The economically significant investment activity by insurance companies is subject to the regulatory requirements of the German Insurance Supervision Act (Versiche­ rungsaufsichtsgesetz – VAG). With regard to the provisions of the European Solvency II Directive, changes to the requirements for capital investments of insurance companies have resulted from the new VAG which came into effect as of 01 January 2016 (VAG new). This gives us cause to take a look at the most important changes.

A.  Former legal situation

I. Restricted and free assets

Pursuant to the version of the VAG which was in force until 31 December 2015 (VAG old), insurance companies had to create “restricted assets” consisting of two pools of funds: Firstly, “guarantee assets” (Siche­ rungsvermögen) which had primarily to be used to satisfy the claims of the insureds in the event of insolvency. Secondly, the “other restricted assets” which secured the other insurance obligations. In addition, “free assets” were distinguished from restricted assets. The latter were not used to cover provisions related to insurance liabilities. Free assets were mainly the equivalent of the equity and non-underwriting liabilities.

II. Restrictions pursuant to VAG old

Restricted assets (unlike free assets on which there were no restrictions) had to be invested in such a way as to achieve a maximum of security and profitability while maintaining the insurance undertaking’s liquidity at all times and ensuring an adequate diversification and spread of investments (see section 54, subsection 1 VAG old). The former Regulation on the Investment of Restricted Assets (Verordnung über die Anlage des gebundenen Vermö­ gens) further defined in greater detail these VAG investment principles and contained a “static” list of permissible forms of capital investment (list of funds). The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht or BaFin) had also published practical advice for the investment of restricted assets in the form of a circular.

B.  New legal situation

I.  Abolition of static investment requirements and new investment principles

According to the Solvency II Directive, static requirements on certain permissible forms of investment such as those in the list of funds of the former Regulation on the Investment of Restricted Assets are no longer permitted. Therefore, with effect as of 01 January 2016, the Regulation on the Investment of Restricted Assets was repealed. The new investment principles set out in section 124 subsection 1 VAG new have substituted the former investment principles for restricted assets pursuant to section 54 subsections 1 to 3 VAG old. These new principles apply to all funds of insurance companies. The former distinction between restricted assets (consisting of the guarantee assets and other restricted assets) and free assets no longer exists. However, what is still relevant is the distinction between guarantee assets and the other assets of an insurance company.

II.  New freedom of capital investment?

By eliminating the static investment requirements set forth in the Regulation on the Investment of Restricted Assets and introducing new investment principles, insurance companies are given greater flexibility in investing their capital. However, the explanatory memorandum to the new Insurance Supervision Act expressly states that the new investment principles do not mean complete freedom with regard to capital investment or that the former security standard is to be relaxed. Instead of complying with specific regulatory requirements, insurance companies are now expected to be more selfreliant for a prudent capital investment.

As a result, insurance companies must invest their entire funds according to the prudent person principle (Grundsatz der unter­ nehmerischen Vorsicht) in future. As regards such prudent person principle, section 124 subsection 1 sentence 2 nos. 1 to 8 VAG new contains further parameters. Under this provision investments may only be made in funds the risks of which an insurance company is sufficiently able to identify, evaluate, monitor, steer, supervise and include in its reporting. Furthermore, all funds are to be invested in such a way that the security, quality, liquidity and profitability of the insurance company’s portfolio may be ensured as a whole. It must also be noted that insurance companies now have to provide evidence within the framework of proper business organisation that they comply with the requirements of section 124 VAG new. This means that, under the new VAG, developing their own guidelines for capital investment within risk management has greater significance for insurance companies than before.

In addition to the statutory regulations of the new VAG, in particular the BaFin decision on interpreting the prudent person principle as of 01 January 2016, the BaFin decision on interpreting risk management at insurance companies as of 01 January 2016 and the EIOPA guidelines 27 to 35 on the governance system shall be observed.

III.  Scope of application

It must be taken into account that the new requirements for capital investment according to the prudent person principle do not apply to so- called “small insurance companies”. Insofar Section 215 VAG new which largely corresponds to section 54 VAG old is relevant for small insurance companies, in particular to primary insurers whose annual gross premium income does not exceed EUR 5 million or whose entire insurance provisions do not exceed EUR 25 million. Beyond  that, as well for certain other types of enterprise, the old legal situation is conserved in whole or in part.

As is the case for small insurance companies, under the new VAG insofar as a basis for authority to give a regulation with static investment requirements for so- called Sterbekassen (life insurance companies with the purpose to provide cover in particular for funeral expenses) and Pensionskasse (life insurance companies with the purpose to provide cover in particular for a loss of income due to old-age, invalidity or death) does exist. On this basis (exclusively) for small insurance companies for the Sterbe­ kassen and the Pensionskassen a regulation on the investment of the guarantee assets has just been published (Verordnung über die Anlage des Sicherungsvermögens von Pensionskassen, Sterbekassen und kleinen Versicherungsunter­ nehmen (Anlageverordnung – AnlV). The requirements of this regulation will presumably also become relevant for other particular pension funds (Versorgungswerke) which are legally required to comply with this regulatory system (see for example section 15 of the Bavarian law for public services, bayerischen Gesetzes über das öffentliche Versorgungs­ wesen) or which submit to this according to their own decision.

C.  Conclusion

The new requirements on capital investments, if applicable, offer greater flexibility to insurance companies than before. Insurance companies, however, do have to provide evidence that they do in fact comply with the requirements of the prudent person principle. Therefore, it can be expected that the greater freedom for insurance companies will presumably be accompanied by an increase in the documentation required for capital- investment-related risk management. This will be the case in particular if insurance companies wish to deviate from the previously permissible forms of capital investment. Furthermore, static requirements on particular forms of investment according to the model of the former Regulation on the Investment of Restricted Assets must still be complied with by small insurance companies, Sterbekassen and Pensionskassen and, as the case may be, pensions funds (Versorgungswerke).