Preparatory phase

BaFin has commented on all EIOPA guidelines with “Yes, do comply” or “Yes, intend to comply”. In addition, BaFin has divided the guidelines into 15 thematic blocks in order to structure the preparatory process and support the undertakings concerned.

Dialogue and support

Undertakings should hold intensive discussions on all guidelines and immediately take the necessary steps to implement them. Questions that arise can and should be discussed with the supervisor. BaFin will help shape the preparatory phase and proceed on a dialogue-driven and structured basis. It will inform undertakings by means of supplementary announcements on the individual thematic blocks. It will also constantly enquire about undertakings’ implementation status.

Aim and purpose of the preparatory guidelines

The EIOPA guidelines are intended to ensure that each undertaking affected by Solvency II can meet the new supervisory requirements in full when they come into effect on 1 January 2016. From this date there will basically be no further transitional provisions for requirements covered by the guidelines, with the result that supervisory measures can then take effect immediately.

Each undertaking must therefore take the necessary steps early on, in order that the requirements can be implemented. Details of how to prepare for Solvency II and the order in which implementation measures are taken are left to the discretion of undertakings themselves. As the guidelines specify the requirements of the Solvency II Directive, undertakings must, at the start of Solvency II, also fully comply with both the provisions of the Directive and those of the Delegated Acts published during the preparatory phase.

Target audience

The guidelines are aimed directly at national supervisory authorities. But as BaFin has decided to apply them in its supervisory practice, the undertakings are effectively the target audience. The guidelines concern all direct insurers, reinsurers and groups to which the Solvency II regime will be applicable.

Only groups from the European Economic Area are affected. If, when applying individual guidelines, the question arises of whether third-country supervisory regimes are on a par with the Solvency II requirements, equivalence will be assumed in the preparatory phase. However, this does not imply that these third-country supervisory regimes are actually equivalent. Also in future, such decisions will be made by the European Commission or the group supervisors.

Structure of the preparatory phase

BaFin has bundled the guidelines into 15 thematic blocks in order to support undertakings affected by Solvency II during the preparatory phase. These 15 blocks follow the themes contained in the guidelines’ structure.

15 thematic blocks for EIOPA guidelines

System of governance
1	General governance requirements
2	Fit and Proper
3	Risk Management
4	The “prudent person” principle and the system of governance
5	Own fund requirements and the system of governance
6	Internal controls and internal audit function
7	Actuarial function
8	Outsourcing
Forward-looking assessment of own risks (based on ORSA principles)
9	Assessment of overall solvency needs and general principles
10	Assessment of continuous compliance with regulatory capital requirements and requirements for technical provisions
11	Assessment of the significance of the deviation of the risk profile from the assumptions underlying the standard formula
Special themes
12	Quantitative reporting
13	Narrative reporting
14	Internal Models (pre-application phase)
15	Full quantitative survey for determining own funds requirements under Solvency II – only for life insurance undertakings

BaFin will publish successive announcements on each of the 15 thematic blocks over a period of 18 months. The aim will be to highlight a particular theme and provide additional information and tips. In assigning the announcements to half-yearly periods, however, BaFin does not intend to give undertakings a specific set of priorities for their preparations or to classify the individual themes.

Thematic blocks 1 to 11: multiple phases

For each of the thematic blocks 1 to 11, there is a dialogue phase and an announcement phase, followed by a second dialogue phase. The announcement is subsequently amended, if necessary. Each thematic block is completed with a status report in the case of all undertakings. The way in which the dialogue phases actually take shape depends on the thematic block concerned. BaFin’s announcements clarify which aspects are, in its opinion, important and what the outcome will be in the event of implementation. The aim is to achieve practicable approaches that will also continue to exist after Solvency II has started. As a priority, the status reports should serve as a form of critical internal monitoring for undertakings and assist them individually in taking any other necessary implementation measures. BaFin can use these reports to find out how much progress individual undertakings have made with the implementation of each thematic block. The feedback can be used in the dialogue with undertakings and more importantly when deciding on the main focus of on-site inspections, for example.

Thematic blocks 12 to 15: Special themes

Thematic blocks 12 to 15 are not broken down into multiple phases for various reasons. Thematic blocks 12 and 13 regarding quantitative and narrative reporting follow a highly IT-driven logic. BaFin is already discussing this with undertakings. It will publish an announcement on the overlapping aspects of both these thematic blocks in the first half of 2014 and is expected to issue further EIOPA specifications by mid-2014. A stand-alone process has been set up for thematic block 14 (internal models). It is only relevant to undertakings in the pre-application phase for an internal model. BaFin will also announce additional information on this in 2014. Lastly, the purpose of thematic block 15 (full quantitative survey) is to obtain quantitative information from life insurance undertakings in the second half of 2014. BaFin will provide undertakings with relevant preparatory information from as early as the first half of the year. The survey includes calculations under Solvency II requirements on the cut-off date of 31 December 2013 and a projection as at 1 January 2016.

Legal effect of the guidelines

Some of the preparatory guidelines contain requirements that have already been laid down by law in Germany (section 55c and section 64a of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), in conjunction with the Minimum Requirements for Risk Management in Insurance Undertakings (Mindestanforderungen an das Risikomanagement – MaRisk VA). These provisions must also be complied with, otherwise BaFin may, as previously, take legal supervisory measures. This also applies to preparatory guidelines that are not explicitly laid down in applicable law at present but can be derived therefrom. If an undertaking has clearly made inadequate preparations for Solvency II, this could basically be grounds for having to supervise the undertaking concerned more rigorously.

Assignment of announcements to half-yearly periods

Period	January to June 2014	July to December 2014	January to June 2015
Themes	1, 2, 5, 9, 12	4, 6, 10, 13, 14, 15	3, 7, 8, 11

Principle-based approach

Generally speaking, the Solvency II requirements follow a principle-based approach. This is embodied in the preparatory guidelines. Undertakings must reflect independently on how they can ensure compliance with the individual guidelines. They must ensure sound and prudent business management in order to fulfil the purpose of the individual provisions contained in the guidelines. That is why BaFin cannot issue any specific requirements.

Principle of proportionality

As with Solvency II, the guidelines are subject to the principle of proportionality – without this being expressly mentioned. This implies that application of the guidelines has to be weighed against the type, extent and complexity of the risks to which an undertaking is, or could be, exposed. The principle of proportionality is not, therefore, merely guided by the size of the undertaking. It also works in both directions: While undertakings with a very complex structure and major risk exposure must meet high expectations, the requirements for less complex and less risky undertakings may not be so significant. The principle of proportionality is therefore always used whhere there are various possibilities to achieve an outcome. However, the principle does not imply that requirements could be dispensed with altogether. The decision is not so much “whether” but “how”. The purpose of each provision must always be fulfilled, also in the event of proportionate implementation. Undertakings have the task of developing a proposal for implementation of the requirements that is proportionate for them and can be justified to BaFin. As proportionality always relates to individual cases, BaFin cannot state in detail what should be regarded as a proportionate solution and under which circumstances.

Reporting

BaFin expects all the undertakings and groups concerned to participate in the voluntary test runs for quantitative and narrative reporting for 2014 with effect from mid-2015. Participation is an important contribution to successful preparation for Solvency II and provides an opportunity to identify deficiencies at an early stage. Therefore, BaFin will not use the thresholds formulated by EIOPA for the German market.

Additional documents from EIOPA

By mid-2014, EIOPA will prepare documents that should assist undertakings with reporting and the forward-looking assessment of their own risks. EIOPA will also consider the changes that have arisen as a result of the Omnibus II Directive. The documents will relate to technical specifications on quantitative requirements, such as the Solvency Capital Requirement (SCR) and assessment of technical provisions, as well as assets and liabilities other than technical provisions. EIOPA will also provide information on the assumptions underlying the SCR calculation on the basis of the standard formula.
It is expected that EIOPA will only publish these texts in English. Therefore, BaFin intends to have these instructions translated into German. Where required, it will also supplement the technical specifications in order to take account of specific national features.

Forward-looking assessment of an undertaking’s own risks

From 2014, all undertakings and groups affected by Solvency II should assess their overall solvency needs based on the preparatory guidelines and report them to BaFin. Basically, these requirements comply with the applicable legal situation in Germany: They are covered by the appropriate risk-bearing capacity concept pursuant to section 64a (1) sentence 4 no. 3a of the VAG and the submission of the risk report stipulated in section 55c (1) no. 1 of the VAG. From 2015, undertakings should also assess their compliance with the provisions on regulatory capital requirements and the requirements for technical provisions, both in accordance with Solvency II principles. The same applies to the significance of the deviations of their risk profile from the assumptions underlying the SCR calculation on the basis of the standard formula. The preparatory guidelines state that they should achieve specific market coverage. In view of the fact that current legislation already requires undertakings to comply with the solvency requirements, BaFin nevertheless expects undertakings to consider in good time how they can ensure compliance with the new requirements. However, they are not obliged to do so already in 2015. In 2015, undertakings will also have to ascertain to what extent they can comply in the medium term with the new supervisory requirements for assessing technical provisions from the start of Solvency II and inform BaFin of the outcome.

Interview with Felix Hufeld, BaFin Chief Executive Director

“Two years is not a long time”

Mr Hufeld, the preparatory phase for Solvency II got under way on 1 January 2014. Why will it take a full two years?

The preparatory phase is essential for ensuring that the transition to the new supervisory requirements is as seamless as possible. Two years is not a long time to do that. Both the undertakings and we, as supervisors, need time to familiarise ourselves with the details concerning the future supervisory regime and the related issues. This is a major opportunity and a prerequisite for a successful launch in 2016.

What action is required on the part of BaFin during the preparatory phase?

BaFin has told EIOPA that it intends to apply all guidelines. We will therefore have a whole host of tasks to perform. We will proceed on a dialogue-driven and structured basis so that we can efficiently utilise the preparatory phase. Dialogue-driven means that we will contact the undertakings concerned and encourage them to implement the guidelines. We have structured the process by dividing the guidelines into 15 thematic blocks. We will gradually deal with 11 of these blocks in a procedure divided into several phases. We will publish various announcements on this as we go along.

Can't undertakings go their own way during preparation for Solvency II, then?

Yes, that is precisely what they should be doing. Undertakings have considerable leeway during the preparatory phase. We have not prioritised the individual thematic blocks for the undertakings, and staggering the phases does not imply a ranking of their importance. I would welcome it if undertakings had their own ideas about how they can successfully implement and comply with the guidelines.

What is the point of the structuring, in that case?

We have placed each guideline in a thematic group, which makes the whole process clearer and easier to manage. In consultation with the industry, we will formulate further helpful tips and urge undertakings to carry out their own assessment of where they are at for a particular theme. We can use the status report to pinpoint more easily where problems persist and what joint efforts we still need to take for a successful preparatory phase.

In terms of legal supervisory measures, which law applies during the preparatory phase?

The requirements of the current regime will continue to apply, i.e. Solvency I. However, some of the contents of the guidelines have already been prescribed in Germany via the Insurance Supervision Act (VAG) or the Minimum Requirements for Risk Management in Insurance Undertakings (MaRisk VA). Whether or not BaFin takes legal supervisory measures will therefore depend on whether the guidelines currently apply to us. If an insurer does not make a serious effort to prepare for Solvency II — which cannot be in its interests — this could essentially be grounds for having to provide more supervisory assistance on our part. The fact is, a new supervisory framework is just around the corner. Things are now getting serious. Solvency II essentially got under way on 1 January – albeit not in one go. All of us should do our utmost so that the changeover to a more modern and improved supervisory system can succeed.

Thank you for speaking with us, Mr Hufeld.