Regulatory
Regulatory: 19 technical terms explained – definition, synonyms and legal basis.
Removal of Board Members
Synonyms: Abberufung von Organmitgliedern
The supervisory authority may require the removal of an insurance company's management or supervisory board member where deficiencies are identified.
Concept
Removal of board members is a supervisory measure by which the supervisory authority, under § 303 VAG, may require the removal of a management board or supervisory board member of an insurance company who no longer possesses the reliability or professional qualification required for their role.
Requirements
The measure generally presupposes a serious breach of regulatory requirements or a subsequent failure to meet “fit and proper” requirements, for example through violations of statutory rules, deficient corporate governance, or conduct that endangers policyholders’ interests.
Significance
As one of the most intrusive supervisory measures in the area of corporate governance, the removal of board members serves to ensure the proper management of an insurance company and to address threats to policyholders’ interests at an early stage.
Legal basis: DE: § 303 VAG
German Investment Ordinance (Anlageverordnung, AnlV)
Synonyms: Anlageverordnung, AnlV
The Investment Ordinance set quantitative investment rules for smaller German insurers outside the Solvency II regime, prior to the introduction of Solvency II.
Concept
Before the introduction of Solvency II, the German Investment Ordinance (Anlageverordnung, AnlV) contained the central quantitative rules for the investments of German insurers, including investment limits for individual asset classes and requirements on the mix and diversification of the tied assets.
Continued Application under Solvency II
Since the introduction of Solvency II, the Investment Ordinance applies only to smaller insurance companies not subject to the Solvency II regime (so-called Solvency II-exempt insurers), and additionally to the tied assets of certain pension institutions.
Significance
For insurers subject to the Solvency II regime, the Investment Ordinance has been replaced by the prudent person principle, which, unlike the AnlV, does not impose rigid quantitative investment limits but instead sets qualitative requirements for prudent investment risk management.
Legal basis: DE: Anlageverordnung (AnlV)
Notification Duties to the Supervisor
Synonyms: Anzeigepflichten gegenüber der Aufsichtsbehörde
Insurance companies must promptly notify the supervisory authority of certain business events and changes, such as changes in board membership or significant changes in shareholdings.
Concept
Notification duties to the supervisor require insurance companies to promptly inform the supervisory authority of certain business events and changes, enabling it to conduct ongoing, timely oversight of the company.
Notifiable Events
Typical notifiable matters include changes among management board and supervisory board members and key function holders, significant changes in shareholdings in the insurance company, the outsourcing of important functions, and material losses arising from the insurance business.
Significance
Notification duties are a central instrument of ongoing, preventive supervision, as they allow the supervisory authority to identify risks at an early stage and, where necessary, initiate supervisory measures before problems escalate into a threat to policyholders’ interests.
Legal basis: DE: §§ 47 ff. VAG
Small Mutual Insurance Association Exemption
Synonyms: Aufsichtsfreiheit kleinerer Versicherungsvereine
Smaller mutual insurance associations below certain premium and membership thresholds may be wholly or partly exempt from ongoing insurance supervision.
Concept
Smaller mutual insurance associations whose premium income and membership numbers do not exceed certain statutorily defined thresholds may, under § 210 VAG, be wholly or partly exempt from ongoing insurance supervision (“small associations”).
Background
This rule reflects the fact that small, regionally operating mutual insurance associations — such as traditional burial funds or agricultural fire insurance associations — pose significantly lower systemic risk than large insurance companies, meaning full supervision would be disproportionate to the effort involved.
Limits of the Exemption
Even exempt small associations remain subject to certain minimum requirements, such as for accounting and the use of recognized actuarial bases; once the relevant thresholds are exceeded, the exemption ceases to apply and the association becomes subject to full insurance supervision.
Legal basis: DE: § 210 VAG
Supervisory Board of an Insurance Company
Synonyms: Aufsichtsrat
The supervisory board oversees the management board of an insurance company and, under the VAG, must be composed of professionally qualified and fit and proper members.
Concept
The supervisory board of an insurance company is the body that continuously oversees the management board and is involved in major corporate decisions. For stock corporations, a supervisory board is legally required; for mutual insurance associations, the requirement generally follows from the VAG.
Professional Qualification and Fitness
Under § 24 VAG, members of an insurance company’s supervisory board must be fit and proper and possess the expertise needed to exercise their oversight function and to assess and monitor the company’s business (“fit and proper” requirements). The supervisory authority may review this professional qualification as part of the notification procedure.
Role in the Governance System
Alongside the management board and other key functions (risk management, compliance, internal audit, and the actuarial function), the supervisory board is a core building block of the effective system of governance required under Solvency II.
Legal basis: DE: § 24 VAG
Supervisory Orders
Synonyms: Aufsichtsrechtliche Auflagen
Supervisory orders are measures imposed by the supervisory authority requiring an insurance company to remedy identified deficiencies within a set period.
Concept
Supervisory orders are directives by which the supervisory authority, under § 298 VAG, requires an insurance company to remedy identified deficiencies in its business organization, risk management, or financial resources within a specified period.
Scope of Application
Orders are typically used when the supervisory authority identifies breaches of regulatory requirements during ongoing monitoring, such as inadequate risk management, deficient internal controls, or insufficient solvency capital, without a license withdrawal yet being necessary.
Graduated Measures
Orders sit within a graduated catalog of supervisory measures, between less intrusive steps such as reviews and hearings and more intensive interventions such as appointing a special commissioner or withdrawing the license to conduct business.
Legal basis: DE: § 298 VAG
BaFin (Federal Financial Supervisory Authority)
Synonyms: Bundesanstalt für Finanzdienstleistungsaufsicht
BaFin is Germany's supervisory authority for banks, insurers, and securities services providers, overseeing insurance undertakings at the federal level under the VAG.
Concept
The Federal Financial Supervisory Authority (BaFin) is Germany’s central supervisory authority for banks, insurance undertakings, pension funds, and securities services providers, and exercises insurance supervision over larger insurance undertakings operating nationally or internationally.
Organization and Jurisdiction
BaFin was established in 2002 through the merger of the federal supervisory offices for banking, insurance, and securities trading, and is subject to legal and technical oversight by the Federal Ministry of Finance; smaller, exclusively regionally operating insurers in Germany are in some cases supervised by state authorities instead.
Responsibilities in Insurance Supervision
BaFin’s core responsibilities in insurance supervision include licensing and ongoing monitoring of insurance undertakings, reviewing solvency under Solvency II, consumer protection, and combating money laundering and market abuse in the insurance sector.
Location of Risk Principle
Synonyms: Belegenheitsprinzip
The location of risk principle ties the permissibility and regulatory treatment of insurance business to the place where the insured risk is situated.
Concept
The location of risk principle is a fundamental principle of international insurance supervisory law, under which the applicable regulatory rules, and the question of which supervisory regime governs an insurance transaction, are determined by the place where the insured risk is located.
Relevance for Cross-Border Business
For internationally operating companies with assets and operations in multiple countries, the location of risk principle means that a single global insurance program must be supplemented by local policies to comply with the respective national regulatory requirements at the location of the risk.
Distinction from Freedom to Provide Services
Within the European Union, the location of risk principle is modified by the freedom to provide services, which generally allows insurers to insure risks in other EU member states without a local establishment, provided the corresponding notification procedures are observed.
Complaints Management (Beschwerdemanagement)
Synonyms: Beschwerdemanagement
Complaints management is the organizationally embedded, regulatorily governed process by which insurers must handle customer complaints.
Concept
Complaints management refers to the organizationally embedded process through which an insurer systematically records, processes, responds to, and analyzes complaints from policyholders and other claimants in order to improve its business processes.
Regulatory Requirements
Supervisory authorities such as BaFin and the European supervisory authority EIOPA require insurers to establish clear, easily accessible complaints procedures for customers, to document complaints received, and to designate a function within the company responsible for complaints management.
Relevance for Supervision and Product Governance
Supervisory authorities regularly use complaints data as an early indicator of systemic issues in product design, distribution, or claims handling; under Product Oversight and Governance (POG) requirements, insurers must also actively incorporate complaints analysis into the ongoing review of their products.
Portfolio Transfer (Bestandsübertragung)
Synonyms: Bestandsübertragung
A portfolio transfer is the regulatory-approval-requiring transfer of an insurance portfolio from one insurer to another while preserving policyholder rights.
Concept
A portfolio transfer is the transfer of an entire insurance portfolio, or a defined sub-portfolio, from one insurance undertaking to another, whereby the affected insurance contracts, together with all rights and obligations, automatically pass to the acquiring insurer.
Regulatory Approval
Under Section 13 of the German Insurance Supervision Act (VAG), a portfolio transfer requires prior approval by the competent supervisory authority, which examines in particular whether the interests of the affected policyholders are adequately safeguarded by the transfer, for example regarding the financial resources of the acquiring insurer.
Relevance for M&A Transactions
A portfolio transfer is a central instrument in mergers, acquisitions, and market consolidation in the insurance industry, particularly when an insurer wishes to exit a specific line of business or market and sell the relevant portfolio to a specialized acquirer (a run-off specialist).
Administrative Fine Provisions (Bussgeldvorschriften)
Synonyms: Bussgeldvorschriften
The administrative fine provisions of the VAG empower the supervisory authority to sanction breaches by insurance undertakings and their officers of regulatory duties with fines.
Concept
The administrative fine provisions of the German Insurance Supervision Act (VAG) empower the competent supervisory authority to sanction breaches by an insurance undertaking or its responsible officers of regulatory duties with a fine.
Typical Offenses
Typical fine-bearing offenses include commencing business operations without the required license, breaches of reporting, notification, and disclosure obligations toward the supervisory authority, and breaches of requirements regarding business organization and risk management.
Relevance for Governance
The possibility of substantial fines, which for serious breaches can also be tied to group-wide turnover, is a significant incentive for insurance undertakings to establish robust compliance structures and an effective internal control system in order to avoid regulatory breaches from the outset.
EIOPA (European Insurance and Occupational Pensions Authority)
Synonyms: European Insurance and Occupational Pensions Authority
EIOPA is the European supervisory authority that coordinates insurance supervision across the EU, develops technical standards, and promotes consistent application of Solvency II.
Concept
EIOPA (European Insurance and Occupational Pensions Authority) is the European supervisory authority for insurance and occupational pensions, established in 2011, which, as one of the three European supervisory authorities (alongside EBA for banking and ESMA for securities markets), contributes to the stability of the European financial system.
Responsibilities
EIOPA’s core responsibilities include developing technical regulatory and implementing standards to give concrete effect to EU legal acts such as Solvency II and the IDD, promoting consistent supervisory practice among the national supervisory authorities of the member states, conducting EU-wide stress tests for insurers, and monitoring risks to financial stability in the insurance sector.
Relationship to National Supervisory Authorities
EIOPA generally has no direct enforcement powers over individual insurance undertakings, instead acting primarily through coordinating and providing technical support to national supervisory authorities, such as Germany’s BaFin or France’s ACPR; in certain exceptional crisis situations, however, EIOPA can exercise more far-reaching intervention powers.
Scheme of Operations (Geschäftsplan)
Synonyms: Geschäftsplan, Business Plan
The scheme of operations is the description of planned business activity, organization, and financial resources an insurer must submit as part of its licensing application.
Concept
The scheme of operations (Geschäftsplan) is a central component of the application for a license to conduct insurance business, through which an insurance undertaking sets out its planned business activity, organization, reinsurance policy, and financial resources to the supervisory authority.
Content Under Section 9 VAG
Under Section 9 of the German Insurance Supervision Act (VAG), the scheme of operations must include, among other things, information on the types of insurance business to be conducted, the broad outlines of reinsurance policy, investment principles, own funds, and estimates of the costs of building up the administrative and distribution organization.
Relevance in the Licensing Process
Alongside proof of adequate own funds and the professional suitability of the executive directors, the scheme of operations is one of the key requirements for granting a license to conduct business, and it enables the supervisory authority to assess whether the planned business model is viable and the interests of future policyholders are adequately safeguarded.
Cross-Border Business
Synonyms: Freedom of Services
Cross-border business refers to the distribution of insurance products beyond an insurer's home state, based on the European freedom to provide services.
Concept
Cross-border business refers to the distribution of insurance products by an insurer in a state other than its home state, without requiring a separate license in the respective target state.
Legal Basis in the EU
Within the European Union, the freedom to provide services and freedom of establishment underpinning the EU single market allow insurers licensed in one EU member state to offer their business in other member states either under the freedom of services (without physical presence in the target state) or through a branch, based on the so-called “European passporting” regime.
Regulatory Responsibilities
For cross-border business, primary supervisory responsibility for the insurer’s solvency and business organization generally remains with the home state supervisory authority (home country principle), while the host state supervisory authority is responsible for compliance with local consumer protection and distribution rules, which in practice requires close cooperation between the supervisory authorities involved.
Group Supervision (Gruppenaufsicht)
Synonyms: Gruppenaufsicht
Group supervision extends solvency supervision under Solvency II from the individual insurance company to the entire insurance group.
Concept
Group supervision is a component of Solvency II supervision that extends the assessment of an insurance undertaking’s financial stability beyond the individual legal entity to the entire insurance group, in order to properly account for intra-group risks, interconnections, and capital flows.
Need for a Group-Wide Perspective
Because modern insurance groups frequently consist of numerous legally independent individual companies in different countries, closely linked by intra-group transactions, guarantees, or capital ties, supervision focused solely on the individual company (solo supervision) can overlook risks that only materialize at group level, for example through contagion effects between group companies.
Responsibility and Cooperation
Group supervision is typically coordinated by the supervisory authority at the location of the group’s parent company, acting as the group supervisor, which cooperates closely with the national supervisory authorities responsible for the individual subsidiaries through supervisory colleges, to ensure consistent and comprehensive supervision of the entire group across national borders.
IAIS (International Association of Insurance Supervisors)
Synonyms: International Association of Insurance Supervisors
The IAIS is the international standard-setting body for insurance supervisors, developing and coordinating global supervisory standards for the insurance industry.
Concept
The International Association of Insurance Supervisors (IAIS) is the worldwide standard-setting body for insurance supervision, with member supervisory authorities from more than 200 jurisdictions. It develops global principles, standards, and guidance intended to promote coherent and effective supervision of insurance undertakings worldwide.
Key Work Products
Among the IAIS’s most important work products are the Insurance Core Principles (ICPs), a comprehensive framework of fundamental supervisory principles, and the Insurance Capital Standard (ICS), a global risk-based capital standard developed specifically for Internationally Active Insurance Groups (IAIGs).
Relevance for National Supervisory Regimes
Although the IAIS standards themselves are not directly legally binding, numerous national and regional supervisory regimes – including Solvency II in the EU – are guided by the principles developed by the IAIS, giving the organization considerable influence over the global convergence of insurance supervisory standards.
ICS (Insurance Capital Standard)
Synonyms: Insurance Capital Standard
The Insurance Capital Standard (ICS) is a global, risk-based capital standard developed by the IAIS for internationally active insurance groups.
Concept
The Insurance Capital Standard (ICS) is a global, risk-based capital standard developed by the International Association of Insurance Supervisors (IAIS), intended to enable a consistent and comparable determination of own funds requirements for Internationally Active Insurance Groups (IAIGs) across different jurisdictions.
Structure and Methodology
The ICS calculates a capital requirement based on a market-consistent valuation of assets and liabilities together with a standardized risk factor methodology covering various risk categories (insurance, market, credit, and operational risk); alternatively, internal models may be used, provided they have been approved by the responsible group supervisor.
Relevance for Global Supervisory Convergence
Over the longer term, the ICS is intended to serve as a common reference standard for group supervision of internationally active insurance groups, thereby reducing regulatory fragmentation between different national capital regimes (e.g., Solvency II in the EU, Risk-Based Capital in the US); practical implementation is proceeding gradually through a multi-year monitoring and transition period.
Appointed Actuary (Verantwortlicher Aktuar)
Synonyms: Verantwortlicher Aktuar
The appointed actuary is a statutorily required function at German life and health insurers, responsible for ensuring compliance with actuarial principles in pricing and reserving.
Concept
The appointed actuary is a function required under § 141 of the German Insurance Supervision Act (VAG) for life and substitutive health insurers. This individual is responsible for ensuring that premium calculation and the computation of technical provisions comply with statutory requirements and recognized actuarial principles.
Duties
Key duties of the appointed actuary include verifying that the insurer’s ability to meet its contractual obligations is assured at all times, and preparing an annual actuarial report to the management board and — in the event of identified deficiencies — directly to the supervisory authority.
Relationship to the Actuarial Function
Under Solvency II, the actuarial function was introduced as one of the four key functions; in many companies, the appointed actuary under German law also performs this function, with the respective duties and requirements partially overlapping but not fully coinciding.
Legal basis: DE: § 141 VAG
Insurance Supervisory Authority
Synonyms: Aufsichtsbehörde, BaFin, FMA, Financial Market Authority
The insurance supervisory authority oversees insurance companies in the interest of policyholders through legal, financial, and qualitative supervisory tools.
Concept
The insurance supervisory authority is the state body that oversees insurance companies and pension funds in the interest of policyholders. In Germany, this task is carried out for most insurers by the Federal Financial Supervisory Authority (BaFin), in Austria by the Financial Market Authority (FMA), while significant insurance groups are additionally subject to the European supervisory authority EIOPA.
Addressees of Supervision
The primary addressees of insurance supervision are primary insurers and reinsurers, but also pension funds, insurance holding companies, and, under certain conditions, larger insurance intermediaries.
Supervisory Objectives and Tools
The central objective of insurance supervision is to safeguard the interests of policyholders and ensure insurers’ ongoing ability to meet their contractual obligations. To achieve these objectives, the supervisory authority has various tools available, including ongoing solvency monitoring, on-site inspections, the power to order remedial measures for breaches, and, in extreme cases, the withdrawal of the license to conduct business.
Legal basis: DE: §§ 294 ff. VAG