take appropriate actions to continue improving the protection of policyholders at the point of sale.
26.	Information, disclosure and transparency towards markets.	Time lags in the publication of aggregate insurance data should be shortened. The availability of preliminary data—perhaps when over 90 percent of input data have been compiled—on a more timely basis would be valuable.
28.	AML/CFT.	The authorities should continue to address the weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible.

B. Authorities’ Response to the Assessment

18. The authorities broadly agree with the assessment.