Johannes Gutenberg University, Mainz, Germany
6.2 General Requirements of Company Law Applicable to the Qualification of Supervisory Board Members
6.3 The Insurance Supervisory Regime Requirements for the Qualification of Supervisory Board Members
6.4 Individual Expertise of the Supervisory Board Members and the Overall Qualification of the Supervisory Board
This chapter deals with the fitness of members of supervisory boards. Since 2009, German insurance regulatory law has provided internal qualification standards for the supervisory board members of insurance companies. In accordance with Paragraph 7a, sec. 4, clause 1 of the VAG [German Insurance Supervision Act], the members of supervisory boards must be able to fulfill their tasks and supervisory functions in accordance with their level of expertise. This new requirement comports with the previous standards of German corporate law, established by the BGH [German Federal Court of Justice] in its “Hertie”-ruling. As such, this ruling will also serve as a basis to interpret the expertise requirements in German insurance regulatory law. Consequently, each supervisory board member must have a certain minimum level of general competencies, so that specialized expertise and advance knowledge are maintained on the board. Even if the supervisory board members are not “persons with key functions” within the meaning of the framework directive of Solvency II, nevertheless, on its own, the pending transformation of existing guidelines into national law will indirectly affect the qualification requirements of supervisory board members in the insurance industry.
First published as “Die Qualifikation der Aufsichtsratsmitglieder von Versicherungsunternehmen nach VAG und Solvency II” [in English: The Qualification of Supervisory Board Members of Insurance Undertakings under the VAG [German Insurance Supervision Act] and Solvency II], ZVersWiss (2011), 211 ff. with Martin Lange as coauthor. Martin Lange was at that time a research assistant at the law school of Johannes Gutenberg University in Mainz.
The Gesetz zur Stärkung der Finanzmarkt- und der Versicherungsaufsicht [German Act To Strengthen the Financial Market and Insurance Supervision] of 29 July 20091 intensified supervision over members of the supervisory bodies of direct insurance and reinsurance undertakings, pension funds, insurance and financial holding companies, and insurance special purpose vehicles.2 Newly crafted sec. 7a, para. 4, sent. 1 of the VAG [German Insurance Supervision Act], which sec. 121a, para. 1, sent. 1 and sec. 121g, para. 2, sent. 1 of the VAG [German Insurance Supervision Act] make applicable also to reinsurance undertakings and insurance special purpose vehicles, prescribes that the supervisory board members must “be reliable and must possess the expertise required for performance of the monitoring function as well as for the assessment and monitoring of the business engaged in by the undertaking”. Thus, the supervisory requirements applicable to supervisory board members have become more closely aligned with similar requirements for managers of insurance undertakings. Under the VAG [German Insurance Supervision Act], managers of insurance undertakings have long been subject to extensive fit-and-proper criteria established by European law.3 In the area of supervision over members of the supervisory and monitoring bodies, absent specific autonomous European law requirements, the fit-and-proper criterion is in any case initially amenable to an interpretation that considers nationally developed principles of trade and supervisory law. By contrast, widespread uncertainty exists up to this point concerning the quality and scope of the expertise requirements.
Thus, the requirements arising from the criterion of expertise that apply to the supervisory board members of the supervised undertakings are treated in the following discussion. This discussion will begin with the general rules of company law that apply to the qualification of supervisory board members (6.2, below). Next, this article will take a closer look at the specific insurance supervisory regime requirements of sec. 7a, para. 4 of the VAG [German Insurance Supervision Act] and amendments made in the course of implementing Solvency II in the context of the criterion of expertise (6.3, below). Finally, these requirements will be considered with respect to the qualification of each individual supervisory board member. The assessment of the qualification requirements will include the overall qualification of the supervisory board (6.4, below).
6.2 General Requirements of Company Law Applicable to the Qualification of Supervisory Board Members
6.2.1 The Federal Court of Justice-Ruling in Hertie
In the case of insurance corporations, sec. 100 of the AktG [German Stock Corporation Act]4 provides certain minimum requirements that supervisory board members must meet. The Act, however, explicitly addresses only personal prerequisites, such as, for example, being a natural person, the full legal capacity of the supervisory board member, as well as incompatibility with other interlocking functions.5 Under sec. 100, para. 4 of the AktG [German Stock Corporation Act], more extensive requirements can be set forth in the articles and by-laws. Furthermore, in 1982 the BGH [German Federal Court of Justice] decided the Hertie case,6 which addressed the qualifications for supervisory board members of a limited-liability company subject to qualified employee participation. The court in its opinion derived further statutory minimum qualifications for supervisory board members from the precept that exercise of the office must be personal and self-dependent. The BGH [German Federal Court of Justice] requires in this respect that, at a minimum, each member “must possess or acquire the minimum knowledge and abilities” required “to be able without outside assistance to understand and properly assess all matters arising in the normal course of business”.7 In its ruling, the court did not put emphasis on the special knowledge belonging to a specific sector or field. Nor did it focus on business experience. Rather, the Court simply set forth the minimum requirements sufficient to enable an individual supervisory board member to understand the ordinary processes of a business operation and to evaluate these processes to a degree sufficient for effective supervision.
With slight individual nuances, this ruling of the BGH [German Federal Court of Justice] has received near-universal approval by commentators.8 And there is general agreement on the concrete criteria relating to undertakings pursuant to which a structural distinction is to be effected and the determination of the minimum requirements for supervisory board members under company law is to be made. This view holds the determinative factors for the requisite minimum qualification to be the type and size of the given undertaking, the nature and purpose of the undertaking, the actual volume of business, and the company structure. Assessment of this last factor includes the issue whether the supervised undertaking belongs to a group.9
For the insurance realm this means that under company law requirements themselves as concretized by the BGH [German Federal Court of Justice] in Hertie, members of the supervisory board must have a basic command of the insurance business, must be conversant with the basic structures of the business model of the given undertaking, and must be able to sufficiently evaluate the ordinary business processes without making use of outside assistance. These minimum requirements under company law apply in principle irrespective of an undertaking’s legal form. While Hertie applied to the supervisory board of a co-managed limited liability company, the minimum qualification for supervisory board members nevertheless was derived from the precept that exercise of the office must be personal and self-dependent. Irrespective of any given legal form, this precept obtains as a principle in carrying out the functions of seats on the supervisory and monitoring bodies. Thus it follows that monitoring body members of mutual insurance associations and public insurance undertakings are likewise included within the minimum qualification requirement, as, for example, supervisory board members of the larger insurance corporations are.10
6.2.2 The German Corporate Governance Code
For exchange-listed companies the company law requirements clarified in the Federal Court of Justice-ruling in Hertie, are supplemented by the requirements and principles of the German Corporate Governance Code (DCGK).11 This code, of course, presents only an unofficial legal scheme but with its reference to sec. 161 of the AktG [German Stock Corporation Act] can nevertheless claim a certain binding force, even if there exists no enforcement mechanism under company law.12 Provision 5.4.1 of the DCGK [German Corporate Governance Code] prescribes that the supervisory board shall be so constituted that “its members as a whole possess the knowledge, abilities, and practical experience required for the proper performance of their tasks”. This guiding principle, viz., in the selection of supervisory board members to be attuned to the minimum knowledge and abilities adequate to the scope of business, is simply a confirmation of the minimum qualification requirements already existing and mandatory under company law.13 Consequently, this provision does not give rise to any further requirements for the individual qualification of supervisory and monitoring body members.14
6.3 The Insurance Supervisory Regime Requirements for the Qualification of Supervisory Board Members
6.3.1 The Statutory Rules on the Expertise Requirement
188.8.131.52 The Substantive Law Requirements of Sec. 7a, Para. 4 of the VAG [German Insurance Supervision Act]
The original legislative intent respecting the VAG [German Insurance Supervision Act] was to codify the requirement of “fitness” for supervisory board members of supervised undertakings and in so doing to go a long way toward bringing the qualification requirements for supervisory board members in line with those of management monitoring.15 In the final version, however, sec. 7a, para. 4, sent. 1 of the VAG [German Insurance Supervision Act] only uses r the term “expertise”.16 The required expertise is deemed present according to the stated intent of the legislator if the members of the supervisory and monitoring bodies of the supervised undertakings are able to “understand the business conducted, assess the attendant risks for the undertaking, and if necessary implement management changes.17 Accordingly, expertise requires at all times “that the individual concerned in case of doubt must demonstrate that he or she possesses the aptitude to understand the economic and legal processes of ongoing events”.18
The expertise requirement in sec. 7a, para. 4, sent. 1 of the VAG [German Insurance Supervision Act] thus corresponds to the company law requirements developed and clarified in the Federal court of Justice-ruling in Hertie.19 The legal requirement of expertise is to be conceived as the codification under supervisory law of the Hertie principles, especially since the legislator in sec. 7a, para. 4, sent. 2 of the VAG [German Insurance Supervision Act] expressly interpreted as applicable a structural distinction according to type and scope of the business conducted as well as to the size of the supervised undertaking also in the area of the supervisory law expertise requirement.20 The codification under supervisory law of the minimum requirements for qualification for members of the monitoring and supervisory bodies of supervised undertakings undergoes a clarification in content only to the extent that the type of business conducted, to which business the knowledge and skills of the supervisory board members must pertain, arises from the insurance-related nature and purpose of the undertaking, that the insurance supervisory regime expertise requirement is in principle connected to knowledge of the given insurance business. An additional factor is the insurance-related predetermination of minimum qualification under supervision law. Thus, it may be derived from sec. 317, para. 4 of the HGB [German Commercial Code] in conjunction with sec. 91, para. 2 of the AktG [German Stock Corporation Act] that all supervisory board members must possess knowledge and skills in the area of risk management. Sec. 64a of the VAG [German Insurance Supervision Act], however, yields far more detailed and extensive requirements relating to risk management for the insurance industry. As a result, all members of an insurance undertaking’s supervisory board must possess a basic understanding of these rules. At the least, within the meaning of qualification as a whole,21 individual members must possess particular knowledge and skills with respect to risk management, such that they may be capable of adequately monitoring the managing board’s compliance with statutory requirements.22
On the other hand, “diversity” of supervisory board members is not a subject of supervision law even under the amended version of sec. 7a, para. 4 of the VAG [German Insurance Supervision Act]. Yet it is true that Provision 5.4.1 of the DCGK [German Corporate Governance Code] prescribes that exchange-listed insurance undertakings in constituting their supervisory boards shall have regard for “variety (diversity)”, for example, by appointment of women and foreign nationals to the board.23 But no such corresponding statutory obligation can be derived from sec. 7a, para. 4 of the VAG [German Insurance Supervision Act]. In particular, the requirement of diversity is not comprehended within the term “expertise” and thus also is not an element of supervisory board member suitability.
184.108.40.206 Intervention Powers
The actual innovation of the codification under supervisory law of the expertise requirement, already required by company law, is thus that meeting the minimum requirements for the qualification of supervisory board members is no longer a matter limited to organizational and liability issues under company law. Rather, infringements of the qualification requirement will support application of the supervisory tools of the VAG [German Insurance Supervision Act]. Since the conventional supervisory powers under the VAG [German Insurance Supervision Act] allowed enforcement of general corporate and company law under an interpretation of intervention powers in conformance with European and constitutional law only within narrow limits,24 the legislator by enacting the Gesetz zur Stärkung der Finanzmarkt- und der Versicherungsaufsicht [Act To Strengthen the Financial Market and Insurance Supervision] expanded the supervisory set of tools and thus brought them into accord with the new requirements of sec. 7a, para. 4 of the VAG [German Insurance Supervision Act].25
Consequently from now on, with reference to the expertise requirement of sec. 7a, para. 4, sent. 1 of the VAG [German Insurance Supervision Act], under sec. 87, para. 8, sent. 1, and sec. 121c, para. 6, sent. 1 of the VAG [German Insurance Supervision Act],26 the supervisory authority has the power to issue a demand to the competent bodies of the supervised undertakings seeking recall of a member of the supervisory board or to prohibit such individual from the exercise of his or her office, if the requisite expertise is demonstrably not present. To the extent the want of expertise is reflected in a breach of the duty of care in respect to exercise of office leading to the results specified in sec. 87, para. 8, sent. 2 and sec. 121c, para. 6, sent. 2 of the VAG [German Insurance Supervision Act] and thus displays its actual concrete effect, these provisions supply the supervisory authority with an additional power to recall and to demand cessation of the exercise of office. Under sec. 1b, para. 6 of the VAG [German Insurance Supervision Act] in conjunction with sec. 1b, para. 4, no. 3 of the VAG [German Insurance Supervision Act], there is further a direct empowerment to prohibit performance with respect to individual supervisory board members if the expertise requirement is not met. This power is not coordinated with the rest of the rules. Such an original power to prohibit performance, however, would have been required in sec. 87, para. 8 and sec. 121c, para. 6 of the VAG [German Insurance Supervision Act] to avoid conflicts with company law provisions, since a tool of pure performance prohibition does not exist in corporate and company law. A demand for such by the supervisory authority upon the competent bodies of the relevant undertaking would be to demand an impossible act.27
If the body of the supervised undertaking responsible for the recall under sec. 103 of the AktG [German Stock Corporation Act]28 does not comply with the recall demand, the supervisory authority also can file for a recall in court, under sec. 87, para. 8, sent. 3 and sec. 121c, para. 6, sent. 3 of the VAG [German Insurance Supervision Act], to the extent the supervisory board has authority under sec. 103, para. 3, sent. 1 of the AktG [German Stock Corporation Act] to pursue a judicial procedure for recall.29 Likewise, the appointment of a special representative under sec 83a, para. 1, no. 4 in conjunction with sec. 7a, para. 4 of the VAG [German Insurance Supervision Act] may be considered. As a last resort, the supervisory authority can eventually revoke the supervised undertaking’s license to operate if supervisory board members do not satisfy the expertise requirement. The authority for such action lies in sec. 87, para. 1, no. 1 of the VAG [German Insurance Supervision Act] in conjunction with sec. 8, para. 1, no. 5 of the VAG [German Insurance Supervision Act] and in sec. 121c, para. 2, no. 1 of the VAG [German Insurance Supervision Act] in conjunction with sec. 121, para. 1, no. 4 of the VAG [German Insurance Supervision Act].
6.3.2 The BaFin [Federal Financial Supervisory Authority] Bulletin of 22 February 2010
220.127.116.11 The BaFin [Federal Financial Supervisory Authority] Interpretation of the Expertise Requirement
In a non-legally binding bulletin dated 22 February 2010,30 the German federal authority supervising financial services clarified the expertise requirement. In particular, it named groups of individuals whom the supervisory authority would presume to possess the required expertise. To this extent, the bulletin supplies some information on the understanding of the supervisory authority as to the relevant provisions of the VAG [German Insurance Supervision Act] and may function in effect as a form of administrative self-limitation.31 Thus, the BaFin [Federal Financial Supervisory Authority] explicitly considers company law requirements in refining the parameters of the expertise requirement. Then it applies the principles of company law to the expertise requirement under supervisory law, in particular using the Federal court of Justice-ruling in Hertie. One field of this application, for example, lies in structural distinctions based on the type of insurance business conducted and the size of the supervised undertaking.32 In this process, the supervisory authority exhibits a tendency to set a very low bar for the supervisory expertise requirement, for example, if it assumes that the mere exercise of political office, such as chief administrative official of a regional administrative body,33 generally occupations in the public administration, or even an occupation as a farmer or forester required to keep accounts—as if the generality of insurance undertakings would operate in the sector of hail and storm insurance for agriculture and forestry—would routinely be a sufficient basis for the expertise required in a supervisory and monitoring body.
18.104.22.168 Special Attention to the Existence of Minimum Qualification upon Assuming Office
The expertise requirement under company law and supervisory law applies in equal measure to all supervisory board members, particularly for labor representatives.34 Occupation of a seat on the supervisory board absent the relevant expertise constitutes in any case fault upon assuming office35 and forms the basis for liability of the supervisory board member for resultant damages to the supervised undertaking. This holds irrespective of any assumption of obstacle to appointment, as set forth explicitly, for example, in sec. 6 para. 3, InvG [German Investment Act].36 In themselves, the company law requirements tied to liability lead to the conclusion that the requisite expertise of the supervisory board member need not be present upon selection, but at the latest must be present upon the member’s assumption of office.37 The bulletin of the BaFin [Federal Financial Supervisory Authority] allowing the required knowledge and skills to be acquired even after assumption of office38 contradicts the company law requirements tied to liability. Further, the provision is incompatible with supervisory assessments, which are geared toward immediate and effective action by the supervisory board to protect the interests of the policy holders and of the undertaking itself and to ensure the stability of the finance and insurance sector as a whole.39
6.3.3 Amendments in the Process of Implementing Solvency II
22.214.171.124 The Requirements of Art. 42, Para. 1, Art. 248, Para. 1 (d), and Art. 257 of the Solvency II Framework Directive
The impending implementation of the Solvency II Framework Directive40 in German law could have an impact on the qualification requirements for members of the supervisory and monitoring bodies of supervised undertakings. The Directive, in fact, covers the supervisory board, a scope illustrated by numerous of its provisions, e.g., arts. 34, para. 2; 40, 41, 41, para. 3, subpara. 2, 46, para. 2, 47, para. 3; and 48, para. 1 (e). Starting points for a potential impact of the European legal scheme on national provisions respecting minimum qualification appear in arts. 42, 248, and 257 of the Solvency II Framework Directive as well as in its Recitals 33 through 35. Thus, art. 42, para. 1 from Section 2 of the Directive, which controls the requirements for the system of governance of insurance undertakings, includes all “persons who effectively run the undertaking or have other key functions”. Under art. 42, para. 1 (a), such persons must be sufficiently fit “to enable sound and prudent management”. Although the members of the supervisory and monitoring bodies of the supervised undertakings are not engaged in management tasks, they could in fact be viewed as persons having key functions.41 Accordingly, relevant CEIOPS papers contain references to the view that supervisory board members indeed could be classified as “persons with key functions”. As a result of such classification, they would be subject to the qualification requirements of art. 42, para. 1 of the Solvency II Framework Directive.42 And in fact, in another context the BaFin [Federal Financial Supervisory Authority] for example explicitly numbers supervisory board chairpersons among those who hold “key positions” in an undertaking.43 And the issuer of a regulation alludes to “executive staff exercising key functions” in its concretizing rule Inhaberkontrollverordnung [Holder Control Regulation], a rule that expressly excludes supervisory board members.44
As a result, the expertise requirement of sec. 7a, para. 4, sent. 1 of the VAG [German Insurance Supervision Act] would have to be autonomously construed pursuant to the criterion of European requirements. This, then, would mean that the requirements for members of supervisory and monitoring bodies would not be determined pursuant to the criteria under national law. One may presume that application of art. 42, para. 1 of the Solvency II Framework Directive to supervisory board members would impede the pertinent qualification requirements with respect to ensuring a functioning system of governance, as detailed in Chapter 2 of the Solvency II Framework Directive. This is so because an effective system of governance pursuant to the requirements of the Solvency II Framework Directive comprises, i.a., areas such as comprehensive risk management, compliance requirements pertaining to internal monitoring and review, and requirements for actuarial and investment functions. Thus, as an essential component of functioning governance within insurance undertakings, the members of the supervisory and monitoring body would be subject to enhanced requirements in respect to the exercise of their monitoring tasks in these areas.