The Federal Financial Supervisory Authority (BaFin) has now regulated the execution and settlement of German portfolio business by insurers from the United Kingdom and Gibraltar operating cross border after the final Brexit. The most important point is the waiver of a license according to sec. 67 para. 1 VAG. However, further interesting questions arise in relation to the details, e.g. with regard to reinsurance and group insurance contracts.
The Federal Financial Supervisory Authority (BaFin) has provided helpful clarification in a timely manner with the General Order on the Implementation and Settlement of Cross-Border Activities of UK and GI Insurers and IORPs dated 31 December 2020 and effective from 1 January 2021 (hereinafter the "Order").
Insurance undertakings and institutions for occupational retirement provision ("IORPs") domiciled in the United Kingdom and Gibraltar that were authorized to take up and carry on insurance and reinsurance activities in Germany under the European Passporting System until the expiry of the agreed transitional period on 31 December 2020 may continue and wind up their existing business.
What does the Order regulate in detail?
No license under sec. 67 para. 1 of the Insurance Supervision Act (“VAG”) is required for the settlement and continuation of existing business.
However, primary insurance contracts and contracts relating to occupational pensions must be terminated immediately, if and as soon as legally permissible.
Portfolio business may be conducted until the completion of a portfolio transfer to a company licensed in Germany initiated by 31 December 2020. In this respect, there is no need to terminate concerned contracts.
During the permitted continuation and wind-up periods, the companies concerned have various reporting obligations vis-à-vis BaFin.
This raise a number of detailed questions, some of them be addressed here:
- What does "legally permissible termination" mean?
- What rules apply to reinsurance contracts?
- What does "continuation and winding up" mean with regard to group insurance contracts?
The correct understanding of a legally permissible termination is derived from the context. First of all, BaFin has stated in No. 1 of the Order that no permission pursuant to sec. 67 para. 1 VAG is required for the winding-up and continuation of insurance and reinsurance activities. Subsequently there is no longer any relevant trigger for an extraordinary termination pursuant to sec. 305 of the German Civil Code -- which would also have had to be considered as a legally permissible type of termination: Since permission is not necessary, there is no possible dilemma situation under which the continuation and settlement of the contracts could have been regarded as a condition contrary to supervision and thus as grounds for extraordinary termination. Therefore, only the legally permissible ordinary termination as contractually agreed or in accordance with sec. 11 of the Insurance Contract Act (“VVG”) applies. Finally, as a positive aspect, it should be emphasized that there are no complicated provisions for any long-running policies and that even a non-cancellable portfolio can be continued and wound up until expiration without any problems under supervisory law.
With regard to reinsurance contracts, it should be emphasized that the requirement of termination - to the extent and insofar as legally permissible - has only been pronounced for primary insurance contracts and IORPs. Portfolio reinsurance contracts may thus be continued and wound up without a termination requirement under No. 2 of the Order and under No. 1 without permission under sec. 67 para. 1 VAG. The reason for this special position will in particular certainly be that the requirement for termination is less relevant in practice, since these are largely expiration policies without tacit renewal. However, another explanation for the deviating treatment of reinsurance contracts could also be a possible EU equivalence decision for pure reinsurers from the UK and Gibraltar. In that regard, it is possible that no ongoing business relationships should be interrupted during the review and decision-making process at the EU level.
The ruling contains no specific statement for group insurance contracts. Again, the rules for primary insurers and IORPs apply, i.e. that no permission is required under No. 1 of the Order and the requirement to terminate contracts under No. 2 of the Order. However, the scope of permissible continuation and settlement up to this point does not appear entirely clear. In particular, the question of whether further insured persons or risks can be brought into an existing group insurance contract to the extent provided for in the contract, or whether the status of the group insurance contract on 31 December 2020 is frozen, so to speak, and can only be continued and wound up to this extent. A comparison with the situation for IORPs could suggest the latter. According to No. 2 of the Order, no new pension commitments for employees of a notified employer may be taken over. This situation is comparable to the situation in a group insurance contract. Applied to group insurance contracts it would mean that the group policyholder cannot add any new insured persons or risks to the contract. This is in opposition to the intended protection of domestic policyholders set out by BaFin in the reasons for the Order. A "frozen" group insurance contract would not resolve all issues for the group policyholder. In order to continue its intended purpose with the group insurance contract, it would have to immediately conclude another group insurance contract for new insured persons or risks. It remains to be seen whether and how BaFin will take a position on this issue.