Germany: Insurance & Reinsurance

Insurance supervision in Germany is mainly regulated by the Insurance Supervisory Act (Versicherungsaufsichtsgesetz, VAG). The VAG contains provisions regarding, inter alia, authorisation, fund requirements and governance for insurance and reinsurance undertakings. The VAG was reformed in order to transpose the Directive 2009/138/EC (“Solvency II Directive”) into domestic law as of 1 January 2016. The Solvency II Directive is supplemented by the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 which is directly applicable in Germany.

In addition to the provisions of the VAG, insurance and reinsurance undertakings have to comply with a wide range of provisions in German law, e.g. under civil, company and data protection law.

The relevant regulatory body in Germany for insurance and reinsurance activities is the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). It supervises all private and public insurance undertakings which carry on private insurance business within the scope of the VAG and have their registered office in Germany. In addition, there are supervisory authorities of the Federal States which are mainly responsible for supervising public insurers whose activities are restricted to the particular Federal State and private insurers who are of lesser financial and economic significance.

Insurance and reinsurance undertakings which have their registered office in another EU Member State, or in a state which is party to the Agreement on the European Economic Area (EEA), and conduct business in Germany under the European Passport or Single License Principle are mainly subject to their home country’s supervision, especially in prudential matters. Additional requirements apply for establishing a branch. BaFin closely cooperates with foreign supervisory authorities, especially within the European System of Financial Supervision including the European Insurance and Occupational Pensions Authority (EIOPA).

The VAG applies to direct life and non-life undertakings. As such, both types of insurers are regulated in the same way in principle, with special requirements applying, however, for example to life insurers given the long-term duration of liabilities for life business and to health insurers. Moreover, the VAG also regulates reinsurers and provides for special rules for insurance groups.

For reinsurance undertakings from third countries, i.e. countries that are not EU or EEA member states, specific authorisation requirements apply, as further detailed below (refer to question 6.).

German law distinguishes between insurance brokers (Versicherungsmakler) acting for and representing the interests of the policyholder and insurance agents (Versicherungsvertreter) acting on behalf of the insurer. Pursuant to Section 34d of the German Commercial Code (Gewerbeordnung, GewO), both brokers and agents in general need to obtain authorisation from the Chamber of Industry and Commerce (Industrie-und Handelskammer, IHK) of the intermediary’s registered seat (subject to exemptions, e.g. ancillary intermediaries or intermediaries acting for only one (or more, if not competing) insurer who has taken on full responsibility for the intermediary’s actions. BaFin does not directly supervise brokers and other intermediaries, but, due to certain statutory provisions such as Sections 23, 26 and 48 VAG, BaFin is authorised to monitor insurers’ sales activities. This includes, but is not limited to, supervision of contractual agreements between insurers and insurance intermediaries.

Since 2017, the prohibition of commission payments (Provisionsabgabeverbot) has been regulated in Section 48b VAG. Pursuant to Section 48b VAG insurance undertakings (Versicherungsunternehmen) and insurance intermediaries (Versicherungsvermittler) are prohibited from granting or promising special remuneration to policyholders, insured persons or beneficiaries under an insurance contract. Any contractual agreement to the contrary shall be invalid. The provision is intended to prevent special remunerations from creating false incentives for consumers.

In order to carry on (re-)insurance business, an undertaking has to obtain authorization from BaFin pursuant to Section 8 VAG. Section 9 VAG requires an undertaking to attach a business plan to its application, disclose the purpose and structure of the business, the region in which business is to be conducted and clearly state the conditions under which the future liabilities of the undertaking are guaranteed. Authorisation can only be granted to stock corporations, mutuals, corporations, institutions under public law and the German branch of a third country insurer or reinsurer. The operating plan has to include, inter alia, the articles of association as well as information about the classes of insurance the undertaking intends to carry on and which risks it intends to cover. Moreover, the operating plan must give evidence of the existence of own funds in the amount of the minimum guarantee fund and provide estimates for the first three financial years of commission expenses and other current operating expenses, expected premiums, the expected expenses for claims incurred and the expected liquidity situation.

If the undertaking has already obtained authorisation to carry on insurance business in another EU/EEA country, the authorisation will be valid in Germany as well as in all other EU/EEA states under the single license regime. After going through a so-called notification procedure, an undertaking may carry on insurance business outside its home country through branches or through cross-border provision of services.

As a general rule, primary insurers and reinsurers from third countries, i.e. countries that are not Member States of the EU/EEA, wishing to carry on insurance or reinsurance business in Germany need to obtain authorisation from BaFin and establish a German branch office. The requirements for the authorisation application and the establishment of a branch office are predominantly based on Sections 68 and 69 VAG. According to these provisions, the undertakings for example have to establish a branch within the country, keep available all business documents relating to the branch locally and invoice the business activities of the branch separately. An authorised representative has to be appointed for the branch office who must have his place of residence and permanent residence in Germany in order to fulfil the duties and personal requirements imposed on the management board of a company domiciled in Germany. The application for authorisation has to contain a separate business plan for the branch office and the members of the body authorised to legally represent the enterprise and of a supervisory body must be appointed at this time. The application also has to include a certificate issued by the competent authority of the country in which the company has its registered office that the undertaking can acquire rights and incur liabilities, sue and be sued at its registered office under its name, a list of the insurance branches in which the undertaking is authorised to operate and the types of risks which it actually covers and the balance sheet as well as the profit and loss account for each of the last three financial years.

Pursuant to Sections 16, 7 para. 3 VAG, major shareholders, i.e. holders of 10 % or more of the capital or voting rights in an entity or those having any other possibility of exercising a significant influence on the management of the entity, must fulfil the requirements for sound and prudent management of the entity. In particular, they have to be trustworthy. If the shares are held by legal entities, the same requirements apply to their legal representatives. The required disclosures are set out in a local regulation (Inhaberkontrollverordnung) There are no specific regulations regarding foreign investment in insurance companies. The general provision of the Foreign Trade Act (Außenwirtschaftsgesetzt AWG) apply.

Additionally, under Section 17 VAG, any person or legal entity has to immediately notify BaFin in writing if they intend to acquire 10 % or more of the capital or voting rights. If a holder of more than 10 % of the capital or voting rights intends to increase its shares beyond 20 %, 30 % or 50 %, they also have to inform BaFin. BaFin has to review the request within 60 days of receiving the notification.

In order to carry on insurance business, an undertaking has to be authorised by BaFin unless it is headquartered in another member state of the EU/EEA. Any authorisation to carry on business obtained in an EU or EEA member state is valid in all other EU and EEA member states (European Passport or Single Licence Principle). Prior to conducting business, an insurer from an EU or EEA member state must notify BaFin of its intention to conduct business.

Third-country insurers wishing to carry on primary insurance business or reinsurance business in Germany are generally subject to authorisation and must establish a German branch office. However, there is an exception with regard to reinsurance business provided in Section 67 para. 1 VAG. According to this exception, the requirement for authorisation and the establishment of a branch office does not apply if primary insurers or reinsurers from third countries carry on reinsurance business in Germany solely through provision of cross-border services and if the European Commission has decided in accordance with Article 172 para. 2 or 4 of Directive 2009/138/EC that the solvency regimes for reinsurance activities carried out by undertakings in the relevant country are equivalent to the regime in that Directive. This currently applies to Bermuda, Switzerland and Japan.

According to BaFin’s interpretative decision of 31 August 2016, the authorisation requirement does not apply to insurance by correspondence. Insurance by correspondence applies to reinsurance businesses if, at the instigation of an insurance undertaking situated in Germany, a 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 by a professional intermediary situated abroad but acting as intermediary in Germany. The initiative to conclude the reinsurance contract must come from the German insurer.

Further, in October 2017, the EU and the USA signed an agreement allowing US reinsurers and EU (re)insurers to conclude a contract without the US reinsurers being required to establish a branch in the respective EU Member State (“US-EU Covered Agreement”). US reinsurers must fulfil certain capital and local risk-based capital requirements and have to submit certain declarations to the supervisory authority responsible for the EU insurance undertaking. The US-EU Covered Agreement entered into force on April 4, 2018. The EU is required to begin applying the elimination of local presence requirements by September 22, 2019, the reinsurance collateral reduction elements of the agreement shall be fully implemented by September 22, 2022.

In light of Brexit, the “US-UK Covered Agreement” was signed on December 19, 2018, extending the terms almost identical to the EU Covered Agreement to insurers and reinsurers operating in the UK following Brexit

There are no facilitations for branches of third-country insurers or intermediaries.

Third-country insurers wishing to carry on primary insurance business or reinsurance business in Germany are generally subject to authorisation and must establish a German branch office (Section 67 para. 1, Section 68 VAG). The branch must have an authorized representative (Hauptbevollmächtigter). There is an exception for reinsurance business (see response to question 6).

Pursuant to Section 34d of the German Commercial Code (Gewerbeordnung, GewO), insurance intermediation is a trade which needs a license. A license is not required if an intermediary is already licensed in another Member State of the EU. However, this does not apply to third-country intermediaries. They must obtain a branch office or separate entity in Germany and obtain a license.

If an undertaking carries on insurance business without prior authorisation from BaFin, BaFin can order the immediate cessation of its business activities or prompt carrying out of its business activities (cf. section 308 VAG). These measures may be made public by BaFin if they are incontestable or immediately enforceable; personal data may only be published if this is necessary for security purposes. In addition, all measures and the respective publication may also be directly imposed on board members of the undertaking. Further, according to section 331 para. 1 No. 1 VAG, a prison sentence of up to five years or a fine shall be imposed on anyone who conducts an insurance or reinsurance business without permission.

The VAG provides for an exemption if primary insurers or reinsurers from third countries carry out reinsurance business in Germany solely through provision of cross-border services and if the European Commission has decided in accordance with Article 172 (2) or (4) of Directive 2009/138/EC that the solvency regimes for reinsurance activities carried out by undertakings in the relevant countries are equivalent to the regime described in that Directive. This is currently the case for Switzerland, Bermuda and Japan.

BaFin has extensive supervisory powers which are, in particular, set out in Sections 294 to 310 of the Insurance Supervisory Act. In order to provide guidance on their supervisory practice, BaFin issues Interpretative Decisions (Auslegungsentscheidungen), Guidance Notices (Merkblätter) or Circular Letters (Rundschreiben) on several topics. Even though not technically legally binding, the Circular Letters in particular are usually deemed to be a clear indication of the regulator’s expectations. Moreover, these publications will usually constitute a binding principle with the effect that BaFin has to treat similar cases alike.

In recent years, BaFin has shown a particular supervisory focus on remuneration and commission issues. In Germany, the law does not allow insurers and insurance intermediaries to promise or offer discounts to policyholders, or to grant them any financial benefits in excess of 15 euros per insurance contract and calendar year, in order to prevent any misplaced incentives on behalf of the insured. However, as an exception, benefits can be provided on the condition that they lead to a permanent reduction of the premium paid by the insured or to a permanent increase of the insurance benefits. BaFin has already investigated compliance with these rules in several cases.

In general, solvency refers to an insurer’s level of own funds, meaning the undertaking’s assets which are free of any foreseeable liabilities. It is important for insurers to have adequate own funds available to cover any unexpected losses they might incur, thereby ensuring that policyholders’ claims are covered. The solvency regime is established by the Solvency II Directive. The Directive is made up of three pillars: quantitative requirements, qualitative requirements and provisions on market discipline, transparency and disclosure obligations.

An insurer’s solvency, which falls into pillar 1 of the Solvency II Directive, is considered to be sufficient if the level of own funds meets at least the required solvency margin (own-funds requirements). Own funds are made up of basic own funds and ancillary own funds. Basic own funds consists of the excess of assets over liabilities and subordinated liabilities while ancillary own funds are own-fund items other than basic own funds which can be called up to absorb losses.

In line with the European Solvency II framework, Sections 89-95 VAG require insurers and reinsurers to be capitalised with so-called “own funds” (normally equity and and long term loss bearing (i.e. subordinated) debt instruments), in the amount of their solvency capital requirements. The amount of solvency capital requirements is determined for certain main categories of economic risk (including insurance underwriting, market, counterparty risk) on the basis of the Solvency II standard model, or an equivalent internal model approved by BaFin. A local regulation sets out certain absolute minimum amounts. Pursuant to Section 89 of the VAG, insurers subject to Solvency II must at all times have eligible basic own funds of at least the level of the Minimum Capital Requirement (MCR). For this reason, only basic own funds classified as Tier 1 and Tier 2 are eligible for covering the MCR. Section 122 VAG provides that the minimum capital requirement corresponds to an amount of eligible basic own funds below which policyholders and beneficiaries would be exposed to an unacceptable level of risk if the insurer was allowed to continue its operations.

Accordingly, BaFin will withdraw an insurer’s authorisation when the insurer’s amount of eligible basic own funds falls below the minimum capital requirement and the insurer is unable to re-establish the amount of eligible basic own funds within a short period of time. The calculation used to determine the minimum capital requirement is set out in the Delegated Regulation 2015/35/EU.

One of the primary aims of the Insurance Contract Act (Versicherungsvertragsgesetz, VVG) is to protect the policyholder who is, in general, considered to be the weaker party, even if the policy-holder is not a consumer. This has been codified by the newly introduced Section 1a VVG, which states that the insurer must always act honestly, honestly and professionally in the best interests of policyholders in its sales activities. These duties also apply to intermediaries (cf. Section 59 VVG). To achieve policyholder protection, the Insurance Contract Act contains various provisions which cannot be waived to the detriment of the policyholder. Exceptions are made with regard to large risks (Section 210 para. 2 VVG) and open policies (cf. Section 53 et seq. VVG) where the legislator assumes that the policyholder has sufficient experience with insurance con-tracts to defend his or her own interests.

The current insurance regulatory framework under Solvency II governs the supervision of insurance groups. This is for the first time that group supervision has been fully integrated into EU law. With the adoption of Solvency II, the European legislator has recognized the important role that insurance groups play in the European single market. Group supervision takes place at the level of the ultimate parent level. If the company is headquartered in Germany, then BaFin is the group supervisor., In exceptional circumstances, however, supervision can also take place at the group level.

In accordance with the European Solvency Framework II Sections 245-293 of VAG impose group supervision on insurance and reinsurers undertakings held by parent companies that directly or indirectly own other financial institutions or qualifying holdings in other insurance companies. In this context, solvency capital requirements, governance and risk management are also monitored group-wide and on a consolidated basis. Group members headquartered in the EU/EEA may be subject to reporting and compliance requirements. Several EU/EEA directors form the so-called supervisory college, and one director is named lead regulator. EIOPA has the authority to resolve disputes between lead regulator and other members of the supervisory college.

Since 2009, BaFin has been responsible for the supervision of the members of administrative and supervisory bodies. Over the years, BaFin has provided a number of guidance notices on “fit and proper”-requirements in order to assist insurers with the various requirements they have to meet. In accordance with the German Audit Reform Act, for example, insurers within the scope of Solvency II must ensure that when appointing members of the supervisory board, at least one member has professional knowledge of accounting or the audit of financial statements. Additionally, the members of the supervisory board as a whole must be familiar with the industry in which the company operates. To this end, the members of the supervisory board must demonstrate that they have sufficient basic knowledge of the insurance sector, the extent of which is based on the undertaking’s individual risk profile, pursuant to the principle of proportionality.

According to Section 303 VAG, BaFin may issue a warning to a person who directs an insurance undertaking or is responsible for other key tasks in an insurance undertaking if the insurance undertaking violates provisions of the Insurance Supervisory Act, the Insurance Contract Act, the Money Laundering Act or certain EU regulations and directives. As a more severe step, BaFin may also order such persons to be removed from their office if they are not fit for their position, they intentionally or recklessly violate the provisions named above or, as a member of the supervisory board, the person has concealed material breaches of the principles of proper management by the company due to the careless exercise of his or her supervisory and control function, or he or she has not taken all necessary steps to remedy any breaches identified and continues such conduct despite a warning from the supervisory authority.

BaFin may publish any specific measures taken on its website.

Under corporate law, the members of the management must exercise the diligence of a prudent and conscientious manager in their management of the company. If they breach their duties, the board members can be held personally liable by the company. There is no breach of duty if the member of the management board could reasonably assume, when making a business decision, that they were acting in the best interests of the company on the basis of appropriate information.

Additionally, there may be personal liability under tort law.

For insurance undertakings domiciled in Germany, the primary presence requirement is that the undertaking must have a particular legal form – that of a German public limited company (Aktiengesellschaft), including a European Company (SE), a mutual society or a corporate body or institution governed by public law.

Pursuant to Section 23 para. 1 VAG, insurance undertakings must have a business organisation that is effective, orderly and proportionate to the nature, scale and complexity of their activities. This includes in particular an appropriate, transparent organisational structure with a clear allocation and adequate division of responsibilities as well as an effective internal communication system within the undertaking. Undertakings must establish written guidelines and take adequate precautions, including the development of contingency plans, to ensure the continuity and regularity of their operations.

One of the main requirements in relation to the organisational structure is that the insurance undertaking must be able to demonstrate that it has at least two senior managers (“four eyes” principle). The senior managers and all other persons who effectively run the undertaking or have other key tasks must be “fit and proper” persons. Key tasks/functions include at least the four key functions: risk management function, compliance function, actuarial function and internal audit function and the supervisory board mandates.

Branches of third-country insurance undertakings must appoint a general representative (Hauptbevollmächtigter) who must be domiciled and permanently resident in the country. They must also deposit all documents related to their business at the branch.

In general, all insurers are allowed to outsource certain parts of their functions or insurance activities, but have to ensure compliance with all supervisory rules and requirements. BaFin has published governance guidelines on the topic of “outsourcing” in June 2020, “Governance – Ausgliederung” (supplementing the guidelines on the “minimum requirements for the business organisation of insurance undertakings (“Mindestanforderungen an die Geschäftsorganisation von Versicherungsunternehmen (MaGo)”) in February 2017). To this end, insurers are required to establish written guidelines. If insurers intend to outsource one of the four key functions identified in the Solvency II Directive (risk management, compliance, internal audit and actuarial functions), they have to appoint an “outsourcing officer” responsible for supervising the outsourcing process. However, the ultimate responsibility of the management for the outsourced function or insurance activity cannot be delegated, but always remains within the company.

Insurers intending to outsource important functions or the insurance activities of sales, portfolio management, claims administration, accounting or asset investment and management immediately must notify BaFin of their intention, providing a draft of the contract they intend to conclude with the service provider pursuant to Section 47 No. 8 VAG. The notification submitted to BaFin must contain the name of the service provider, its address, a description of the scope of the outsourced activities, the reasons for outsourcing and, if key tasks are outsourced (in particular one of the four key functions identified in the Solvency II Directive) the name of the responsible person at the service provider.

In the case of outsourcing to cloud providers, the EU guidelines on outsourcing to cloud providers (EIOPA-BoS-20/002 EN) must also be observed in order to ensure the security of data and systems.

Pursuant to Section 124 VAG, (re)insurers must invest their entire assets in accordance with the principle of corporate prudence and, in doing so must comply with the following requirements:

1. they may invest solely in assets and instruments whose associated risks they can a) sufficiently identify, assess, monitor, control, manage, include in their reporting systems, and b) adequately take into account in the assessment of their solvency needs;
2. all assets must be invested so as to ensure the security, quality, liquidity and profitability of the portfolio as a whole; assets must also be located so as to ensure access and availability;
3. assets held to cover the technical provisions must also be invested in a manner appropriate to the nature and maturity of the primary insurance and reinsurance liabilities of the undertaking; these assets must be invested in the interests of all policyholders and those entitled to benefits, taking into account the investment policy, if such an investment policy has been published;
4. in the case of a conflict of interest, action must be taken to ensure that the assets are invested in the best interest of the policyholders and those entitled to benefits;
5. derivative financial instruments may only be used to help reduce risk or facilitate efficient portfolio management; this criterion is not satisfied if derivative financial instrument transactions are used solely to build up trading positions (arbitrage) or if the insurance undertaking concerned is not actually in possession of the relevant investment portfolios involved in the transaction (short-selling);
6. investments and assets that are not admitted to trading on a regulated financial market must be kept at prudent levels;
7. assets must be mixed and diversified appropriately to avoid excessive dependency on a certain asset, issuer, group of undertakings or geographical area and an excessive concentration of risk in the portfolio as a whole; andinvestments in assets involving the same issuer or issuers who belong to the same group of undertakings must not result in an undue concentration of risk.

No. 5 to 8 do not apply to life insurance.

For all other companies not falling under the Solvency II Directive, the Investment Ordinance (“Verordnung über die Anlage des Sicherungsvermögens von Pensionskassen, Sterbekassen und kleinen Versicherungsunternehmen“) remains the applicable standard for capital investment. This defines the legally permissible assets for the security assets.

Since 23 February 2018, the new rules for insurance sales implementing the Insurance Distribution Directive (IDD) have been applicable in Germany. BaFin has summarises its position on insurance sales in a circular (Circular 11/2018 on cooperation with insurance intermediaries and risk management in distribution) issued on 17 July 2018. The circular provides guidance with respect to of the likely supervisory practice, not least with regard to the supervisory authority’s interpretation of statutory provisions. Even though a circular from the supervisory authority does not have binding legal effect, BaFin is thereby establishing a framework in which market participants can find direction and these will generally be followed. Pursuant to Section 80 para. 2 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetzt -VAG) Insurers may only cooperate with intermediaries within the meaning of Section 34d para. 1 of the German Industrial Code (Gewerbeordnung – GewO) if they are in possession of a licence from the competent Chamber of Industry and Commerce. Insurers must verify this by inspecting the register of intermediaries prior to the start of the cooperation. If a licence is not listed there, cooperation with these intermediaries is out of the question. 2. In order to fulfil their legal obligations under Section 48 para. 1 no. 1 VAG, it is necessary for insurers to regularly check whether the prerequisites for cooperation with the respective insurance brokers or insurance agents continue to be met, i.e. whether they are still listed in the register of intermediaries.

There are also rules providing specification of the IDD at the European level in the form of the directly applicable delegated regulations from the European Commission of September 2017 mentioned at the beginning on the product approval process under Section 23 para. 1(a) (new version) (VO 2017/2358) and on notification requirements and good conduct rules in the sale of insurance investment products (VO 2017/6229).

In addition, the EU Commission has defined standards for a product information sheet (Insurance Product Information Document, IPID) with an implementation regulation of 11 August 2017 (VO 2017/1469). This is implemented in Germany through a change in the regulation on notification duties from the Insurance Contract Act (VVG-InfoV).

On 20 December 2018, the new regulation on insurance intermediation and insurance advice (“Verordnung über die Versicherungsvermittlung und –beratung (Versicherungsvermittlungsverordnung – VersVermV)“) entered into force, which provides regulatory provisions for insurance intermediaries and advisors.

The extent to which third-country insurance undertakings can market the sale of insurance into Germany is very limited. In the context of insurance by correspondence (Korrespondenzversicherung), BaFin has stated that the operation of business in Germany does not only cover legal transactions, but also the essential steps leading to the conclusion of the contract as well as the execution of the contract. The decisive factor is whether the insurance undertaking from a third country addresses the domestic market in a targeted manner (e.g. through advertising with specific products, websites aimed at the domestic market, customer visits by employees of the insurance undertaking from a third country aimed at concluding reinsurance contracts).

There are various specific rules pertaining to distance selling or online sales of insurance. As an example, we will briefly touch on the text form requirement for the transmission of information as well as consultation requirements.

Under statutory insurance law, the insurer shall inform the policyholder in writing of his terms of contract, including the general terms and conditions of insurance, as well as certain other information in good time before the policyholder submits his contractual acceptance (according to Section 7 para. 1 of the Insurance Contract Act (Versicherungsvertragsgesetzt – VVG). This information shall be provided clearly and comprehensibly in keeping with the means of communication employed. If, upon the request of the policyholder, the contract is concluded using another means of communication which does not permit the information to be provided in writing prior to the policyholder’s contractual acceptance, that information must be provided without undue delay after the contract is made; this shall also apply if the policyholder explicitly waives the right to information by a separate written declaration prior to submitting his contractual acceptance.

In online sales, in order to meet the text form requirement, any documentation submitted to the policyholder must be made on a durable medium in which the person making the declaration is named. A durable medium is any medium which (i) enables the recipient to keep or store a declaration made on the medium and addressed to him personally in such a way that it is accessible to him for a period of time appropriate for its purpose and (ii) is suitable for reproducing the declaration unchanged. In the case of online distribution, this is ensured if the information is either transmitted by e-mail, the user is prompted to make a forced download or the information is stored on a so-called sophisticated website, which has a secure storage area that excludes the possibility of subsequent changes to the stored information. Internet websites do not generally satisfy the text form requirement, as there is no “durable medium”.

In distance selling, text form is sufficient for the waiver of advice. The waiver of advice must be accompanied by an explicit reference to the fact that the waiver could have a negative effect on the assertion of claims for damages against the insurance distributor (i.e. either insurer or intermediary). The insurance provider only needs to provide the information listed in the annex to Section 5 para. 2 of the Regulation on Information Obligations for Insurance Contracts (Verordnung über Informationspflichten bei Versicherungsverträgen (“VVG-InfoV”)) if the customer waives the right to further information. The complete information must then be provided immediately after the conclusion of the contract. If the insurer has initiated the call, the customer must also be expressly informed of the business purpose of the contact at the beginning of the conversation.

On its 100th anniversary, the Insurance Contract Act underwent comprehensive revision with its current version taking effect as of 1 January 2008. In revising the Insurance Contract Act, the legislator intended to promote consumer protection. For example, the new law, on the one hand, introduced extensive duties for insurers to inform and advise policyholders before the formation of the insurance contract and, on the other hand, restricted sanctions in case of breach of the policyholder’s obligations to disclose material risks pre-contractually or to cooperate with the insurer in the claims handling process. Accordingly, most provisions of the Insurance Contract Act which serve consumer protection are mandatory.

In addition to the Insurance Contract Act, insurance contracts are further governed by the German Civil Code (Bürgerliches Gesetzbuch, BGB). Even where the Insurance Contract Act leaves room for party autonomy, standard insurance terms and conditions are subject to Sections 305 et seq. BGB. Accordingly, provisions which are so unusual that the other party to the contract does not need to expect to encounter them do not form part of the contract. This may, for example, apply to foreign provisions copied and pasted into German policies. Furthermore, pursuant to Section 305c para. 2 BGB, any doubts in the interpretation of standard business terms are resolved against the user. Moreover, provisions in standard business terms will be ineffective if they unreasonably disadvantage the insured. While this scrutiny plays a predominant rule in consumer insurance, it is also relevant for business insurance.

In broad terms, there are four courts in which civil disputes of a commercial nature may be heard. These are: the Local Courts (Amtsgerichte); the Regional Courts (Landgerichte); the Higher Regional Courts (Oberlandesgerichte) and the Federal Court of Justice (Bundesgerichtshof), whereby the Regional Courts have jurisdiction in insurance law disputes with an amount in dispute of more than EUR 5,000 and appeals are mostly admissible in one or two levels of jurisdiction.

Each Regional Court in Germany also operates a Specialist Commercial Chamber. The Commercial Chambers allow for the appointment of lay judges alongside the presiding judge. These lay justices are not lawyers, but experienced merchants. For a case to be heard in the Commercial Chamber, the plaintiff must make a motion requesting this in his Statement of Claim. The defendant may also make such a motion later on and apply for the transfer of the action from the “ordinary” civil court to a Commercial Chamber.

Further, some Regional Courts (usually those situated in larger cities) have the option of setting up additional specialist chambers, which hear cases that may benefit from specific judicial expertise such as, for example, construction, banking, insurance or professional liability disputes of lawyers, tax advisors and certified public accountants.

German judges are constitutionally guaranteed to rule independently and irrespective of the parties’ backgrounds. Corruption of judges is unknown. Judges have a thorough legal education and a high standard of professionalism. Most cases are decided in a timely and cost efficient manner and only very complex cases may result in lengthy litigation proceedings.

Arbitration clauses in insurance and reinsurance agreements are generally enforceable, and Germany has become a more and more significant venue for international arbitration proceedings. As reinsurance disputes tend to be settled in private, the majority of reinsurance contracts contain arbitration clauses. In direct insurance contracts, arbitration clauses remain the exception but are, for example, frequently used in W&I polices, sometimes in D&O policies and in a few other lines of business. While most agreements so far provide for ad hoc arbitration, parties increasingly use institutional rules. The German Arbitration Institute (DIS) is an experienced and highly respected institution which just recently published its updated 2018 Arbitration Rules.

In business reinsurance and insurance, the arbitration agreement must generally be in writing. However, the form requirements under German law are far more lenient than those under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the UNCITRAL Model Law. The arbitration agreement may not only be derived from a document signed by the parties but also from an exchange of letters, faxes or other means of telecommunication which provide a record of the agreement. Further, the form requirement is deemed to have been complied with if the arbitration agreement is contained in a document transmitted from one party to the other party or by a third party to both parties and – if no objection was raised in good time – the contents of such document are considered to be part of the contract in accordance with common usage. Moreover, reference in a contract complying with the written form requirements to a document (e.g. standard insurance terms and conditions), containing an arbitration clause also constitutes an arbitration agreement provided that the reference is such as to make that clause part of the contract.

Pursuant to Section 13 para. 1 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetzt – VAG)), a contract for the formal transfer of the insurance portfolio to another insurance company requires the approval of the Federal Financial Supervisory Authority (BaFin), which is to be granted upon application of both the transferring and the accepting company “if the interests of the insured persons are safeguarded and the obligations arising from the insurance policies are shown to be permanently fulfillable” (Section 13 para. 1 sentence 2 VAG). In addition, it must be shown that the obligations arising from the insurance contracts can be fulfilled (Section 13, para. 1, sentence 2, subsection 1 VAG). A portfolio transfer agreement must be in writing. Approval of the portfolio transfer must be published in the German Federal Gazette (Bundesanzeiger). The portfolio transfer agreement between the two insurers must be in writing. BaFin’s approval replaces the individual approval of insureds or cedents which would in principle be necessary under German contract law.

As soon as the portfolio transfer comes into effect, the transferring insurer must inform the policyholders of the cause, structure and consequences of the portfolio transfer and, in particular, must provide information on any resulting change in the competent authorities responsible for legal or financial supervision and/or any change affecting a claim against a guarantee scheme in the event of insolvency on the part of the insurer. If there is a change in the competent supervisory authority (e.g. if there was a cross-border transfer), the policyholder may terminate the insurance contract with immediate effect within one month of receiving the notification from the insurer. In the initial notification, the insurer must draw the policyholder’s attention to the right to termination.

As part of the portfolio transfer, the rights and obligations of the transferring insurer under the insurance contracts in relation to the policyholders are also transferred to the receiving insurer.

The German insurance market is a highly developed, regulated and mature market. Accordingly, competition is intense and consolidation is to be expected. At the same time, in many business lines, the market has been soft resulting in low premiums in many lines. In addition, the continuing low interest rate environment is challenging and exerting pressure on capital investments and, in particular, life insurers. A number of life insurance and other carriers are considering run off solutions, and are under increasing public scrutiny and political pressure. In May 2021, for example, the legislator passed a law for a commission cap of 2.5 per cent for residual debt insurance. A commission cap for the conclusion of life insurance policies is also a recurring topic of discussion, which is likely to make the corresponding insurance lines significantly less profitable for sales.

Moreover, new market entrants will need to be ready to cope with existing and future regulation. The last years have seen a number of major developments affecting the insurance market, such as the European General Data Protection Regulation, the Insurance Distribution Directive, Brexit and new regulatory initiatives for collective redress mechanisms, to name a few.

Digital innovation has been one of the major challenges for the insurance market in recent years. The insurance sector in Germany is traditionally more conservative than other sectors and traditional business models have to be changed without disrupting day-to-day services. While many insurers are already now offering digital vehicles such as mobile phone apps, studies have shown that a large number of insurers do not have the necessary technological capabilities by just using their internal resources.

Furthermore, traditional insurers have recently received increasing competition from insurtech entities. Whilst insurtech previously took on a supporting role for the most part (and as an insurance intermediary, for example, fall within the scope of Section 34d GewO), various insurtech entities are now starting to carry on insurance business themselves. Unlike traditional insurers, insurtech entities are and will be working predominantly or exclusively digitally; both in terms of selling their products and claims handling. As many insurtech entities are still in the planning phase and only few have started to underwrite risks, it remains to be seen whether they will catch on. However, the established insurance industry is now also active in the market through subsidiaries or acquisitions of numerous insurtech offerings.

A new trend to cope with the digitalisation challenge for established players seems to be cooperation with competitors or other entities in the respective market branches. We expect an increase in transactional developments and new business strategies allowing the traditional and established players to keep up with the challenge, although the start-up boom has flattened out slightly. So far, few insurtechs have focused on ESG. We expect this to change and sustainability to become a dominant theme among insurtechs as well.

BaFin is neutral towards all market participants but observes the proportionality principle (“Proportionalitätsprinzip”, requirements depend on the size of the institution as well as the type, scope, complexity and risk content of the business activities). Due to its technology neutrality, it does not matter to BaFin which innovative financial technology is used to provide services.

From a regulatory perspective, Section 23 et seq. VAG and BaFin’s Circular 10/2018 (Insurance Supervisory Requirements for IT (VAIT)) are particularly relevant. Pursuant to BaFin, impact and risk analyses are essential before implementing IT projects. The companies must identify and take into account changes and shifts within existing risk structures that may result from the use of innovative technologies or cooperation with (new) market participants or the offer of new types of insurance products. Moreover, the affected employees in the company, the key functions and, of course, the board members must have adequate knowledge and information so that they can continue to perform their tasks in the future.

Insurers’ use of customer data is governed by the GDPR and the German Data Protection Act (Bundesdatenschutzgesetz, BDSG). Accordingly, there are no specific rules for insurers in addition to the generally applicable data protection regime.

Pursuant to Article 44 GDPR, any transfer of personal data to a third country (or to an international organisation) requires an additional authorisation. This means that is not merely sufficient that the processing is lawful, but that it must also be determined whether the transfer is lawful on the basis of Article 44 et seq. GDPR.

The ESG agenda has become an increasing priority for the financial services sector, including insurers and has received increased attention from the public and political institutions worldwide. EU law requires certain large companies to disclose information on how they address and manage social and environmental challenges: Directive 2014/95/EU (Non-Financial Reporting Directive (NFRD)) sets rules for the disclosure of non-financial and diversity information by certain large companies. This directive amends the Accounting Directive 2013/34/EU.

Under Directive 2014/95/EU, large companies have to publish information related to

• environmental matters
• social matters and treatment of employees
• respect for human rights
• anti-corruption and bribery
• diversity on company boards (in terms of age, gender, educational and professional background)

On 21 April 2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the NFRD. The proposal

• extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises),
• requires the audit (assurance) of reported information,
• introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards,
• requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

For the insurance industry, two elements of the EU action plan for Sustainable Finance Framework are particularly important – the EU Taxonomy and the SFDR

The EU Taxonomy Regulation (EU 2020/852) adopted in July 2020 explicitly defines reinsurance and primary insurance as economic activities that can contribute to climate change mitigation. The Taxonomy Regulation provides criteria for determining whether an economic activity is environmentally sustainable in order to determine the degree of environmental sustainability of an investment and to prevent green washing. It is aimed at EU member states, financial market participants offering financial products and companies that are obliged to publish a non-financial statement. With respect to insurers’ and reinsurers’ investments, the ability to assess the extent to which these assets finance or fund economic activities as defined in Article 3 of the Taxonomy Regulation depends largely on the availability of sufficiently granular and relevant information on the underlying investments. Insurers and reinsurers must use all available information to make the assessment.

The Sustainable Finance Disclosure Regulation (SFDR, EU 2019/2088) came into force in March 2021. It aims to trigger behavioural change in the financial sector, prevent greenwashing, and promote responsible and sustainable investment. The EU´s SFDR defines harmonized requirements for financial market participants to disclose to end investors on how to strategically manage sustainability risks, integrate sustainability risks, consider negative sustainability impacts on sustainable investment objectives, or on the promotion of environmental or social features, in investment decisions‐making and advisory processes.

On 9 December 2021, a first delegated act on sustainable activities for climate change mitigation and adaptation objectives of the EU Taxonomy Commission Delegated Regulation (EU) 2021/2139 (“Climate Delegated Act”) was published in the Official Journal. Articles 10(3) and 11(3) of EU Taxonomy Regulation 2020/852 require the Commission to adopt delegated acts establishing the technical screening criteria (TSC) for determining the conditions under which a specific economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation, respectively, and to establish, for each relevant environmental objective laid down in Article 9 of that Regulation, technical screening criteria for determining whether that economic activity causes no significant harm to one or more of those environmental objectives. The TSC should be established for engineering activities and related technical consultancy dedicated to adaptation to climate change, research, development and innovation, non-life insurance consisting in underwriting of climate-related perils, and reinsurance. The delegated act is applicable since 1 January 2022.

BaFin requires regulated entities such as insurance companies to manage climate risks and to integrate them into their risk management frameworks. In this regard, BaFin published non-binding guidelines, updated in January 2020.This Guidance Notice can be seen as a useful addition to the minimum requirements for risk management for credit institutions, insurance undertakings, pension funds, asset management companies and financial services institutions

For the market leaders of tomorrow, it will be even more crucial to encounter the opportunities and challenges of digitisation and to transform their business models accordingly, to come up with attractive and flexible products and to manage the client interface successfully. Further, due to the existing market pressure, we further expect increased consolidation activities and insurers continuing to consider growth opportunities in other markets, including emerging countries in Asia and Africa. In addition, the importance of aligning the insurance business with sustainability aspects will also continue to increase.