Germany: Solvency II: BaFin provides interpretative decision on some aspects regarding the conduct of reinsurance business in Germany by insurance undertakings situated in third countries

In the past, the German Federal Financial Supervisory Authority (BaFin)  published guidance on its web pages concerning correspondence insurance in the reinsurance sector (see RegZone report of 15 August 2016).

Following  this guidance, on 30 August 2016 BaFin has issued an official interpretive decision on some aspects regarding the conduct of reinsurance business in Germany by insurance undertakings situated in a third country, which  clarifies the earlier guidance.

Insurance undertakings from third countries are subject to authorization and must establish a German branch

In its introductory remarks of its interpretative decision of 30 August 2016, BaFin again points out that since Solvency II has come into force on 1 January 2016, insurance undertakings (primary insurers and reinsurers) from third countries, i.e. countries that are not member states of the European Union or signatories of the Agreement on the European Economic Area, are subject to authorization and must establish a German branch  if they wish to carry on insurance or reinsurance business in Germany. There is, however, an exception for the conduct of reinsurance business (sect. 67 subsect. 1, sentence 2 of the German Insurance Supervisory Act (VAG)): There is no need to be authorized and to establish a German branch if the insurance undertaking from a third country carries on solely reinsurance business in Germany through provision of cross-border services and if the European Commission has decided in accordance with Article 172 (2) or (4) of the Solvency II-Directive that the solvency regime for reinsurance activities carried out by the undertaking in the relevant country is equivalent to the regime described in that Directive.

Content of the interpretative decision:

In its interpretative decision of 30 August 2016 BaFin now explains under which circumstances this exception applies.

Impact on existing and new business

First, BaFin clarifies that if the renewal of a reinsurance contract concluded on or before 31 December 2015 between a German insurer and a third-country insurer requires a contractual agreement between the parties (especially regarding key elements such as the scope of cover or premiums), the annual renewal is subject to the authorization requirement or the exemption mentioned above.

"Carrying on reinsurance business"

According to BaFin´s interpretative decision, carrying on reinsurance business in Germany does not only include the execution of legal transactions, but also the main steps leading up to signing the contract as well as the performance of the contract. The decisive element is whether the third-country insurance undertaking deliberately targets the German market in order to offer reinsurance contracts to German insurers or to initiate such business. This is also the case if intermediaries situated in Germany or abroad are used to contact German insurers or to provide offers to the German market as well as if the insurance undertaking deliberately targets the German market by concluding contracts with German insurers on a regular basis.

No authorization necessary in case of correspondence

However, the authorisation requirement does not apply if reinsurance contracts are concluded by correspondence, i.e. the reinsurance contract is concluded by correspondence with an insurer situated abroad without one of the parties being assisted by a professional intermediary in Germany or an intermediary abroad but acting as intermediary in Germany:.

BaFin points out that the crucial element here is that the initiative to conclude the reinsurance contract must come from the German insurer. This is, however, not the case if the initiative of the German insurer is based on activities carried out by a third country insurance undertaking which constitute the conduct of business in Germany. BaFin further emphasizes that another important requirement is the conclusion by way of correspondence – which is assumed to be the case if the contracting parties make use of the usual methods of communication such as telephone, fax, e-mail or post. The correspondence requirement is also fulfilled if the German insurance undertaking, on its initiative, authorizes a third party to prepare and/or conclude a reinsurance contract. This applies in particular to cases where a German insurer uses an intermediary situated in Germany or abroad in order to establish contact with a particular third country insurer. BaFin further points out that third country insurance undertakings are not permitted to conclude and perform contracts when a branch having its head officer in another EU/EEA-member state or another third country is involved.

Legal obligations for German insurers

With regard to the German insurers, BaFin also emphazises that if a German insurer concludes reinsurance contracts with a third country reinsurer by way of correspondence, it  must take adequate account of risks arising from this reinsurance relationship. Risk management systems must include all the risks the insurer is exposed to and must in particular cover reinsurance and other risk mitigation techniques. Therefore, it is of particular importance to also assess the creditworthiness of the relevant third country insurance undertaking and to take into account the specific legal and default risks.

BaFin´s powers of intervention and consequences under criminal law

Lastly, BaFin stresses that BaFin is allowed to order third country insurance undertakings to cease conducting business immediately and run-off the business without delay. The operation or commencement of reinsurance business without the necessary authorization is considered a criminal offence, regardless of whether the lack of authorization is due to intent or negligence.