Why is retirement provision such an important topic for this year’s Annual Insurance Supervision Conference?

In Germany, retirement provision, which is offered in addition to statutory pensions, is covered predominantly by insurance corporations and Pensionskassen (occupational pension schemes). As a supervisory authority, we have seen these companies be hit particularly hard by the period of low interest rates over the past years. In some cases, they promised customers high guarantees that are now no longer readily achievable. In addition, a large number of new types of pension products have been created in the life insurance sector. One thing these often have in common is that the investment risk is in part transferred to customers. There are therefore plenty of reasons to discuss retirement provision on 13 November (see info box “Annual Insurance Supervision Conference”).

How do things look for providers of pension products in Germany?

Despite the challenges of the low interest rate environment, things are essentially looking good for insurers and institutions for occupational retirement provision (IORPs). German insurers have high solvency ratios in comparison with other countries, and many IORPs have the support they need from their sponsoring undertakings or shareholders. But we take a closer look at individual undertakings when particular situations demand it.

How great an interest has the industry taken in the Act to Strengthen Occupational Pensions (Betriebsrentenstärkungsgesetz), which was introduced on 1 January 2018?

At the start of the year, the legislature introduced pure defined-contribution schemes as part of the Act to Strengthen Occupational Pensions. These do not provide any guarantees; instead, they allow for more freedom in investment and for higher yields on a long-term basis. This is quite novel, and requires unions and employers to take a conscious decision to give beneficiaries the prospect of retirement benefits that are higher, but that might fluctuate because they lack the guarantee of a sponsoring body. We have established through a number of discussions that there is considerable interest among life insurers and pension funds (Pensionskassen and Pensionsfonds) as possible providers of these products, as well as among social partners. Nevertheless, no collective agreements on defined-contribution schemes have been concluded as yet.

What is the situation with PEPPs, pan-European personal pension products?

Intensive debates on pan-European pension products are still ongoing at European level. There is not yet any sign of them being implemented in practice in Germany. In my opinion, it is very important to stress that PEPPs must remain pension products. A life-long annuity should take clear precedence over the one-off lump sum payment of an amount saved. Otherwise the PEPP would have to be renamed PEIP for “Pan-European Investment Product”.

Do sustainable investments and long-term liabilities in insurance corporations conflict with or complement each other?

Long-term investments make particular sense for insurance undertakings if they also have long-term liabilities on their balances sheets. In this respect, sustainable investments, which are often long-term, and the industry’s long-term liabilities can certainly complement each other. For insurers, however, this has to be gauged on the basis of appropriate risk management.

When can we expect a legal definition of sustainability and what does BaFin understand by the term?

As supervisors, we do not need to come up with our own definition of sustainability. We are waiting with anticipation to see how sustainable investment will be defined by the High-Level Expert Group appointed by the European Commission, which includes, for example, representatives from the European Insurance and Occupational Pensions Authority EIOPA. In our work at present we use the definition of sustainability employed by the respective company as our starting point. But this is not satisfactory in the long term, of course.

What have your initial experiences been following the introduction of the VAIT, the Supervisory Requirements for IT in Insurance Undertakings?

We received a great deal of feedback while preparing the VAIT circular and during the consultation phase – often positive, occasionally mixed. This reflects the tension between ongoing digitalisation in the undertakings and the requirement for effective governance to be in place for this digitalisation. Because ultimately the management boards are responsible for IT security. The dialogue between supervisors and the industry led to an improved level of mutual understanding and awareness on all sides, which made it very valuable. The experience gathered will undoubtedly make it easier for the undertakings to deal with the VAIT in the future. BaFin will look at how the VAIT principles have been implemented in insurance undertakings in the coming months and years, during on-site inspections for example.

How likely do you think it is that the insurers’ value chain will be broken apart by fintech companies?

No disruption has happened yet. Of course, fintech companies have hastened the process of digitalisation. But almost all insurers are now improving their digital offerings of their own accord, and some insurers have bought stakes in fintech companies. At the moment bigtech companies prefer to offer their products, such as cloud services, to insurance undertakings.

On that note, how likely is it that in the future insurance undertakings will be purely risk bearers?

Bearing risk is at the core of every insurance corporation. But whoever bears the risk must ultimately always be in control of it in order to safeguard the interests of policyholders. This is something that we will watch out for. It remains to be seen how far outsourcing will go and how this will change the corporate landscape. The key thing is that control is retained by the outsourcing companies. I do not see any issue with outsourcing arrangements or splitting up the value chain as long as this is managed prudently.

A report by the Federal Ministry of Finance (BMF) on the application of the proportionality principle under Solvency II showed that the new supervisory regime poses significant challenges particularly for small and medium-sized insurance undertakings. Is there a need for a “small insurance box”, i.e. a special arrangement for small insurers?

There already is a “small insurance box”. Fundamentally, Solvency II only applies to undertakings that reach certain thresholds, for example premiums of five million euros per year. And even for insurers that are above these thresholds, many of the requirements only need to be applied in a manner proportionate to the nature, scale and complexity of their risks. There is no “one size fits all” approach.

And finally, a question on the Zinszusatzreserve, i.e. the additional provision to the premium reserve introduced in response to the lower interest rate environment. What is your assessment of the consequences of allowing a longer period for the Zinszusatzreserve to be built up, as suggested by the BMF?

We consider the draft that was presented to be both appropriate and necessary. It is a much-needed adjustment to the original calibration, which was too inflexible. This adjustment prevents the undertakings from being overburdened, which in turn benefits the customers.

Mr Grund, thank you for your time.