Germany Adopts New Own Capital Rules For Insurance Companies

by Ulrika Lomas, Tax-News.com, Brussels

20 February 2012

The German cabinet has recently adopted a bill providing for changes to the country’s insurance supervision act (Versicherungsaufsichtsgesetz), designed to implement the European Union (EU) directive (2009/138/EG) on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

According to the German finance ministry, the overarching aim of the project is to ensure that primary and reinsurance companies in the EU, which have up to now withstood the European state debt crisis relatively well, are crisis-resistant in the future. As this will have an impact on the own capital provision of the entire insurance industry, the project is also known under the name of “Solvency II".

The key elements of the project, currently one of the most important EU projects in the area of financial services, are: improving the protection of policy holders as well as beneficiaries; modernising the regulatory framework; a forward-looking, risk-based supervision in line with the economic reality; the integration of the European insurance market; reducing the regulatory differences between banks and insurance companies; and improving the competitiveness of the European insurance industry.

The ministry underscores in its release that the risk-orientated and forward-looking approach of Solvency II will lead to a fundamental change in the calculation of own capital requirements of insurance companies, and to a change in the regulatory measures and instruments, to reduce the risk of insurance company insolvency.

The ministry explains that the project follows a three-pronged strategy, comparable with the Basel II own capital standard in the area of banking supervision. It serves firstly to regulate how much own capital the insurance company must hold in the future, secondly to determine how the companies are regulated in the future both by the German Federal Financial Supervisory Authority (BaFin), and by the European insurance supervisory authority (EIOPA), and to determine the internal governance of a company, and finally deals with market discipline, transparency, disclosure and reporting requirements.

Concluding its remarks, the ministry states that although the directive is to be transposed into German law by October 31, 2012, the Commission has suggested that the new requirements for insurance companies enter into force on January 1, 2014.

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