Stand:updated on 26.06.2020 | Topic Investments of insurance companies Prudent Person Principle
The prudent person principle is based on section 124 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) (Article 132 of the Solvency II Framework Directive). It sets out the requirements applying from 1 January 2016 to investments and the associated risk management of primary insurers and reinsurers subject to Solvency II. Prior to the implementation of Solvency II, these undertakings were subject to the Investment Regulation (Anlageverordnung – AnlV), which now only applies to undertakings outside the scope of Solvency II.
The prudent person principle stipulates that insurers may only invest in assets and instruments whose risks the undertaking concerned can properly identify, measure, monitor, manage, control and report and appropriately take into account in the assessment of its overall solvency needs. All assets are to be invested in a manner that ensures the security, quality, liquidity and profitability of the portfolio as a whole.
In practical terms, this means that investments as such are no longer restricted by external quantitative requirements. Rather, the insurer must prepare an internal schedule of investments, which describes the undertaking's investment universe and defines the investment limits (e.g. counterparties, asset classes, etc.) the insurer must observe. The requirement under this schedule is that undertakings invest only in products whose nature and risks they fully understand and that they are thus always able to react appropriately to current developments.