2. Supervisory Review Process

See art. 29, para. 1 of Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of insurance and reinsurance (Solvency II), OJEU, 17 Dec. 2009, no. L 335, 1–155 (hereafter, Solvency II Directive).

Any mention of insurance undertakings in this chapter includes reinsurance undertakings.

See the Government’s Draft of a Tenth Act Amending the VAG [German Insurance Supervision Act], 15 Feb. 2012, BT-Drucks. [Document of the German Bundestag] 17/9342, also found at BR-Drucks. [Document of the German Bundesrat] 90/12, cited as VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] in this chapter.

The particulars of the group supervisory review process under arts. 218, para. 4 and 247 ff. of the Solvency II Directive are outside the scope of the matters addressed in this chapter.

See in detail Dreher, “Solvenzanforderungen in der Versicherungsaufsicht nach Solvency II und künftigem VAG” [in English: Solvency Requirements in Insurance Supervision under Solvency II and the Future German Insurance Supervision Act], ZVersWiss (2012), 381 (388 f.; 410 ff.) (Chap. 4, below, at 4.​2.​4 and 4.​4.​2).

The European law principle of proportionality applies automatically to the VAG RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] pursuant to interpretation in conformity with the Directive, even if the VAG RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] is not expected to expressly adopt the Directive.

On whether this manner of assessment is accompanied by restrictions on judicial review, see 2.5.1.3, below and Dreher, n. 6 above, at 422.

See on this point, BaFin [Federal Financial Supervisory Authority], Präambel Aufsichtsrichtlinie [in English: Preamble to Supervisory Directive], in the version of 21 Feb. 2008.

See esp. arts. 92 ff., Proposal for a Directive of the European Parliament and of the Council on the access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms and amending Directive 2002/87/EC of the European Parliament and of the Council on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate, COM (2011) 453 final, also found at BR-Drucks. [Document of German Bundesrat] 424/11.

Protection of insureds and insurance beneficiaries is the primary objective of Solvency II. At a secondary level, the objectives are fair and stable markets and financial stability. On this subject see Recital 16 of the Solvency II Directive; on the objectives of insurance supervision, see also, Dreher/Häußler, “Die Aufsicht über Versicherungsunternehmen durch die BaFin und die Überwachungsaufgabe des Aufsichtsrats” [in English: Supervision of Insurance Undertakings by BaFin [Federal Financial Supervisory Authority] and the Monitoring Task of the Supervisory Board], ZGR (2011), 471, (485); Wandt/Sehrbrock, “Regelungsziele der Solvency II-Rahmenrichtlinie” [in English: Regulatory Objectives of the Solvency II Framework Directive], ZVersWiss (2011), 193 (195 ff.); Dreher, n. 6 above, at 384; all with further references.

See Issues Paper, no. 1.3. On the examination criteria, see 2.4.1, below.

See in detail Dreher/Ballmaier, “Die unternehmenseigene Risiko- und Solvabilitätsbeurteilung (ORSA) nach Solvency II und VAG 2012” [in English: Risk and Solvency Evaluation by Undertakings under Solvency II and the German Insurance Supervision Act 2012], VersR (2012), 129 ff (Chap. 5, below).

At least this is so when these risks are viewed as part of the operational risks as set forth in art. 44, para. 2, subpara. 2 (e) of the Solvency II Directive, as suggested by the definition of operational risk in art. 13, no. 33 of the Solvency II Directive: “risk of loss arising[…]from external events”.

See the wording of this provision (“in particular”).

Besides the listing of provisions addressed, it is proper, for example, to review insurance undertakings as to whether they are complying with the sector demarcation rule under art. 73 of the Solvency II Directive. Overall, however, the regulatory scheme set forth in art. 36, para. 2 of the Solvency II Directive covers the important supervisory areas. The subject-matter scope of a detailed supervisory review process, however, rests in the hands of the supervisory authorities, within the general limits set for the process.

Bericht an die Aufsicht [in English: Report to Supervisors] under Art. 35 the Solvency II Directive and sec. 43 VAG RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act]; see Dreher, “Die Veröffentlichungspflichten von Versicherungsunternehmen gegenüber der BaFin” [in English: Insurance Undertakings’ Duty of Disclosure to the BaFin [Federal Financial Supervisory Authority]], ZVersWiss (2009), 187 ff (Chap. 12, below).

Bericht über die Solvabilität und Finanzlage [Solvency and Financial Condition Report] under art. 51 the Solvency II Directive and sec. 50 VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act]; see Dreher/Schaaf, “Die Veröffentlichungspflichten gegenüber der Allgemeinheit nach Solvency II” [in English: Duty of Disclosure to the Public under Solvency II], in: Dreher/Wandt, eds., Solvency II in der Rechtsanwendung [in English: Solvency II in Legal Application] (2009),129 ff (Chap. 13, below).

See arts. 35, para. 2 (c) and 72, para. 1 of the Solvency II Directive.

See Issues Paper, no. 4.35. ff.

To the same effect, Issues Paper, no. 4.4.

But see particularly as to group supervision sec. 257, para. 2, sent. 5 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

RegE [Government’s Draft] at n. 4, statement of grounds for sec. 289, p. 322; see on this point 2.5.1.2, below.

On the incompatibility of supervision according to the principles of abusiveness with Solvency II, see in the present context 2.5.1 und 2.5.2, below, and generally in detail Dreher/Lange, “Die Vollharmonisierung der Versicherungsaufsicht durch Solvency II” [in English: Full Harmonization of Insurance Supervision through Solvency II], VersR (2011), 825 ff. (Chap. 1, above); Bürkle, “Die Zukunft der materiellen Missstandsaufsicht in Deutschland” [in English: The Future of Substantive Supervision According to the Principles of Abusiveness in Germany], VersR (2011), 1469 ff.; Bürkle/Grote, “Die aufsichtsbehördlichen Eingriffsbefugnisse nach Solvency II” [in English: Supervisory Intervention Powers under Solvency II], in: Dreher/Wandt, n. 22 above, at 191 ff., 225 ff.; Kaulbach, “Die laufende Rechts- und Finanzaufsicht nach § 81 VAG – Grundlegung” [in English: Ongoing Legal and Fiscal Supervision pursuant to § 81 VAG – Basics] in: Bähr, ed., Handbuch des Versicherungsaufsichtsrechts [in English: Manual of Insurance Supervision Law] (2011) sec 8, ref. 46, at the end.

The table of corresponding sections at the end of the statement of grounds of the government’s draft, however, indicates that sec. 289, para. 2 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] implements art. 36, para. 3 of the Solvency II Directive. A recitation of the required tools is not set forth there, however. But see also, RegE [Government’s Draft], n. 4 above, at 322.

BT-Drucks. [Document of the German Bundestag] 17/9342, at 7; also BR-Drucks. [Document of the German Bundesrat] 90/12.

BT-Drucks. [Document of the German Bundestag] 17/9342, 7.

See Issues Paper, no. 4.9 ff.

Report to Supervisors, see n. 21, above.

Solvency and Financial Condition Report, see n. 22 above.

See Issues Paper, no. 4.12.

See Issues Paper, no. 4.22. CEIOPS emphasized that supervisory authorities should consider the following principles in selecting measures: Every policyholder should be afforded the same level of protection; the proportionality principle must be followed; the supervisory review process should be preventive and future-looking; supervisory authorities must be able to react quickly with appropriate measures. See Issues Paper, no. 4.25.

See Issues Paper, no. 4.27.

See Issues Paper, no. 4.29 f. Some possibilities are information gathering at the site of the undertaking or requiring information from third parties. See art. 34, para. 5 and art 35, para. 2 (c) of the Solvency II Directive and also sec. 300, para. 1 and sec. 299 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

See Gabler Verlag, ed., Gabler Wirtschaftslexikon [in English: Gabler’s Dictionary of Business and Economics], Stichwort: Prozess [Entry: Process]; online on the Internet: http://​wirtschaftslexik​on.​gabler.​de/​Archiv/​12416/​prozess-v10.​html.

See for the relevant risks of supervisory review of ORSA, Dreher/Ballmaier, n. 17 above, at 135 ff., 143 and generally, Dreher, n. 6 above, at 411 f.

On this point see in detail 2.5.1.2, below.

CEIOPS has emphasized this risk in Issues Paper, no. 3.6.

But compare art. 36, para. 5 of the Solvency II Directive with the paired terms “weaknesses and deficiencies” and in detail on this point 2.5.1, below.

But see the phrase “restriction or distortion” in art. 101, para. 1 AEUV [Treaty on the Functioning of the European Union].

See art. 29, para. 1 of the Solvency II Directive, according to which supervision is based on a prospective approach.

No. 3.70 CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Supervisory Reporting and Public Disclosure Requirements, 2009.

The Solvency II Directive provides for a risk management system with a risk management function as an imperative component of corporate governance, to which is added a compliance system with a compliance function. Also required is an internal review function. And under art. 48 of the Solvency II Directive and sec. 31 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] an actuarial function is to be embedded in insurance undertakings. Under art. 42 of the Solvency II Directive and sec. 25 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] persons with key functions must be “fit” and “proper.” On this point see in detail Dreher, “Begriff und Inhaber der Schlüsselfunktionen nach Solvency II und VAG 2012” [in English: Concept and Holders of Key Functions under Solvency II and the German Insurance Supervision Act 2012], VersR (2012), 933 ff. (Chap. 7, below); id., “Die aufsichtsbehördliche Kontrolle der Inhaber von Schlüsselfunktionen nach Solvency II und künftigen VAG” [in English: Review by Supervisory Authorities of the Holders of Key Functions under Solvency II and the Future German Insurance Supervision Act], VersR (2012), 1061 ff (Chap. 8, below). With regard to the requirements for corporate governance from the European and national point of view, see for an overview, e.g., Lüttringhaus, “Neue Governance- und Aufsichtsregeln für die europäische Versicherungswirtschaft nach Solvency II” [in English: New Governance and Supervisory Rules for the European Insurance Industry under Solvency II], EuZW (2011), 856 ff.; Grote/Schaaf, “Zum Referentenentwurf der 10. VAG-Novelle zur Umsetzung der Solvency II Richtlinie in deutsches Recht – eine erste Analyse” [in English: On the Consultants’ Draft of the Tenth German Insurance Supervision Act for the Implementation of the Solvency II Directive in German Law – A First Analysis], VersR (2012), 17 (19 ff.).

CEIOPS, Draft Proposal for Level 3 Guidelines on the System of Governance, 2011; see also: CEIOPS, Consultation Paper EIOPA-CP-14/017, of 2 June 2014.

See on this point n. 13, above.

See art. 41, para. 1, subpara. 2 of the Solvency II Directive (“an effective system for ensuring the transmission of information” and sec. 24, para. 1, sent. 2, at the end, of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act]).

On this point see 2.5.1.2, below.

Issues Paper, no. 5.27 ff.

See, e.g., Issues Paper, no. 5.27.

Art. 76, para. 4 of the Solvency II Directive and sec. 70, para. 2, sent. 2 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

More detailed provisions on data quality are set forth in art. 82 and art. 83 of the Solvency II Directive and secs. 77 f. of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Art. 77, para. 2, subpara. 2 of the Solvency II Directive and sec. 72, para. 2 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Art. 77, para. 2, subpara. 2 of the Solvency II Directive and sec. 72, para. 2 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

See art. 78 of the Solvency II Directive and sec. 74 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] for these three requirements.

See art. 79 of the Solvency II Directive and sec. 75 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] for the latter two factors.

Art. 81 of the Solvency II Directive and sec. 76 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Expected to be concretized in arts. 12 TP [Technical Provision] 1 through 50 quater of the DVO.

See especially Art. 19 TP [Technical Provision] 6 ff. and 38 IR [Implementing Regulation] 2 ff. of the DVO, which set forth the requirements for the assumptions meant to undergird the technical provisions and for the calculation of the risk-free interest rate structure.

See, e.g., art. 19 TP [Technical Provision] 6, para. 4 of the DVO, under which the projected future business activities must be consistent. See n. 42 above, on the principle of supervisory freedom of insurance undertakings’ management.

See on this point n. 21 f., above.

And also of the RTS, via art. 294, SRS1, para. 1 (a) of the DVO.

Art. 283, PDS2, para. 2 of the DVO.

Art. 284, PDS3, para. 1 (g) of the DVO.

Art. 296, SRS3 of the DVO.

Art. 300, SRS7 of the DVO.

Art. 45, para. 5 of the Solvency II Directive and sec. 28, para. 1, sent. 1 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Issues Paper, no. 4.38.

In Issues Paper, no. 4.39, CEIOPS identifies among other early warning indicators: rapid growth, declining profitability, sudden increase (also, dramatic decrease) in technical provisions, and high expenses coupled with low profitability.

See Issues Paper, no. 4.40, which lists among other indicators: change in strategy, failure to implement supervisory requirements, non-cooperation with the supervisor, and vulnerability to legal or fiscal changes.

The ALM consists of “all strategical and tactical partial procedures of insurance undertakings that promote the objective of controlling the interaction between assets and liabilities in order to eliminate the time lag (“mismatch”). See “DIIR-Arbeitskreis ‘Interne Revision in der Versicherungswirtschaft’” [in English: German Institute for Internal Revision Working Group ‘Internal Review in the Insurance Industry’], ZIR (2009), 270 for this definition and on a possible practical implementation by insurance undertakings; see further on the ALM, Dreher, n. 6 at 4.1.1.3.

Art. 132, para. 4, subpara. 2 of the Solvency II Directive together with sec. 115, para. 1, no. 5, clause 1 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Art. 132, para. 4, subpara. 4 of the Solvency II Directive together with sec. 115, para. 1, nos. 7 and 8 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

See 2.4.2.2, above.

See 2.4.2.2, above.

See 2.4.1.1, above.

All criteria are defined in art. 93, para. 1 (main criteria) and para. 2 (additional criteria) of the Solvency II Directive and sec. 82 VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].

Under art. 88 of the Solvency II Directive and sec. 80, para. 3 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act], these include “the excess of assets over liabilities” (excluding own shares) and subordinated liabilities.

Art. 89, para. 1, subpara. 1 of the Solvency II Directive and sec. 80, paras. 4 and 5 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act]: The ancillary own funds items consist of items not counted toward basic own funds which can be called up on demand to absorb losses. Under art. 90 of the Solvency II Directive and sec. 81 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act] they are subject to approval. See in detail, arts. 51 AOF [Ancillary Own Funds]1 through 57 AOF7 of the DVO.

See 2.4.2.2, above.

See Recital 28 of the Solvency II Directive.

See on this point 2.3.2.2, above and 2.5.1.2, below.

On the frequent use of this “method” in European law, see 2.4.1.3, above.

See in detail 2.5.1.2 and 2.5.2. The questionable legal and administrative provisions under art 34, para. 1 of the Solvency II Directive are those rules designed to implement the objectives of insurance supervision. When such is the case, they should be construed by objective interpretation. For the criteria of such interpretation, applicable also in the present circumstances, see Dreher, Die Konkretisierung der Missstandsaufsicht nach § 81 VAG [in English: Concretizing Supervision According to the Principles of Abusiveness under sec. 81 of the German Insurance Supervision Act] (1997), 24 ff.; Art. 29, para. 1 of the Solvency II Directive, in reference to supervision of insurance undertakings by supervisory authorities, stipulates “continuous verification of the proper operation” of insurance undertakings and review of “compliance with supervisory provisions” by insurance undertakings. By this language, it narrows the scope of art. 34, para. 1 of the Solvency II Directive to rules which serve the purpose of supervision over insurance undertakings. For a different view, see Bürkle, n. 16 above, ref. 54 f., interpreting art. 34, para. 1 of the Solvency II Directive so that the “activities of supervisory authorities are in service only of compliance with the revamped European insurance supervisory regime.” But the very language of art. 34, para. 1 of the Solvency II Directive contradicts this, because in contrast to art. 36, para. 1 of the Solvency II Directive, it does not mention this restriction. Further, on the implementation of the Solvency II Directive rules addressing compliance with legal requirements, see also Bürkle, “Berliner Sprachverwirrung im RegE des 10. VAG-Änderungsgesetzes” [in English: The Berlin Tower of Babel in the Government’s Draft of the Tenth German Insurance Supervision Act], VersR (2012), 829 f.

See 2.4.2.2, above; Bürkle, n. 28 above, 1476 f.; BVerwG [“Federal Administrative Court”], VersR (1981), 222 (223) on identical sec. 8, para. 1, sent. 1, no. 3, VAG [German Insurance Supervision Act] in the current version; and addressing same, Rittner, “Die Versicherungsaufsicht nach dem D.A.S.-Urteil des Bundesverwaltungsgerichts” [in English: Insurance Supervision Following the D. A. S. Judgment of the Federal Administrative Court], VersR (1982), 205 ff. and Dreher, Die Versicherung als Rechtsprodukt [in English: Insurance as a Legal Product] (1991), 215 ff.

See the references at n. 28, above.

Somewhat contradictory, however, is no. 4.45. of the Issues Paper: “Where necessary, the supervisor may require undertakings to remedy weaknesses or deficiencies identified in the SRP.” This may also be the case if the capital requirements have been met. Presumably this refers to a situation where the insurance undertaking has met the regulatory capital requirements but other breaches of legal requirements are found. On this point see also 2.5.3, below.

Beginning with ECJ, 13 Jul. 1966, case nos. 56/64 and 48/64, E.C.R. 1966, 321, 396 (Consten und Grundig).

See most recently ECJ., 8 Dec. 2011, case no. C-389/08 P, also, WuW (2012), 281 (KME). See also ECJ., 25 Oct. 1977, 26/76, E.C.R. 1977, 1875 (Metro/SABA).

See, e.g., EGC, 19 Nov. 2008, case no. T-187/06, E.C.R. 2008, II-3151 (Schräder/CPVO [SUMCOL1]), headnote 1.

EGC, n. 116 above, at headnote 1 and ref. 59 f.

BVerwGE [Federal Administrative Court Decisions] 92, 340 (348).

BVerwGE [Federal Administrative Court Decisions] 72, 300 (316 ff) (Wyhl).

BVerwG [in English: Federal Administrative Court] NVwZ (1999), 1232 (1233).

BVerwGE [Federal Administrative Court Decisions] 131, 41.

BVerwGE [Federal Administrative Court Decisions] 130, 299.

This applies in the case of the capital add-on under art. 37 of the Solvency II Directive or for the requirement of a (partial) internal model under art. 119 of the Solvency II Directive, in the event that the standard model is not adequate for the risk status of the insurance undertaking. It does not apply, however, to the rules concerning powers to investigate a situation such as the basis to intervene for an on-site review, mentioned in art. 34, para. 5 of the Solvency II Directive, or to obtain information from third parties pursuant to art. 35, para. 2 of the Solvency II Directive. Nor does it apply to the powers of the regulatory authorities under art. 62 of the Solvency II Directive regarding natural or legal persons, who have taken a decision to acquire a qualifying holding and hence could have a negative influence on the “prudent management” of an insurance undertaking.

Issues Paper, no. 4.45.

Issues Paper no. 4.45: “Where necessary, the supervisor may require undertakings to remedy weaknesses or deficiencies identified in the SRP”.

Issues Paper, no. 4.45. This power is conferred by art. 35 para. 2 (c) of the Solvency II Directive.

Compare to the prohibition on optimization above, at 2.5.1.2.

See 2.5.1.3, above.

Recital 27 and art. 37, para. 1, sent. 1 of the Solvency II Directive and sec. 295, para. 1 of the VAG-RegE [Government’s Draft of a Tenth Act Amending the German Insurance Supervision Act].