This country-specific Q&A gives a pragmatic overview of the law and practice of insurance & reinsurance law in the Germany.
It addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution as well as personal insight and opinion as to the future of the insurance market over the next five years.
This Q&A is part of the global guide to Insurance & Reinsurance. For a full list of jurisdictional Insurance & Reinsurance Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/insurance-reinsurance
How is the writing of insurance contracts regulated in the jurisdiction?
The insurance and reinsurance activities of insurance (and reinsurance) undertakings headquartered in Germany, e.g. underwriting and claims handling, are mainly regulated by the German Insurance Supervisory Act (VAG), which contains provisions for, among other things, the licensing, continuous supervision and solvency capital and competency requirements for insurance providers.
Insurance and reinsurance undertakings headquartered in Germany as well as the German branch of a third country insurer or reinsurer are supervised by the German Federal Financial Supervisory Authority (BaFin). Insurance or reinsurance undertakings, which have their registered office in another EU or EEA member state and which conduct business in Germany under the freedom to provide services are primarily subject to supervision by their home country regulator. But BaFin may identify breaches of German mandatory (general good) provisions and take certain regulatory actions in consultation with the home state regulator, for example with regard to market conduct.
Against the background of the implementation of the Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II Directive) in German law, the VAG has been amended with effect from 1 January 2016. The provisions of the VAG have to be construed in accordance with the Solvency II Directive. Furthermore, the provisions of the Commission Delegated Regulation (EU) 2015/35 supplementing the Solvency II Directive are applicable directly in Germany.
Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Life, non-life and reinsurance businesses are all subject to the Solvency II capital regime and in this respect are subject to the same regulatory structure established by the German Insurance Supervision Act and Commission Delegated Regulation (EU) 2015/35. Under the German Insurance Supervision Act, reinsurers are treated as insurers unless a rule specifies that they are excluded or subject to an alternative approach. For example, reinsurers are subject to a specific supervisory regime pursuant to section 169 of the German Insurance Supervision Act or special provisions regarding the transfer of a portfolio under section 166 of the German Insurance Supervision Act. These special provisions are normally not applicable for the reinsurance activities of “mixed” insurers.
For reinsurance undertakings from third countries, i.e. countries that are not EU or EEA member states, specific authorisation requirements apply, as detailed above.
Are insurance brokers and other types of market intermediary subject to regulation?
Insurance brokers and other types of market intermediaries are subject to the provisions in the German Trade Regulation Code (GewO) rather than in the German Insurance Supervision Act. The local Chambers of Trade and Commerce (Industrie- und Handelskammer) are responsible for licensing and overseeing insurance intermediaries. The activities undertaken by any intermediaries is not subject to the supervision by BaFin.
The German Trade Regulation Code determines in section 34d intermediation activities for which authorisation is mandatory and those which are exempted from this requirement, including product-accessory intermediaries and tied intermediaries for which the insurer has assumed full responsibility. Insurance intermediaries domiciled in either an EU or EEA member state may operate in Germany if they have been registered in their home state in accordance with the statutory regulations.
In a recent publication BaFin maintains that brokers must not undertake any claims handling activities for insurance undertakings. BaFin refers to a decision of the Federal Supreme Court (BGH) dated 14 January 2016 under which any claims handling activities of a broker normally qualify, inter alia, as a breach of the German Legal Services Act (RDG) considering the conflict of interests that arise when undertaking claims handling activities on behalf of the insurer considering that the broker should act solely in the interests of the policyholder. Due to the significance of claims handling by brokers, further developments should be monitored closely.
Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
Providers of intermediation activities which are not exempted from the authorisation requirements pursuant to the provisions of the German Trade Regulation Code have to obtain a license prior to the commencement of intermediation services from the competent Chamber of Industry and Commerce, see above. The licencing and registration of a German intermediary takes about four weeks.
Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
Under section 16, in connection with section 7, No 3 of the German Insurance Supervision Act, the direct and indirect acquirer of at least 10% of the equity interests or voting rights in an insurer (and each of its directors) must fulfil the requirements necessary for the reasonable and prudent management of an insurance company and be trustworthy. Approval by BaFin is also required when an existing controller of a qualifying holding (which may also consist of several persons acting in concert) proposes to increase its holding above 20%, 30% or 50%.
Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
Insurance undertakings may not conduct insurance business in Germany unless or until they have obtained authorisation from BaFin, except for insurance undertakings headquartered in another EU/EEA member state. The authorisation obtained by such insurance undertakings from a home state regulator is valid in all EU/EEA states and an insurance undertaking may subsequent to the notification of BaFin carry on insurance business outside its home state in Germany via branches or through cross-border provision of services.
Importantly however, the term “conduct of insurance business” captures commercial activities by the insurer or reinsurer that are aimed at the German market but does not necessarily apply to every situation where an insurer underwrites a risk located in the Germany.
Insurance and reinsurance undertakings from third countries, i.e. countries that are not member states of either the EU or EEA, are subject to authorisation and normally must establish a German branch office. Section 67 (1) sentence 2 of the German Insurance Supervision Act provides an exemption from authorisation requirements for reinsurers from third countries which carry on solely reinsurance business in Germany without a German branch, and where the European Commission has decided in accordance with Article 172 (2) or (4) of the Solvency II Directive that the solvency regimes for reinsurance activities carried out by undertakings in the relevant country are equivalent to the regime described in that Directive. A similar regime will, upon ratification, apply under the new EU-US agreement on prudential measures regarding insurance and reinsurance.
Furthermore, the authorisation requirement does not apply, if the respective insurance contract is concluded by “reverse solicitation” which is commonly referred to as “insurance by correspondence” (Korrespondenzversicherung). Additional rules apply to third country reinsurers, and in this case certain requirements (such as rating, enforceability and/or collateral) may have to be met for cedants to obtain credit for the reinsurance cover pursuant to the rules under the Commission Delegated Regulation (EU) 2015/35.
What penalty is available for those who operate without appropriate permission?
It is a criminal offence to conduct insurance business in Germany without a required authorisation, punishable by up to five years imprisonment or a fine pursuant to section 331 (1) No. 1 of the German Insurance Supervision Act in case of intentional misconduct. Where the lack of authorisation is due to negligence, the breach is punishable by up to three years imprisonment or a fine. BaFin may, among other things, impose the cessation of the business operations with immediate effect and the winding-up of the insurance business conducted pursuant to section 308 of the German Insurance Supervision Act. A policyholder who has entered into an insurance contract with an insurer operating without a licence is normally entitled to claim damages suffered and/or terminate the insurance contract at its discretion with immediate or retroactive effect.
How rigorous is the supervisory and enforcement environment?
BaFin has extensive statutory enforcement powers set out in the German Insurance Supervision Act. Furthermore, BaFin has extensive investigatory powers. BaFin may, inter alia, request any information relating to the business of the individual carrying out a regulated activity and conduct site visits, including investigations regarding any provider of outsourced activities.
How is the solvency of insurers (and reinsurers where relevant) supervised?
German insurers are subject to the European Solvency II regime (effective since 1 January 2016). Solvency II is a risk-based capital regime, similar in concept to Basel II, based on three ‘pillars’. Pillar 1 is a market consistent calculation of insurance liabilities and risk-based calculation of capital. Pillar 2 focuses on the system of governance to be established by an insurance undertaking. Pillar 3 imposes reporting and transparency requirements. Solvency II requires firms to hold both a Minimum Capital Requirement (MCR) and a Solvency Capital Requirement (SCR). Breach of the MCR is designed, unless remedied quickly, to lead to a loss of the insurer’s authorisation. Breach of the SCR results in supervisory intervention designed to restore the SCR level of capital.
In Germany, BaFin has responsibility for ensuring that insurers and reinsurers comply with Solvency II.
What are the minimum capital requirements?
The risk based capital requirement, the SCR, will be calculated using either a standard formula, a bespoke internal model that has been approved by the insurer’s supervisor, or a mixture of both. The standard formula will inter alia cover underwriting risk, market risk, credit risk and operational risk in a formulaic way (e.g. assumed stress level for equities). The calculation will be calibrated to seek to ensure a 99.5 per cent confidence level over a one year period. This means that insurers holding eligible own funds equivalent to the SCR will, with a probability of at least 99.5%, be able to cover any unexpected losses they might incur during the year to come. There is also an MCR set at lower threshold (e.g. about 85 per cent confidence level). The MCR should not be less than 25 per cent of the SCR. The MCR has an absolute floor of € 3.7 million for life insurers, € 2.5 million for non-life insurers and € 3.6 million for reinsurers.
Is there a policyholder protection scheme?
Policyholder protection schemes are established for life and health insurance covers.
Pursuant to section 221 (1) of the German Insurance Supervision Act, the statutory guarantee fund for life insurance protects all insurance contracts of insurance classes 19 to 23. The purpose of the statutory guarantee fund for health insurance is to protect substitutive health insurance. Health insurance is referred to as substitutive when it either in part or wholly covers the same type of risks as health insurance provided by social security carriers for employees and their families earning salaries below a certain threshold.
How are groups supervised, if at all?
Under Solvency II groups are subject to supplementary supervision in addition to the solo supervision of individual insurance companies in order to protect policyholders against risks that might be present within a group but not necessarily apparent where only the individual insurance company is considered. The Solvency II Directive sets out the circumstances in which group supervision is triggered. The threshold is set relatively low, meaning that only one insurance entity need be headquartered in Germany (or elsewhere in the European Union) for group supervision to be applied.
Where a European headquartered Solvency II group is identified, it must hold eligible own funds equal to or in excess of a group SCR. The recognition of individual company own funds (in excess of any applicable solo capital requirement) at the group level depends on their availability and transferability between group entities. In addition, group-wide governance, reporting and intra-group transaction and risk concentration monitoring shall apply.
Where a group is headquartered outside the European Union, Solvency II group supervision may still apply, either to a sub-group or to the worldwide group, depending on whether a finding of equivalence has been made or whether other methods have been applied.
Do senior managers have to meet fit and proper requirements and/or be approved?
The German Insurance Supervision Act requires that the individuals responsible for certain key functions (Schlüsselfunktionen) must be notified to BaFin to ensure that the individual is fit and proper for the role.
Are there restrictions on outsourcing parts of the business?
In accordance with Solvency II, where an insurer outsources part of its business it will remain fully responsible for discharging all of its obligations under law, regulation and administrative provisions. Specifically, insurers must not outsource any critical or important part of the business in such a way as might lead to any material impairment in the quality of the firm’s systems of governance, any increase in operational risks, impairment of the ability of the supervisory authorities to monitor compliance or undermining of continuous and satisfactory service to policyholders. The intention to outsource important insurance functions must be notified to BaFin by providing the draft outsourcing agreement. Section 203 of the German Criminal Code has so far imposed severe limitations on the transfer of sensitive data by a domestic or foreign life or health insurer to an outsourcing provider. After almost 20 years of discussion, this provision is about to be changed in early 2017 to finally open the way for outsourcing by life and health insurers.
How are sales of insurance supervised or controlled?
Both the German Insurance Supervision Act and the German Insurance Contract Act (VVG) set out certain objectives on the sale of insurance products, in particular relating to the provision of information and suitable advice by the insurer and/or the insurance intermediary.
The insurer is obliged to provide suitable advice to the customer pursuant to section 6 of the German Insurance Contract Act. Where insurance products are distributed by insurance intermediaries, the insurer has to ensure that the insurance intermediary is a broker, or actually provides suitable advice to the customer to comply with the insurer’s corresponding obligation. The transposition of the European Insurance Distribution Directive into German law in 2017 will extend the advice obligations with regard to insurance-based investment products.
Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
The customer protection provisions of the German Civil Code (BGB) apply in full to insurance contracts, regardless of whether or not the customer qualifies as a consumer.
With regard to so-called “jumbo risk” policies, the parties are, subject to the transparency and fairness requirements for standard terms (see below), permitted to deviate from any mandatory insurance contract law provisions as well as the mandatory European conflict of law provisions contained in the Rome I Regulation. Pursuant to section 210 of the German Insurance Contract Act, a jumbo risk is – building on the definition in Art. 13 No. 27 of the Solvency II Directive defined as a policy that falls within certain classes of business (such as railway rolling stock, aircraft, ships, goods in transit or commercial trade credit insurance), or for other classes such as P&C, liability, financial losses where the policyholder exceeds at group level the limits of at least two of the following criteria: (i) a balance-sheet total of EUR 6.2 million; (ii) a net turnover of EUR 12.8 million; (iii) an average number of 250 employees during the financial year.
Except where the details of the relevant clause have been specifically negotiated by the parties, the provisions concerning standard terms under sections 305 et seq. of the German Civil Code apply. Under these provisions, any clauses of the standard terms and conditions that are surprising, non-transparent or unfair are void and deemed as replaced by what would apply if the contract was silent. The standards of what is deemed to be non-transparent or unfair may be less stringent with regard to professional customers, in particular with regard to jumbo risks.
Many provisions of the German Civil Code are supplemented by provisions in the German Insurance Contract Act. Except with regard to jumbo risks (see above), any terms diverging from certain mandatory provisions to the detriment of the (professional or non-professional) customer are void, e.g. an insurer may normally not reduce benefits where the policyholder is able to demonstrate the absence of gross negligence (sections 28, 32 of the German Insurance Contract Act).
Are the courts adept at handling complex commercial claims?
The Federal Supreme Court has a long history of dealing with complex insurance claims; a chamber specialised in insurance law has been established. Many of the district courts, dealing with insurance matters with a value exceeding EUR 5,000, have also established specialised chambers. The German judiciary are widely regarded as impartial and expert in commercial disputes – frequently dealing with international parties.
Is alternative dispute resolution well established in the jurisdiction?
The two important mediation organisations recognised by the German Ministry of Justice under section 214 of the German Insurance Contract Act are Ombudsmann Private Kranken und Pflegeversicherung for private health insurance disputes, and Versicherungsombudsmann eV for all other insurance types involving consumers. Versicherungsombudsmann eV is a private law association of many insurers with headquarters or branches in Germany and the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft eV). With the Versicherungsombudsmann eV, 20,827 complaints were filed in 2015. The Versicherungsombudsmann eV may issue binding decisions against its members in an amount up to EUR 10,000. However, decisions are not binding for policyholders and other insured persons if they prefer to continue pursuing their claims in court. Furthermore, arbitration clauses in commercial insurance agreements are enforceable under German law and well established in e.g. commercial and financial lines covers.
What are the primary challenges to new market entrants?
Germany has a long-established and therefore mature insurance market that covers all product lines in life, general insurance and reinsurance and has the infrastructure and professional expertise to rival any other global insurance hub. New market entrants have to consider differences in the legal environment relating to inter alia employment, data protection and unfair competition law.
To what extent is the market being challenged by digital innovation?
The German market is expected to be transformed by digital innovation such as telematics devices, distributed ledgers and connected devices (or the Internet of Things). Similarly, the harnessing and use of Big Data will change underwriting as insurers will have far greater access to personal (or at least risk-specific) information than ever before. With more personalised information and with automated processes, for example automated claims handling, insurers are seeing an opportunity to offer customers new product lines with potential cost savings.
Adapting to new business models will require significant investment (whether in research and development or acquisitions) by existing market players and start-ups are attracting funding. New market entrants that design their business models around new technology and the use of digital information may be able to steal a march on their competitors. In an overcrowded market, many existing product lines are likely to struggle without adaptation to the new digitally-reliant environment.
Over the next five years what type of business do you see taking a market lead?
Because of the pressures on growth in established markets, German insurers are likely to continue to seek growth in new markets such as Africa, Asia and South America. Because of the regulatory and market pressures in Europe consolidation is likely to continue for the next few years. Buyers are likely to include investors from outside the traditional insurance markets, including private equity. For life businesses, particularly affected by the low interest rate environment, the quest for returns is likely to result in insurers investing in different asset classes such as infrastructure projects.
The technical progress is expected to have a significant impact on insurance business and will shift the risk to cyber incidents as opposed to the liability for human misconduct, e.g. autonomous vehicles, Internet of Things, telematics solutions as well as the implementation of the smart contract and blockchain technology in the insurance sector. Cyber threats are challenging not just global business but also individuals and governments. Insurers that can genuinely offer credible solutions to both mitigate and manage cyber threats and adapt to the changing risk environment are likely to fare much better than those insurers relying on traditional product lines only.