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Erscheinung:09.05.2025 | Topic Investments of insurance companies, Sustainability PPP and sustainability: BaFin’s new administrative practice
BaFin is consolidating its administrative practice relating to the prudent person principle in a new circular for Solvency II insurers. This new circular also provides guidance on sustainability risks.
By Rebecca Frener and Romy Ramsay, BaFin Insurance Supervision
The prudent person principle (PPP) specifies that insurers may only invest in assets and instruments whose risks they can adequately identify, assess, monitor, manage, control and include in their reporting. Under the PPP, insurers must invest all assets in a manner that ensures the security, quality, liquidity and profitability of the entire portfolio. The PPP is based on section 124 of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) and Article 132 of the Solvency II Directive. The details of how the PPP is to be implemented are governed by BaFin’s administrative practice. A new BaFin circular for Solvency II insurers now consolidates various PPP requirements and also provides guidance for the first time on how to handle sustainability risks.
Revision of the MaGo
The new PPP Circular has been introduced against the background of the planned revision of the Minimum Requirements on the System of Governance for Solvency II Insurance Undertakings (MaGo for SII IU), public consultations for which were concluded at the end of February. Since the MaGo for SII IU will focus on key topics relating to the system of governance, BaFin has transferred certain risk management provisions from the MaGo to the new PPP Circular.
Moreover, the circular replaces a number of interpretative decisions (see info box “Circular on the Prudent Person Principle”). BaFin made a large number of edits, cuts and updates to the existing rules when moving them to the new circular. In addition, content taken from the Guidelines on System of Governance published by the European Insurance and Occupational Pensions Authority (EIOPA) and from the relevant explanatory texts has now been replaced by general references.
At a glance:Circular on the Prudent Person Principle
BaFin’s new Circular on the Prudent Person Principle (PPP) for Solvency II Insurance Undertakings (PPP Circular) consolidates its existing administrative practice with respect to the PPP. This comprises the following:
- the interpretative decision on the prudent person principle of 21 December 2015,
- the interpretative decision on the use of derivative financial instruments in the context of the prudent person principle of 14 July 2017,
- the interpretative decision on investment decisions in the interests of policyholders and beneficiaries and on dealing with conflicts of interest in the context of the prudent person principle of 13 July 2020 and
- three sections previously included in the MaGo for Solvency II Insurance Undertakings (investment risk management policy, asset-liability management policy and liquidity risk management policy).
Furthermore, BaFin has added a new section on dealing with sustainability risks in the context of the PPP.
The circular is immediately applicable; the above-mentioned interpretative decisions have now been repealed.
New section on sustainability
In addition, the circular establishes administrative practice on sustainability under the PPP for the first time. A separate section has been dedicated to this topic. Article 275a of Comission Delegated Regulation (EU) 2015/35 (“CDR”) explicitly requires insurers subject to the Solvency II Directive to take sustainability risks into account in the context of the PPP. Insurers must also address the question of how their investment strategy and investment decisions could impact sustainability factors in the long term (see info box “Sustainability risk and sustainability factors”). This means that the concept of double materiality applies: when investing, insurers must take into account both their financial risks (“outside-in perspective”) and the impact of their investments on people and the environment (“inside-out perspective”). They must also reflect their customers’ sustainability preferences in their strategy and their decisions wherever relevant.
At a glance:Sustainability risk and sustainability factors
- The term “sustainability risk” is defined in point (55c) of Article 1 of the CDR as an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential negative impact on the value of the investment or on the value of the liability.
- The term “sustainability factors“ is defined in point (55d) of Article 1 of the CDR in conjunction with point 24 of Article 2 of the EU Sustainable Finance Disclosure Regulation as environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.
The provisions of the CDR are binding and directly applicable. BaFin’s new PPP Circular now sets out the authority’s expectations for insurers in greater detail, with the goal of helping undertakings with implementation and in order to create a uniform administrative practice.
The aspects of sustainability addressed in the new circular are closely modelled on EIOPA’s expectations. Furthermore, BaFin held discussions with a number of major life insurers regarding the implementation of Article 275a of the CDR; the insights gained have been included in the PPP Circular. The latter contains both basic explanations and numerous examples of proven methods with which insurers can meet the requirements in practice.
