Mr Hufeld, you had worked for decades in various management positions in the financial industry. What persuaded you to become head of BaFin’s Insurance Supervision Directorate now?

By moving from the private sector to BaFin I have gained the opportunity to play an active role in shaping the future of the financial industry in a responsible position. Supervision – word of which probably spread far and wide in the crisis years – is relevant and necessary to ensure the proper functioning and integrity of the market. I consider it both a privilege and a challenge to be allowed to play a part in this on the front line.

Incidentally, the differences from my previous activities are not as great as might be thought. In some respects a public authority like BaFin does not of course function in the same way as a company whose primary objective is to earn a profit. But in both instances what matters is mastering complex issues and finding viable solutions – including in an international context. Here my experience of the private sector serves me very well.

How did you find starting in your new job?

The first three months were enthralling, intensive and instructive. We have many highly-skilled people working here – I really appreciate the collaboration. So we have already been able to tackle a whole heap of important topics.

What tasks are in your opinion currently the most pressing?

The challenges that we are having to face up to can be divided into three sets. First of all, of course, there are the major changes in our environment, such as Solvency II or the persistent low interest rate phase. At the same time, the international dimension is assuming greater importance. We must also prepare ourselves for these changes internally as well; that is the second important task: insurance supervision must constantly adapt and improve – and that includes our staff as well – in order to be able to respond to the challenges in a forward-looking manner. But in all this we must never lose sight of the third set of tasks: our day-to-day business, ongoing supervision.

Let us begin with Solvency II. The start of the new European supervisory regime has already been deferred several times. How do you view that?

We should take this whole discussion a little more calmly. I don’t see the postponement as that much of a problem. It is quite normal for rule-books of this size to take years to come to fruition. Even after it has been adopted, Solvency II will not remain set in stone but will have to be continually refined. Furthermore, for us the deferral of the start until 2016, maybe even 2017, doesn’t mean that we would have nothing to do in this time.

How will you use this time?

First of all, we must of course arrive at a solution on the issue that is mainly responsible for the postponement: namely, the question of how long-term contracts and guarantees can be adequately modelled. To that end, a Europe-wide impact study is being carried out since late January. The European Supervisory Authority EIOPA will pass on the results to the EU Commission in mid June. But the main thing that we shall be doing is examining which elements of the Solvency II regime could be introduced in advance.

What might they be?

That will differ from Member State to Member State – depending on how their respective national law is framed. A key determinant will always be whether it is legally, factually and technically possible to bring a particular section forward. We are already well prepared in Germany, especially in the field of risk management, which is part of Pillar II of Solvency II. I could also imagine that some, more descriptive, elements of Pillar III, which covers public disclosure requirements, might be introduced in advance. Wherever practicable, we will do so. We shall proceed quite pragmatically on this.

What are the advantages of bringing individual parts forward, then?

Basically, it’s simply a question of implementing Solvency II in stages instead of as a “Big Bang” on one fixed date. This has the great advantage that undertakings and supervisors can build up experience in its application gradually – and that we make headway on the implementation. After all, why should we delay introducing enhancements on such issues as governance or risk management if there are no legal or practical impediments? Some undertakings have already indicated to us that they are also willing to test other parts of Solvency II voluntarily, on top of the standards required by us as binding. We emphatically support that.

What will change for BaFin under Solvency II?

We must prepare ourselves for supervision becoming much more international under Solvency II. We shall be consulting regularly with the supervisors of other countries in the colleges. We must see to it that we can assert our influence there. A much greater proportion of the standards and material content to which our supervision must be geared will also be coordinated by EIOPA. That is also the right way to go, in my opinion. Looking through purely national spectacles is no longer enough.

We shall also have to increase and strengthen our dialogue with undertakings in order to be able to take account of the more heavily principles-based approach of Solvency II and the principle of proportionality. In this, as supervisors we should always use our common sense. The financial crisis of the last five years has shown clearly that we cannot look only at the results of sometimes complex – and supposedly infallible – model calculations. Under Solvency II, it is, rather, the interplay between quantitative variables and the very important risk management that needs to be taken into account. Only in this way can we get an overall picture that enables us to assess undertakings correctly and – almost even more importantly– that makes it possible for undertakings themselves to become more aware of their risk situation in a structured and clear fashion from a forward-looking perspective.

The persistent low interest rate environment is occupying the minds of the insurance industry at least as much as Solvency II.

Yes, that is a major challenge for the industry, and first and foremost for life insurers. The longer interest rates remain so low, the more difficult it becomes for them to generate sufficient earnings on their capital. As a supervisor this problem is something we must keep a very close eye on. In order to obtain as clear a picture as possible, since 2009 we have regularly been asking all life insurers for the economically relevant data and analysing them. In addition, we carry out stress tests and forecasts. These have confirmed that German life insurers will be able to meet their commitments in the short to medium term. They are still earning sufficiently high returns on their investments.

How can one ensure that life insurers will be able to meet their obligations to policyholders in the long term as well?

There is a whole range of potential safeguards. Just as much is being demanded of the legislature and BaFin as of undertakings themselves. Some measures have already been taken. You only have to think, for example, of the Zinszusatzreserve, the additional reserve that undertakings have been required to build up since 2011 to ensure that they can meet their guaranteed obligations. These charges on their profits run into billions, but they are absolutely justified and necessary.

But we think that the participation of policyholders in the valuation reserves on fixed-interest securities still needs amending. Although the Bundestag and Bundesrat have adjourned this matter for the time being, I am confident that it will be dealt with again in the not too distant future. The proper modelling of long-term guarantees under Solvency II, of which we have already spoken, is also an important topic. And finally the industry itself will also have to do its own homework. It must develop product innovations based on more flexible models for guaranteed returns. In addition it will have to make adjustments in its investments; the limits set by law and risk management will of course also have to be observed here as well.

Radical changes are therefore taking place in the world of insurance supervision. Does that not mean that BaFin itself must also change?

It goes without saying that we are constantly developing and adapting our supervisory philosophy. Here, I attach particularly great importance to the aspect of forward-looking supervision: we must be able to identify potential risks as early as possible. That doesn’t just apply to micro-prudential supervision. It is important that potentially problematical macro-prudential developments are also monitored in a forward-looking way, for instance, if insurers are invested in crisis countries on a large scale. It is better to know something early than to have to rush around analysing things after the event, trying to shut the stable door after the horse has bolted.

What might such forward-looking supervision look like?

One of the things that we’re currently discussing is whether insurers should draw up recovery plans, like banks. I think that this is extremely useful, for it forces undertakings to think hard about possible future crises. The result of that is that they structure their risk management accordingly and engage in a dialogue with BaFin earlier than before.

In order to be better able to assess macro-prudential risks, the German lawmakers have created the new Financial Stability Commission. The principal national institutions sit round a table there in order to discuss and assess developments at an early stage and if necessary issue warnings or recommendations. At the same time the Bundesbank’s macro-prudential mandate now also extends to the macro-economic impact of insurers. It will therefore also be able to use its enormous and highly-skilled resources in future to undertake a macro-economic analysis not just of bank data but of insurer data as well. I welcome that very much.

Let us now discuss another supervisory topic that is currently on everybody’s lips: consumer protection. The Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG for short) contains a clear mandate for this. How does the Insurance Supervision Directorate fulfil this mandate?

According to the Act, protection of the interests of policyholders is one of the primary objectives of our supervision. We take this mandate for collective consumer protection very seriously. We have always actively promoted this subject. But perhaps we should be a bit more aggressive in our marketing of what we do to protect the policyholder population. For instance, we can counter the mistaken impression that we are becoming less involved in consumer protection than in other areas. That is undoubtedly not the case. Quite the contrary – we are actually doing a very great deal.

Can you give us some examples?

The best consumer protection is, of course, our solvency supervision – we ensure that undertakings remain solvent. But we also seek to ensure that insurers conduct their business properly and comply with the legislation and supervisory requirements. We aim to tackle four main consumer protection areas in 2013: complaints management, product information leaflets, claims settlement practice and sales incentives.

What does that mean specifically? Let’s start with complaints management.

We want all insurers to clearly define their complaints management processes and set them down in writing. That should go without saying for the proper conduct of business anyway. Especially since an intelligent complaints management system benefits not only consumers but also undertakings themselves. It can be extremely profitable for claims settlement and product development if lessons from complaints feed into them. EIOPA recently issued guidelines on this, according to which Member States are to seek to ensure that insurers comply with certain minimum standards in their complaints handling. We strongly support this initiative and will be publishing a Circular on it and a Collective Decree. There will shortly be a consultation on the subject as well.

How far will the Insurance Supervision Directorate concern itself with product information leaflets and claims settlement?

Since 2008 insurers have had to provide their clients with a product information sheets containing the key contract information, in order to enable them to come to a well thought-through decision. Product information sheets contain, for example, details of the amount of the premium or point out benefit exclusions. It is important that all the information is presented succinctly, transparently and in an easily understandable form – otherwise the objective will be missed. If we receive indications that product information sheets are overloaded with detailed information or are simply not easy to understand, we shall look into them. In the final analysis, it is also in the industry’s own interest to improve their product information sheets: it does rely on the confidence of consumers.

We shall also be examining more closely whether there are individual insurers who do not manage their claims settlement properly. If we have reason to believe that undertakings are systematically endeavouring to prevent claims being settled, we shall of course take the appropriate counter-measures.

And where are the sticking points in selling?

There are cases of insurance undertakings offering misplaced sales incentives. That can lead to brokers in individual cases recommending unsuitable products or even on a grander scale persuading policyholders to switch insurer when this is not in the client’s interest but is aimed solely at earning the broker a bigger commission. We shall be examining this aspect of selling more closely than before in the coming months. Preventing such abuses is, incidentally, also one of the objectives of the Insurance Mediation Directive reform currently under discussion at the European level.