Guidance notice on the authorisation of insurance joint-stock companies for the pursuit of reinsurance business
Guidelines for the authorisation of insurance joint-stock companies for the sole pursuit of reinsurance business within the Federal Republic of Germany
I. Formation under the Stock Corporation Act
1. Presentation of the notarised record of formation (sections 23 et seq. of the AktG)
- Articles of formation (sections 23-27 of the AktG; cf. II.3 below)
- First supervisory board (sections 30 (1)-(3); 31 of the AktG; cf. III.1.a)aa) below)
- First auditor (section 30 (1) of the AktG)
2. Presentation of the minutes of the first meeting of the supervisory board, with the appointment of the management board (section 30 (4) of the AktG; cf. III.1.a)aa) below)
3. Presentation of the formation report (section 32 of the AktG)
4. Presentation of the formation audit report by the management board and the supervisory board (section 33 (1), section 34 of the AktG)
5. Where appropriate, presentation of the report produced by a court-appointed formation auditor (section 33 (2)-(5), sections 34, 35 of the AktG)
6. Presentation of a certified excerpt of the commercial register
The documents are to be submitted as copies or in notarised form to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin).
II. Business plan (section 9 (1), (2), (3) of the VAG)
1. Establishment of the undertaking (section 9 (1) second half-sentence of the VAG)
Details of the organisational structure of the undertaking (e.g. in the form of an organisational chart)
2. Territory of the envisaged business operations (section 9 (1) second half-sentence of the VAG)
Details of the registered office and the branches of the undertaking as well as details of the geographical scope. The geographical scope is determined based on the registered office of the prospective ceding undertaking and is to be defined per country, listed by (sub-)continents (Europe, North America, South America, Africa, Asia, Australia/Oceania).
3. Articles of formation (section 9 (2) no. 1 of the VAG)
Presentation of the articles of formation (in this respect, note in particular sections 15 (2), 33 (1) of the VAG; sections 23 (3)-(5), 25-27, 95, 108 (2) and (4), 109 (3), 110 (3), 179 (1) sentence 2 of the AktG; cf. 1978 annual report of the German Federal Insurance Supervisory Office (Geschäftsbericht Bundesamt für Versicherungen – GB BAV) p. 26 part 130, whose contents remain applicable, subject to section 188 of the VAG, new version (as the equivalent legal provision to section 34 of the VAG, old version)).
The notarised minutes of the annual general meeting at which the amendments to the articles of formation necessary for the pursuit of reinsurance business were resolved are to be attached to the application either as a copy or in notarised form.
In respect to the business name, a clearance certificate issued by the chamber of industry and commerce and, where appropriate, the competent judge in charge of the commercial register must be presented.
4. Reinsured risks (section 9 (2) no. 2 of the VAG)
a) Details of the risks that are to be covered by reinsurance (section 9 (2) no. 2 first half-sentence of the VAG, also as part of the purpose of the undertaking within the meaning of section 9 (1) second half-sentence of the VAG).
The details of the risks are to be specified according to the lines of business set out in Annex I of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014.
b) Details of the types of reinsurance contracts that the reinsurance undertaking intends to enter into with the ceding undertaking (section 9 (2) no. 2 second half-sentence of the VAG).
aa) This includes information on whether the undertaking intends to carry on proportional, non-proportional or facultative reinsurance business.
bb) Information is also required on whether the undertaking intends to conclude financial reinsurance contracts or contracts whose main purpose is the assumption of interest rate risks or other market risks (for example asset-intensive reinsurance).
5. Reinsurance (section 9 (2) no. 3 of the VAG)
Presentation of the basic features of retrocession, taking into account the individual risks (section 9 (2) no. 2 second half-sentence of the VAG) as well as a list and summary of the envisaged retrocession contracts. This also comprises details on the intended “alternative risk transfer” (ART) including the use of special purpose insurance vehicles.
6. Own funds (section 9 (2) no. 4 in conjunction with section 9 (3) of the VAG)
a) The reinsurance undertaking to be authorised must already, as of its authorisation, have eligible own funds pursuant to section 89 (1) sentence 1, (3) in conjunction with section 94 of the VAG of not less than the solvency capital requirement on the basis of the expected overall volume of business (section 9 (3) no. 4 of the VAG). Eligible basic own funds as set out in section 89 (3) in conjunction with section 95 of the VAG must be in place to cover of the absolute floor of the minimum capital requirement (section 9 (2) no. 4 of the VAG).
The composition and calculation of own funds is to be explained (cf. II.8 below).
b) The minimum capital requirement is defined in section 122 of the VAG.
The absolute floor of the minimum capital requirement is €3.6 million for reinsurance undertakings and €1.2 million for captive reinsurance undertakings.
The solvency capital requirement is to be calculated in accordance with the provisions of the VAG (section 96 et seq. of the VAG). The amount of the minimum eligible own funds to be maintained is to be calculated on the basis of the minimum capital requirement and the solvency capital requirement, whichever is greater.
In the interest of solid initial capital resources for the reinsurance undertaking which is to be authorised, BaFin emphasises that it is not sufficient if own funds merely reach the minimum amount required by law.
In case of an envisaged portfolio transfer, the portfolios of contracts to be transferred are to be included in the above-mentioned calculations.
c) The contribution of the own funds which are necessary to ensure that the reinsurance undertaking has sufficient eligible own funds is to be documented by means of a confirmation issued by the institution holding the account. The contributed amount will be definitively available to the management board for its free disposal (cf. section 37 (1) sentence 2 AktG).
d) If the undertaking is subject to additional supervision due to its membership of an insurance group (section 245 et seq. of the VAG) or a financial conglomerate (within the meaning of the German Financial Conglomerates Supervision Act (Finanzkonglomerate-Aufsichtsgesetz – FKAG)), the appropriateness of its own funds must also be documented at the level of the group (section 250 of the VAG) or at the level of the financial conglomerate (sections 17, 18 of the FKAG).
7. Organisation fund (section 9 (2) no. 5 first half-sentence of the VAG)
An organisation fund is to be set up to cover the expenses for the establishment of the administration and the network of agents.
The undertaking must document the availability of the funds necessary for the establishment of the administration and the network of agents (organisation fund) (section 9 (2) no. 5 first half-sentence of the VAG).
The expenses for the establishment of the administration and the network of agents must be estimated. The underlying assumptions for the estimate must be stated, e.g. the planned administration structure, the channel of distribution, specific groups of ceding undertakings, portfolios to be transferred and other key features.
The details in the estimate must be sufficiently presented and substantiated in relation to the individual expenses, in terms of their scope and their amount.
As a rule, the necessary expenses will comprise the expenses for the authorisation and the establishment of the undertaking (excluding commission expenses and other ongoing expenses for the insurance business, since these are to be included in the estimate of the profit and loss accounts for the first three financial years in accordance with section 9 (3) no. 1 of the VAG (cf. II.8 below)).
The authorisation expenses include e.g. consulting and notary’s fees. However, registration and publication costs and associated notary’s fees are considered part of the formation expenses and are consequently subject to section 26 of the AktG.
The expenses for the establishment of the undertaking include e.g. expenses for operating and office equipment, organisational set-up expenses for registration and processing of transactions up to the accounting stage (these include expenses for purchasing the necessary technical literature and legal texts, as well as consulting costs), expenses for office staff and field service personnel (this includes training and retraining costs for existing employees) and expenses for the operating and office equipment for the (planned) offices.
The estimate of the above-mentioned expenses should not only include the expenses for the year of authorisation but also those for the establishment years which exceed the other ongoing expenses for insurance business, as listed in the estimate in accordance with section 9 (3) no. 1 of the VAG (cf. II.8 below).
Except in case of demonstrably exceptional circumstances, experience shows that, depending on the scope of the envisaged business operations, minimum amounts of between €500,000 and €1.5 million are to be assumed.
The organisation fund is to be provided in full “while expressly waiving repayment, profit participation and interest”. BaFin must be issued with a declaration from the subscriber for the organisation fund in this respect. It is advisable to include this declaration in the certificate of formation (cf. I.1 above).
BaFin is to be provided with proof of contribution of the organisation fund as well as contribution of the necessary funds for fulfilment of the own funds requirement (cf. II.6.c above).
8. Estimates for the first three financial years (section 9 (3) of the VAG)
a) Estimates of the balance sheet and the profit and loss account are to be presented for the first three financial years. The estimates for the profit and loss account must show the commission expenses and the other ongoing expenses for insurance business, the expected premium income, the expected expenses for claims incurred and the expected liquidity position (section 9 (3) of the VAG). The retrocessionaires’ shares are to be deducted from the expenses and income initially calculated on a gross basis.
b) Estimates are to be presented of the future solvency capital and minimum capital requirement. The calculation method serving as the basis for these estimates is to be indicated.
Furthermore, estimates of the financial means likely to be available to cover the technical provisions and comply with the minimum capital and solvency capital requirement (own funds) are to be presented for the first three financial years. This includes the solvency statements for the first three financial years pursuant to section 74 (1) sentence 1 of the VAG.
If the estimates indicate that expenses which cannot be covered through the organisation fund will lead to a net loss for the financial year, even before its authorisation the undertaking is to be provided with further financial resources which at least prevent the eligible own funds from shrinking below the (estimated) solvency capital requirement.
c) The assumptions underlying the estimates are to be indicated.
III. Other preconditions for authorisation
In addition, the following is to be submitted:
1. Details of the nature and scope of the business organisation in accordance with section 2, chapter 1, part 3 of the VAG.
This includes the following aspects:
a) Personnel (section 9 (4) no. 1 (a) of the VAG)
aa) Management board (senior management), other persons who effectively run the undertaking, supervisory board members and additional persons who are responsible for other key tasks
The management board must consist of at least two members (sections 33 (1), 188 (1) sentence 1 of the VAG) who must each be qualified in accordance with the requirements of section 24 (1) of the VAG (fit and proper). As well as the management board members, other persons who effectively run the undertaking (see section 24 (2) sentence 1 of the VAG), the members of the supervisory board as well as the additional persons who perform other key tasks must be fit and proper.
Pursuant to section 9 (4) no. 1 a) of the VAG, the details which are material for a fit and proper assessment must be submitted for all of the above-mentioned persons. However, for persons who perform other key tasks – this includes the four key functions prescribed by law (the independent risk control function pursuant to section 26 of the VAG, the compliance function pursuant to section 29 of the VAG, internal audit pursuant to section 30 of the VAG and the actuarial function pursuant to section 31 of the VAG) – this only applies in regard to the persons responsible in this regard. Moreover, the undertakings may themselves decide whether they perform other key tasks. These may be the divisions to be identified by the undertakings which are of considerable significance for the undertaking’s business operations. If so, the above details are to be submitted for the responsible person. In regard to the specific details to be provided and the documents to be presented in this respect, see the relevant guidance notes on the fitness and properness of the individual persons indicated on BaFin’s website.
In regard to the permissibility of so-called multiple senior management positions, see section 24 (3) of the VAG: upon request, BaFin may authorise more than two senior management positions held by a single person in insurance undertakings, Pensionsfonds, insurance holding companies or special purpose insurance vehicles if these are undertakings in the same insurance group or group of companies (on the details, see the guidance note on the fitness and properness of senior managers pursuant to the VAG on BaFin’s website).
In regard to the permissibility of so-called multiple supervisory board positions and restrictions on positions, see in particular section 24 (4) of the VAG and section 100 (2) of the AktG (on the details, see the guidance note on the fitness and properness of members of management and supervisory bodies on BaFin’s website).
bb) Other expert personnel
The undertaking must have other expert personnel (office staff and field service). BaFin must be provided with details of these personnel (number and qualifications). This requirement ultimately results from the obligation to estimate the expenses required for the establishment of the administration and the network of agents pursuant to section 9 (2) no. 5 first and second half-sentence of the VAG. This includes the expenses for office staff and field service personnel (including training and retraining costs for existing employees) (in this respect, cf. item II.7 above).
b) Enterprise agreements (section 9 (4) no. 1 b) of the VAG)
Details on and, where appropriate, presentation of the enterprise agreements within the meaning of section 9 (4) no. 1 b) of the VAG indicated in sections 291, 292 of the AktG (see also Official Bulletin of the BAV (Veröffentlichungen des Bundesamts für Versicherungen – VerBAV) 2001, 118: the insurance undertaking must maintain a certain decision-making scope of its own).
c) Contracts regulating the outsourcing of important functions or activities (section 9 (4) no. 1 c) of the VAG)
Presentation of contracts regulating the outsourcing of important functions or activities pursuant to section 9 (4) no. 1 c) of the VAG. In regard to the basic contents of the contracts, reference is made to the provisions in section 32 (2) sentence 2, (4) of the VAG and Article 274 no. 4 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014. Further details of the contents of the contracts should be agreed with the competent BaFin supervisor. Otherwise, reference is made to BaFin’s announcements on the outsourcing of important functions or activities.
d) Business organisation in the broad sense of the term
Details of the general requirements for the business organisation (section 23 of the VAG), remuneration (section 25 of the VAG), risk management (section 26 of the VAG), own risk and solvency assessment (section 27 of the VAG), external ratings (section 28 of the VAG), the internal control system (section 29 of the VAG) and internal audit (section 30 of the VAG).
2. Details of qualifying holdings (section 9 (4) no. 2 of the VAG)
If qualifying holdings (section 7 no. 3 of the VAG) are held in the insurance undertaking, the details stipulated in section 9 (4) no. 2 of the VAG must be provided. For the details and documents which are necessary for assessment of the requirements indicated in section 9 (4) no. 2 b) in conjunction with section 16 of the VAG, it is advisable to follow the guidance set out in section 9 and section 10 of the German Holder Control Regulation (Inhaberkontrollverordnung – InhKontrollV). Otherwise, reference is made to BaFin’s currently applicable announcements regarding the control of qualifying holdings.
3. Close links (section 9 (4) no. 3 of the VAG)
Any close links within the meaning of section 7 no. 7 of the VAG with other natural persons or with undertakings must be indicated (section 9 (4) no. 3 of the VAG).
Details must be provided as to whether the undertaking
1. is a subsidiary or affiliated company of an insurance undertaking, a CRR credit institution within the meaning of section 1 (3d) sentence 1 of the German Banking Act (Kreditwesengesetz – KWG), an e-money institution within the meaning of section 1 (3d) sentence 6 of the KWG or of a securities trading firm within the meaning of section 1 (3d) sentence 4 of the KWG and if the parent or the other affiliated company is already authorised in another Member State of the European Union or in a signatory state to the Agreement on the European Economic Area (EEA) or
2. is controlled by the same natural persons or undertakings that exercise control over an insurance undertaking, CRR credit institution, e-money institution or securities trading firm domiciled in another Member State or signatory state (cf. section 9 (5) of the VAG).
Further guidance on technical issues
1. The application should indicate the types of reinsurance (life and/or non-life reinsurance) and the geographical scope for which authorisation is sought. Consultation with BaFin at an early stage is recommended, in particular with regard to the items II.3 (articles of formation), II.4 (risks), II.6 (own funds), II.7 (organisation fund), II.8 (estimates for the first three financial years), III.1.a) and d) (personnel and business organisation), III.2 (holder of a qualifying holding).
2. The competent judge in charge of the commercial register should be consulted in advance regarding the registrability of the articles of formation, and in particular the business name, and BaFin must be notified of his/her consent.
3. Regarding items III.1.b) (enterprise agreements) and III.1.c) (contracts on the outsourcing of important functions or activities), timely presentation of the draft versions for review is advisable.
4. In order to speed up the process, it is helpful if all of the documents which may be relevant for a preliminary review are presented in duplicate.
The documents may be submitted as completed.
5. Costs of the authorisation procedure
In accordance with the German Regulation on the Imposition of Fees and Allocation of Costs Pursuant to the Act Establishing the Federal Financial Supervisory Authority (Verordnung über die Erhebung von Gebühren und die Umlegung von Kosten nach dem Finanzdienstleistungsaufsichtsgesetz – FinDAGKostV), BaFin will charge a fee pursuant to section 2 (1) in conjunction with the schedule of fees indicated in section 2 of the FinDAGKostV. Its value is stipulated in section 2 (1) in conjunction with no. 6.2 of the FinDAGKostV and thus amounts to €10,000.