The product approval process under the Insurance Supervision Act applies to (primary) insurance undertakings that are subject to Solvency II, with the exception of insurance of major risks within the meaning of section 210 (2) of the Insurance Contract Act (Versicherungsvertragsgesetz – VVG). The provisions also do not apply to small insurance undertakings, funeral expenses funds, Pensionskassen and Pensionsfonds. The DR POG applies both to insurers subject to Solvency II and to insurance agents, brokers and advisors within the meaning of section 34d of the German Industrial Code (Gewerbeordnung – GewO) in the version applicable as of 23 February 2018. However, the statements made in this article only apply to insurance undertakings.

Essential formal and content-related requirements

The product approval process is for the purposes of consumer protection and forms part of the system of governance. It is subject to the principle of proportionality. It sets out requirements on the product manufacturer (product approval process in the narrower sense) and on those who are merely distributors of another manufacturer’s product. Insurance undertakings responsible for product distribution for other insurers, particularly within groups, are also considered to be mere distributors.

Product manufacturers must develop a product approval policy (‘product oversight and governance policy’ in accordance with Article 4(2) of the DR POG) wherein the requirements for the product approval process are defined. This must be applied to each specific new insurance product and each material change made to an existing product. The product approval policy must be set out in writing in an internal guideline which t must include the following:

• definition of the "insurance product" or of the "material change" to an insurance product
• definition of the methods used to identify the target market for the insurance product as well as determination and assessment of the risks relevant to the target market
• definition of the methods used to determine the distribution strategy corresponding with the target market and the information to be provided to distribution partners
• definition of the methods used to ensure that the insurance products are distributed to the identified target market
• definition of how the insurance products will be monitored and undergo regular reviews

Insurance product and material change

The definitions of the insurance product and of the material change are applicable to the specific product approval process which ties in with the new product or the material change. A new insurance product or material change is at hand when the product manufacturer advertises a new product or change, or the intended target market changes. A material change is also applicable if the change is considered to be a material change from the perspective of the intended audience in the target market. This may be the case for instance if multiple-risk insurance that covers various risks is supplemented to include new risks.

On the other hand, adaptation of existing insurance products for individual customers and the design of tailor-made contracts at the request of a single customer do not qualify as insurance product manufacturing under Article 3(3) of the DR POG. Mere changes to premiums also do not generally represent a material change. This applies at any rate to the extent that special supervisory regulations are in place for premium adjustments.

Target market

The target market describes the circle of potential customers in an abstract and generalised manner. This enables the manufacturer to adapt the features of the product to the needs, characteristics and objectives of the relevant group of customers. The insurance undertaking must verify whether this is guaranteed over the entire lifecycle of the product. The characteristics, risk profile and complexity of the insurance product must be taken into account when determining the level of detail used to describe the target market.

However, the product may also be distributed outside of the target market. The regulations under civil law on advising and providing information to customers are applicable here, particularly in accordance with sections 6 et seq. of the Insurance Contract Act.

Distribution

The channel of distribution forms part of the distribution strategy. It can, for instance, be determined with reference to the intensity of the advice required. Fully digitised distribution may not be appropriate for a product for which the customer requires more detailed advice.

The information provided to the distributors must be determined in such a way that the advisory and information obligations towards customers in civil law are met. More detailed provisions are included in Article 8(2) and (3) of the DR POG.

Undertakings must ensure that their products are distributed on the identified target market, as part of a suitable system of governance. An increased lapse rate may indicate that this is not the case or that the target market is inappropriate and that the product does not meet the needs of this market. This may provide a reason for reviewing the product as part of the product monitoring process.

Product monitoring

The product monitoring obligation also imposes requirements on the system of governance. This applies in particular for Article 7(3) of the DR POG, which governs the process for dealing with circumstances that could adversely affect the customer of the relevant product. Supervisory law requires undertakings to set up a process for identifying such circumstances. They must also verify, when necessary, which insurance relationships of which customers are affected and whether a duty to provide information to these customers arises from the insurance relationship.

The law does not specify how frequently the regular review of the insurance products needs to take place. The interval should be appropriate with respect to the particular features of the relevant insurance product. It should generally be no more than three years.

Requirements imposed on specific products and material changes

As part of the product-specific approval process, which applies both to new insurance products and material changes, undertakings must meet the following requirements:

• identification of the target market as well as determination and assessment of the risks relevant to the target market
• determination of the distribution strategy corresponding with the target market and the information to be provided to distribution partners
• ensuring that the insurance product is distributed to the identified target market
• definition of how the insurance product will be monitored and undergo regular reviews (follow-up)

Fulfilment of these requirements must be documented appropriately.

Multiple product manufacturers

Whoever "essentially" designs the insurance product is the product manufacturer. The party that carries the relevant risk is, at the same time, also considered to be the product manufacturer. In addition to individual insurance undertakings, there are also cases that involve multiple product manufacturers.

Multiple-risk products that cover a number of risks may for instance involve multiple insurance undertakings. It is also conceivable that an insurance intermediary such as an underwriting agent may act as the product manufacturer and be looking for a risk carrier for the product. In such a case the insurance undertaking acts as the risk carrier. Syndicate business in which multiple primary insurers assume liability towards external parties within the scope of co-insurance is also relevant here.

With all these sets of circumstances, the insurance undertaking involved is in all cases responsible for meeting the requirements related to the product approval process.

Integration within the system of governance

In accordance with Article 4(4) of the DR POG the "manufacturers' governing body or structure responsible for the manufacturing of insurance products" is ultimately responsible for establishing, implementing and reviewing the product approval process. Under the law, this is not a case of an independent function with an individual who is answerable internally.

There are also points of contact that arise within the system of governance, in particular with the risk management system, the internal control system or the compliance function, the actuarial function and the "distribution function" in accordance with section 48 (2a) sentence 2 of the Insurance Supervision Act. Within the scope of risk management, the operational risks must be analysed and the results incorporated into the decision-making process pursuant to margin no. 164 of the Minimum Requirements under Supervisory Law on the System of Governance of Insurance Undertakings (Aufsichtsrechtliche Mindestanforderungen an die Geschäftsorganisation von Versicherungsunternehmen – MaGo) before products are introduced or undergo a material change. The compliance function must ensure that the legal framework applicable to the product is adhered to, particularly the relevant provisions of the Insurance Contract Act. The actuarial function will also provide an opinion on the general underwriting and acceptance policy. The new distribution function must ensure that the requirements imposed on distribution employees and partners – in particular related to professional qualification – are implemented in line with the regulations.