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Stand:updated on 16.03.2023 Supervisory Review Process (SRP)

The supervisory review process (SRP) is laid down in section 294 (5) of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG). It comprises an assessment of the qualitative requirements relating to the system of governance, an assessment of the risks to which the undertakings are or could be exposed and an assessment of the ability of the undertakings to assess and bear these risks, taking into account the environment in which the undertakings are operating. The review process concerns both individual insurance undertakings (solo supervision) and insurance groups (group supervision).

Pursuant to Article 31 of the Solvency II Framework Directive (Directive 2009/138/EC), BaFin and the supervisory authorities of the Federal States are required to disclose the general criteria and methods, including the tools developed in accordance with Article 34(4), used in the supervisory review process as set out in Article 36. In accordance with section 320 of the Insurance Supervision Act, public-law insurance undertakings are subject to Federal State supervision if they carry out their business activities in no more than one Federal State or in cases where supervision was transferred to a Federal State. It is also possible that the relevant undertaking carries out its business activities in only part of a Federal State.

Supervisory review process at BaFin

Part of BaFin's review process is a risk classification system which classifies insurance undertakings and groups by taking into account the nature, scope and complexity of their business activities and the associated risks. The classification of individual insurance undertakings and groups is based on a two-dimensional matrix that uses the market impact and quality of the undertaking as classification criteria. The market impact of life insurers and pension funds is measured on their total capital investment while the impact of health insurers, property/casualty companies and reinsurers is assessed on their premium income. For the classification of the groups, the criterion for market impact is the sum of the list of assets. The market impact is rated using a four-point scale, with ratings of "very high", "high", "medium" and "low". For the assessment of the quality of an undertaking, the following areas are taken into consideration: "assets and financial situation", "income situation", "business organisation", "future viability" and "significant shareholders". In order to assess the groups the area "group specificities" is used instead of the area "significant shareholders". BaFin scores the first two areas using quantitative parameters. The areas "business organisation" and "significant shareholders" are assessed based on qualitative criteria. The "future viability" area contains sector-specific quantitative or qualitative criteria that are suitable for assessing the company’s or group’s future development. In addition, the area "group specificities" assesses the entire group-specific aspects that go beyond the first four areas. The BaFin evaluation system combines the scores achieved in the respective areas into a total score, which is reflected in a four-point scale from "A" (high quality) to "D" (low quality). Information on the aggregated results is provided in BaFin's Annual Report.

These risk classifications are conducted on a regular basis. They can be complemented by undertaking-specific ad hoc classifications at any time if current supervisory findings change BaFin's risk perception.

The results of risk classifications feed into BaFin's annual supervisory planning. The supervisory planning determines both the frequency of inspections set out in the annual inspection schedule and the frequency and depth of certain supervisory processes which, in particular, include the evaluation of documents and information submitted to BaFin under the undertakings' reporting requirements.

The tools defined in Article 34(4) of the Solvency II Framework Directive are quantitative tools (developed in addition to the calculation of the Solvency Capital Requirement) necessary under the supervisory review process to assess the risk-bearing capacity of undertakings. They include, in particular, the provision of a projection tool, which was transposed into German law by section 44 of the Insurance Supervision Act. Projection calculations are calculations supervised undertakings must perform that include the projected business results of future financial years and the undertaking's risk-bearing capacity in stress situations. The actuarial assumptions for these projections are partly defined by BaFin. The projection tool (formerly scenario-based calculation) can be used for several insurance lines. BaFin's Annual Report provides information on the relevant methods to calculate projections and the respective aggregated results.

Moreover, knowledge gained within the supervisory review process from other surveys on the risk-bearing capacity of undertakings (for example macro-prudential analyses for financial stability purposes) is used on an ad hoc basis if such knowledge is relevant for micro-prudential findings and its use is legally allowed.

The supervisory review process is adapted for the supervision of undertakings not falling within the scope of the Solvency II Framework Directive, for example by using other quantitative instruments.

Supervisory review process at the insurance supervisory authorities of the Federal States

The review process concerns individual insurance undertakings (solo supervision). The undertaking’s parent company, if any, is supervised by BaFin (group supervision) based on the principles published on BaFin’s website, which are similar to the principles of Federal State supervision. If insurance undertakings are part of a group but subject to supervision at Federal State level, the supervisory authority of the respective Federal State ensures that the same actuarial assumptions (e.g. projection calculations) specified by BaFin for the entire group are used.

The review process of Federal State supervision also includes a risk classification, which takes into account the nature, scope and complexity of the undertaking’s business activities and the risks involved for the undertaking itself and the financial market in general. Given the limited (regional) scope of business operations and, as a result, the comparatively lower total capital investment of life insurers, and given the lower level of gross premium income of property/casualty insurers as compared to the market, it can be presumed that risks for the financial market are generally rather low. The financial position and performance of undertakings is regularly evaluated based on specific underwriting parameters.

The risk classifications are conducted on a regular basis. If if current supervisory findings indicate a change in risk, the Federal State supervisor may conduct ad hoc inspections or impose additional reporting requirements at any time.

The results of risk classifications feed into in the annual supervisory planning. The annual supervisory planning determines both the frequency of on-site inspections set out in the annual inspection schedule and the frequency and depth of certain off-site supervisory processes which, in particular, include the evaluation of documents and information submitted to the supervisor under the undertakings' reporting requirements.

The tools defined in Article 34(4) of the Solvency II Framework Directive are quantitative tools (developed in addition to the calculation of the Solvency Capital Requirement) necessary under the supervisory review process to assess the risk-bearing capacity of undertakings. They include, in particular, the provision of a projection tool, which was transposed into German law by section 44 of the Insurance Supervision Act. Projection calculations are calculations supervised undertakings must perform that include the projected business results of future financial years and the undertaking's risk-bearing capacity in stress situations.

Moreover, knowledge gained within the supervisory review process from other surveys on the risk-bearing capacity of undertakings (for example macro-prudential analyses for financial stability purposes) is used on an ad hoc basis if such knowledge is relevant for micro-prudential findings, its use is legally allowed and, if the undertaking belongs to a group, if it has not been already provided under the requirements of group supervision.

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