Supervisory Reporting

Many of the obligations to disclose organizational form are related to appointments to key offices. This specifically includes the reporting duties under sec. 13d, nos. 1 and 2 of the VAG [German Insurance Supervision Act] designed to inform the supervisory authority of changes—planned or executed in the past—in the persons occupying management positions or to the power of representation of the managers. According to no. 1, direct insurance undertakings must inform the BaFin [Federal Financial Supervisory Authority] without delay of their intention to appoint a member of their management and provide the information relevant to an assessment of the individual’s fit-and-proper qualification under sec. 7a, para. 1 of the VAG [German Insurance Supervision Act].⁷ According to no. 2 the same applies with regard to the separation of a member of management or the withdrawal of the power of representation given to a member of management. By references in sec. 121a, para. 1, sent. 1 and sec. 113, para. 1 of the VAG [German Insurance Supervision Act], reinsurance undertakings and pension funds are also subject to sec. 13d, nos. 1 and 2 of the VAG [German Insurance Supervision Act]. All of these notifications to the insurance supervisory authority enable it to conduct the management monitoring as required under law.⁸

Sec. 11a, para. 2, sent. 1 and sent. 4 of the VAG [German Insurance Supervision Act] currently contain reporting duties with respect to the responsible actuary that functionally correspond to sec. 13d, no. 1 and no. 2, first instance. This is directly applicable to life insurance undertakings and, by reference, to certain accident, liability, and health insurance undertakings as well as pension funds.⁹ Further, sec. 71, para. 2, sent. 1 in conjunction with. sec. 79 of the VAG [German Insurance Supervision Act] requires that direct insurance undertakings engaged in the business of life insurance, substitute health insurance, or private long-term care insurance, and who must therefore appoint a trustee under the law, notify the BaFin [Federal Financial Supervisory Authority] as to the proposed trustee prior to the appointment.¹⁰ In contrast, there is generally no reporting duty for the separation of a trustee. However, as an exception, the supervisory authority must be informed if the supervisory authority itself appointed the trustee in accordance with sec. 71, para. 2, sent. 3 of the VAG [German Insurance Supervision Act] and the insurance undertaking intends to terminate the appointment.¹¹ Termination requires the supervisory authority’s consent in this case only. Internally, in accordance with sec. 71, para. 1 of the VAG [German Insurance Supervision Act], the supervisory board—or the managing board, if none exists—is responsible for the termination.¹²

A look at art. 42 of the Draft Solvency II suggests that the number of obligations to notify based on formal organizational grounds affecting the appointment of key offices will grow in the future. Art. 42, para. 1 of the Draft Solvency II requires that all persons who effectively run the insurance undertaking or have other key functions satisfy a certain suitability and integrity profile. The disclosure obligation in art. 42, para. 2 of the Draft Solvency II accompanies this “fit-and-proper test”. It requires direct insurance and reinsurance undertakings to notify the supervisory authority of any change to the occupants of key offices. The insurance undertaking must also send all information needed to assess the suitability and integrity of all persons proposed for the respective offices.¹³ The CEIOPS Issues Paper of 17 Jul. 2007¹⁴ indicates that the understanding of key offices under EU law whose tenure may only proceed after notification and evidence of the suitability of the person proposed is submitted to the supervisory authority could extend further than that on which insurance supervision law is currently based. Under number 2.2., pnt. 21 of the Issues Paper, CEIOPS states that, in addition to executive management and senior staff,¹⁵ key persons in an insurance undertaking specifically include “independent non-executive directors”, meaning the supervisory board members of an Aktiengesellschaft (German stock corporation) or the non-executive administrative board members of a monistic insurance SE (European public limited company).^{16 , 17} CEIOPS is closely integrated with the four-level Lamfalussy process¹⁸ used in the Solvency II initiative. It can therefore be expected that, in the near future, the legislator will stipulate, at least for direct and reinsurance undertakings, corresponding reporting duties in sec. 13d, no. 1 and no. 2 of the VAG [German Insurance Supervision Act] to the BaFin [Federal Financial Supervisory Authority] for changes to the supervisory board—which are currently mentioned only in sec. 13d, no. 2a of the VAG [German Insurance Supervision Act] in the context of submitting internal rules of procedure.¹⁹ This is also true for rules pertaining to the supervisory board that would parallel sec. 7a, para. 1 of the VAG [German Insurance Supervision Act] for a future check on supervisory board members regarding the applicable form of fitness²⁰ and properness.

Within art. 42 of the Draft Solvency II, it must be further emphasized that paragraph 3 provides for an immediate reporting duty in the event a person holding a key office no longer has the integrity required under paragraph 1 (b).²¹ In contrast, the loss of professional qualification—conceivable in exceptional cases—within the meaning of paragraph 1 (a) has no associated reporting duty. Here as well, the list of disclosure requirements under insurance supervisory law can be expected to grow longer with respect to holding key offices. Add to this that factors such as personal “integrity” or “properness” are difficult to define objectively as a matter of legal certainty. They are therefore inadequate as basis for additional disclosure requirements of this type in the future. This reporting duty also demonstrates by example that such duties often have their starting point in the area of obligation to notify based on formal organizational grounds. They are, however, substantive in nature and thus far more significant than their systematic legal classification currently suggests.

Sec. 13d, no. 2a of the VAG [German Insurance Supervision Act] requires direct insurers and, by reference in sec. 113, para. 1 of the VAG [German Insurance Supervision Act], pension funds to report the entry into force as well as later amendments of the internal rules of procedure of the managing board and supervisory board immediately to the supervisory authority. Based on sec. 121a, para. 1, sent. 1 of the VAG [German Insurance Supervision Act], this reporting duty does not apply to reinsurance undertakings.

Lastly, sec. 13d, no. 9 of the VAG [German Insurance Supervision Act] contains an additional obligation to notify based on formal organizational grounds. Direct insurers in motor vehicle liability insurance must report the name and address of the designated claims adjustment officer in accordance with sec. 7b, para. 1, sent. 1 of the VAG [German Insurance Supervision Act] to the supervisory authority.

The disclosure obligations described below for financial reporting based on formal organizational grounds are distinctive from the obligations to notify based on formal organizational grounds in that they provide the supervisory authority with information about the net asset, financial and earnings position of an insurance undertaking, at least indirectly. In content, the obligations concern organizational actions in an insurance undertaking such as changes to the shareholder structure, restructuring measures, or the development of the business. Unlike the disclosure obligations for substantive financial reporting, however, the duties of financial reporting based on formal organizational grounds do not enable the BaFin [Federal Financial Supervisory Authority] to quantify the net asset, financial and earnings position of an insurance undertaking and judge on a reliable basis how financially viable the undertaking is. The information provided to the supervisory authority merely presents indicators of financial stability of an insurance undertaking.

Direct and reinsurance undertakings and pension funds must disclose their shareholder structure and close ties to third parties to the BaFin [Federal Financial Supervisory Authority] in accordance with sec. 13d, no. 4 and 5 of the VAG [German Insurance Supervision Act].²⁴ They are also required, under sec. 13d, no. 4 of the VAG [German Insurance Supervision Act], to report, immediately upon becoming aware, any change to a significant ratio of ownership interest²⁵ in the undertaking itself, the attainment, surpassing, or shortfall of certain qualifying holdings (namely, 20, 33 and 50 %), as well as the fact that the undertaking will become a subsidiary of another undertaking within the meaning of the legal definition of sec. 7a, para. 2, sent. 6 of the VAG [German Insurance Supervision Act].²⁶ Under sec. 13d, no. 5 of the VAG [German Insurance Supervision Act], the names and addresses of those with significant holdings, along with the amount of their holding, must be disclosed annually to the BaFin [Federal Financial Supervisory Authority]. The primary meaning and purpose of these disclosures is first and foremost to enable an assessment by the supervisory authority of the good repute of holders of a significant ownership interest who have a considerable ability to influence the stability and continuity of an insurance undertaking. With sec. 13d, no. 4 and 5 VAG [German Insurance Supervision Act], the insurance supervision law should correspond to the requirements of art. 60 in conjunction with art. 56 of the Draft Solvency II and there is no apparent need for adjustment here.²⁷

Sec. 13d, no. 4a of the VAG [German Insurance Supervision Act] concerns the disclosure of close ties under sec. 8, para. 1, sent. 4 of the VAG [German Insurance Supervision Act] to another natural person or undertaking. With sec. 13d, no. 4a of the VAG [German Insurance Supervision Act], the legislator intends to prevent the emergence of a non-transparent holdings structure that could significantly impair effective supervision and thus the protection of the interests of insured persons.²⁸ The potential to impair the holdings network arises at the threshold of 20 % of the shares or voting rights. Additionally, under sec. 8, para. 1, sent. 4, no. 2 of the VAG [German Insurance Supervision Act], the legislator always assumes a close tie in the case of parent, subsidiary, or affiliate relationships. The disclosure obligations in sec. 13d, no. 4a of the VAG [German Insurance Supervision Act] should also satisfy the requirements of art. 60 of the Draft Solvency II that expressly refer to direct and indirect holdings.

Additional disclosure obligations for direct insurance undertakings are mandated in secs. 14 and 14a of the VAG [German Insurance Supervision Act] with regard to restructuring measures. These also apply to pension funds in accordance with sec. 113, para. 1 of the VAG [German Insurance Supervision Act], but not to reinsurance undertakings, which are subject to separate rules under sec. 121a, para. 3 and sec. 121f of the VAG [German Insurance Supervision Act].²⁹ The new sec. 14 of the VAG [German Insurance Supervision Act] encompassed in the 9th amendment to the VAG [German Insurance Supervision Act] codifies—if not expressly, then certainly indirectly—the obligation to submit portfolio transfer agreements. A portfolio transfer does not represent a conversion within the meaning of the German Law Regulating the Transformation of Companies. Rather, it is an option available to the insurance undertaking in addition to a fusion, splitting-up, sale of assets, and change of legal form.³⁰ According to sec. 14, para. 1, sent. 1 of the VAG [German Insurance Supervision Act] the portfolio transfer agreement requires supervisory approval in order to take effect.³¹ The approval requires application by both the transferring and receiving undertaking.³² A copy of the portfolio transfer agreement, which must be in writing in accordance with sec. 14, para. 6 of the VAG [German Insurance Supervision Act], and a declaration that no ancillary agreements have been made must be included with the application. In consideration of art. 39, para. 1 of the Draft Solvency II, changes are scarcely to be expected.

The rules of sec. 14a of the VAG [German Insurance Supervision Act] subject any conversion of an insurance undertaking to the condition of supervisory approval. Here, too, it is a precondition for validity. Approval requires application by all undertakings participating in the conversion. To be submitted with the application is the relevant transformation agreement, which means the fusion, splitting-up and takeover agreement, the transfer agreement, or, for a change of legal form, a transformation report in which both the change of form and the future holdings of the shareholders in the legal entity are described and justified.³³ Disclosure obligations in connection with conversions of direct insurance and reinsurance undertakings are not provided for in Solvency II.

Under sec. 13b, para. 1, sent. 1, domestic direct insurance undertakings must notify the BaFin [Federal Financial Supervisory Authority] of the intended establishment of offices outside of Germany in the EU and European Economic Area, indicating the relevant countries. The content of this notice must satisfy the requirements in sec. 13b, para. 1, sent. 2 of the VAG [German Insurance Supervision Act]. Accordingly, the notice must include estimate of expenses for the expansion of administrative capacity, the network of representatives, and projected premium income as well as information about the organizational structure. In addition, an appropriate general agent with powers of representation must be named. Any changes to the information required under sec. 13b, para. 1, sent. 2, nos. 1–4 of the VAG [German Insurance Supervision Act] are also subject to reporting requirements under paragraph 4, sentence 1.

Corresponding disclosure obligations are found in sec. 13c, para. 1, sent. 1 of the VAG [German Insurance Supervision Act] for cases in which a domestic direct insurance undertaking intends to engage in services in foreign EU and European Economic Area countries. The undertaking must also notify the BaFin [Federal Financial Supervisory Authority] accordingly if it intends to operate additional insurance lines there, cover additional risks, or appoint a different representative for claims settlement. The requirements of secs. 13b and 13c of the VAG [German Insurance Supervision Act] do not apply to pension funds and reinsurance undertakings.³⁴ This will change in the future, at least with regard to reinsurance undertakings, against the background of arts. 143 and 145 of the Draft Solvency II, which contain the corresponding disclosure obligations for the development of business in foreign countries.

In sec. 13, para. 1a, the insurance supervisory law contains the duty of advance notice to the BaFin [Federal Financial Supervisory Authority] with regard to the outsourcing of important functions as defined by sec. 5, para. 3, no. 4 of the VAG [German Insurance Supervision Act].³⁵ Submission of the outsourcing contracts to the BaFin [Federal Financial Supervisory Authority] is even a precondition for their validity under civil law according to sec. 13, para. 1a, sent. 2–6 of the VAG [German Insurance Supervision Act]. With its duty of advance notice, sec. 13, para. 1a of the VAG [German Insurance Supervision Act] corresponds to the advice in Recital 20 of the second draft of Solvency II recommended to the Member States to standardize a disclosure obligation with respect to outsourcing that informs the supervisory authority about the plan for the outsourcing contract prior to its execution.

In contrast, art. 48, para. 3 of the Draft Solvency II requires only that insurance undertakings headquartered in Germany inform the BaFin [Federal Financial Supervisory Authority] “in a timely manner” of an executed outsourcing of important functions as well as all important developments relating to the outsourced functions.³⁶ Since the proposed directive has no notification deadline, a strong argument can be made that the term “in a timely manner” should not be understood as having a technical meaning, but rather in the general sense of “immediately, without undue delay”. In this respect, art. 48, para. 3 of the Draft Solvency II would entail changes to the VAG [German Insurance Supervision Act] as, in the future, even important developments related to the outsourced functions that occur after execution of the contract would need to be cause for reporting duties. Added to this is the preliminary work by CEIOPS for the implementing regulations at Level 2 requiring that a significant amount of information with regard to outsourcing be disclosed by undertakings to the supervisory authority. In the future, for example, undertakings must document how they determine the competence of external service providers (“a detailed due diligence checking process”), how they monitor the same, and how they ensure that their organization is not adversely impacted by the outsourcing.³⁷ Further, the disclosure obligations with respect to outsourcing in the future must also apply to reinsurance undertakings, which currently have no such obligations.³⁸

At the center of substantive financial reporting—in addition to the disclosure obligations for assessment of the structure of own funds—are the disclosure obligations that enable the supervisory authority to assess the solvency of the undertaking.³⁹ Direct insurance undertakings are required under sec. 53c, para. 4 of the VAG [German Insurance Supervision Act] to submit a calculation of their solvency margin annually to the BaFin [Federal Financial Supervisory Authority] and to document the underlying own funds as part of their regular business operations. The calculation of the solvency margin is governed by the German Capital Resources Regulation,⁴⁰ and enacted through sec. 53c, para. 2, no. 1 VAG [German Insurance Supervision Act]. Specifications as to the form of the notice and calculation of the solvency margin are provided in the BaFin [Federal Financial Supervisory Authority] Circular 4/2005 (VA) of 1 Mar. 2005.⁴¹ Equivalent obligations exist for reinsurance undertakings in accordance with sec. 121a, para. 1, sent. 2 in conjunction with sec. 53c, para. 4 of the VAG [German Insurance Supervision Act], and for pension funds in accordance with sec. 4, para. 1 of the PKAustV [German Pension Fund Capital Resources Regulation].⁴² Based on the information disclosed, the BaFin [Federal Financial Supervisory Authority] reviews whether the undertaking has met its solvency requirements and, in the event of insufficient funds, takes the necessary measures under sec. 81b of the VAG [German Insurance Supervision Act]⁴³ or sec. 121a, para. 1, sent. 3 of the VAG [German Insurance Supervision Act].

The draft of a framework directive for Solvency II makes clear that the scope of disclosure duties for the purpose of supervisory assessment of solvency will notably increase when the new supervisory regime takes effect. This is due primarily to complexity but also to greater individualization in the future solvency system. The solvency system is the subject-matter of the first pillar of Solvency II. At its center are the rules for the calculation of quantitative Solvency Capital Requirements, the Minimum Capital Requirement, and the Target Solvency Capital Requirement.⁴⁴ The Target Solvency Capital Requirement is the decisive solvency figure under Solvency II. It reflects the actual risk profile of an insurance undertaking. Undertakings essentially have the choice of calculating their Target solvency capital requirement using a universal standard model or an internal model requiring approval. In contrast, the Minimum Capital Requirement serves as a simple, robust measure of the level of own funds below which the issuer of the directive views the interests of the insured as seriously endangered.⁴⁵

A minimum framework for disclosure for the purpose of supervisory assessment of solvency is provided in art. 35, para. 1, sent. 1, 2 (a) in conjunction with art. 36 of the Draft Solvency II.⁴⁶ Accordingly, the Member States must require that insurance and reinsurance undertakings, as part of regular business operations, provide the supervisory authority with the information needed by the supervisor to assess their “valuation principles applied for solvency purposes” and “their [solvency] capital … needs”, at a minimum.^{47 , 48} Indeed, only the implementation regulations of the Commission, expected at the second level of the Lamfalussy process, will provide complete certainty as to which information specifically requires disclosure.⁴⁹ However, arts. 102, para. 1, sent. 1 and 127, para. 2 of the Draft Solvency II contain special, concrete disclosure obligations for the supervisory assessment of the “[solvency] capital needs” within the meaning of art. 35, para. 1, sent. 1, 2 (a) in conjunction with art. 36, para. 2 (c) of the Draft Solvency II. According to these, insurance and reinsurance undertakings must calculate and report to the supervisory authority their Target Solvency Capital Requirement at least annually and their Minimum Capital Requirement quarterly.⁵⁰ If the Minimum Capital Requirement is below 20 % of the Target Solvency Capital Requirement or exceeds half of it, the undertaking must report this to the supervisory authority and provide the reasons for it.⁵¹

The evaluation principles for the purpose of solvency are primarily reflected in the internal model for calculation of the Target Solvency Capital Requirement, if the undertaking uses this. With regard to internal models, whose compliance with the law requires supervisory review under art. 36, para. 2 (f) of the Draft Solvency II, special disclosure obligations are stipulated in art. 110, para. 7 as well as arts. 116 and 118 Draft Solvency II.⁵² For the calculation of the Target solvency capital requirement based on an internal model, art. 110, para. 7 of the Draft Solvency II additionally requires that the undertaking submit an estimate based on the standard formula for the first 2 years following issuance of the license to operate. Under art. 116, para. 1 of the Draft Solvency II, direct insurance and reinsurance undertakings must notify the supervisory authority if a previously approved internal model is either no longer used or no longer meets the legal requirements. They must simultaneously submit a plan to restore compliance or demonstrate that the effect of non-compliance is immaterial. They must also provide evidence to the supervisory authority under art. 118 of the Draft Solvency II that the internal model is used in the business “for other purposes”. This means that the internal model is used for risk capital allocation, in particular for the internal assessment of risks and solvency within the meaning of art. 44 of the Draft Solvency II, and integrated into the risk management system of the undertaking under art. 43 of the Draft Solvency II. In cases where an undertaking uses a partial internal model, it must also demonstrate to the supervisory authority that the model is used to calculate individual factors specified in art. 110, para. 2 of the Draft Solvency II.⁵³

A general obligation on insurance undertakings to periodically disclose the structure of their own funds to the BaFin [Federal Financial Supervisory Authority] is not currently part of insurance supervisory law. Only sec. 13d, no. 3 of the VAG [German Insurance Supervision Act] stipulates a disclosure obligation related to own-funds structure. It requires direct insurance undertakings and, by reference in sec. 113, para. 1 of the VAG [German Insurance Supervision Act], pension funds in the legal form of a stock corporation, including the SE,⁵⁴ to immediately notify the BaFin [Federal Financial Supervisory Authority] of amendments concerning capital increases to the articles of incorporation. The requirement does not apply to reinsurance undertakings. The implementation of a capital increase gives the supervisory authority information about the—amended—amount of own funds held by the insurance undertaking. Under sec. 181, para. 3 of the AktG [German Stock Corporation Act], amendments to the articles of incorporation take effect only after entry in the commercial register. Thus, the notification to the BaFin [Federal Financial Supervisory Authority] must occur immediately following the entry.

The Solvency II regime will introduce various disclosure obligations to enable supervisory review of the own-funds structure of direct insurance and reinsurance undertakings. The basic framework in art. 35, para. 1, sent. 1, 2 (a) in conjunction with art. 36 of the Draft Solvency II requires the Member States to require that direct insurance and reinsurance undertakings provide the supervisory authority with the information needed by the supervisor to assess “their [own] capital structure”.⁵⁵ With regard to art. 36, para. 2 (e) of the Draft Solvency II, it can be assumed that the implementation regulations expected at the second level of the Lamfalussy process will require direct insurance and reinsurance undertakings to disclose the quality and quantity of their own funds periodically.⁵⁶

Under sec. 55, para. 2, sent. 1 of the VAG [German Insurance Supervision Act], insurance undertakings must submit their annual financial statement as prepared by their legal representative, followed later by the adopted financial statement, to the supervisory authority along with the management report. Sec. 55, para. 2, sent. 1 of the VAG [German Insurance Supervision Act] is supplemented by secs. 58, para. 2, sent. 1 and 59, sent. 1 of the VAG [German Insurance Supervision Act].⁵⁷ Under this rule, insurance undertakings must immediately advise the BaFin [Federal Financial Supervisory Authority] of the auditor appointed by the supervisory board and submit a copy of the audit report immediately upon adoption of the annual financial statement. In view of this extensive regimen of accounting disclosure obligations, the requirements pending under EU law in art. 33, para. 1 and para. 3, sent. 1 of the Draft Solvency II—apart from the textual references to new solvency regulations—would hardly require anything new.

Under sec. 54d, sent. 1 of the VAG [German Insurance Supervision Act], insurance undertakings must report their total investments to the BaFin [Federal Financial Supervisory Authority], broken down by new and existing investments. The disclosure obligations include periodic recurring reports as well as notifications based on certain events. They encompass both restricted and unrestricted assets as well as the use of derivative financial instruments. In accordance with the powers assigned to it in sec. 54d, sent. 1 of the VAG [German Insurance Supervision Act], the BaFin [Federal Financial Supervisory Authority] has regulated the form and timing of the disclosures in detail in Circulars 30/2002, 1/2004 and 11/2005.⁵⁸ The disclosure obligations in sec. 54d, sent. 1 of the VAG [German Insurance Supervision Act] are also applicable to pension funds under sec. 113, para. 1 of the VAG [German Insurance Supervision Act] and to reinsurance undertakings under sec. 121a, para. 1, sent. 1 of the VAG [German Insurance Supervision Act].

Under sec. 66, para. 1 of the VAG [German Insurance Supervision Act] direct insurance undertakings must establish a minimum level of guarantee assets as indicated in paragraph 1a for coverage of their technical provisions. They are required, in addition to the obligations under sec. 54d, sent. 1 of the VAG [German Insurance Supervision Act], to inform the supervisory authority of the nature of custody for these assets under sec. 66, para. 5, sent. 2 of the VAG [German Insurance Supervision Act]. At the close of each financial year, insurance undertakings are required under sec. 66, para. 6, sent. 6 of the VAG [German Insurance Supervision Act] to submit a copy of the list of assets disclosing the individual items of the guarantee assets to the BaFin [Federal Financial Supervisory Authority]. Sec. 66, paras. 5 and 6 of the VAG [German Insurance Supervision Act] are likewise applicable to pension funds through sec. 113, para. 1 of the VAG [German Insurance Supervision Act], but not to reinsurance undertakings.

Further disclosure obligations relating to the investment activity of direct insurance undertakings are provided in sec. 54, para. 4 of the VAG [German Insurance Supervision Act]. According to sec. 54, para. 4, sent. 1, no. 2 in conjunction with sent. 2 of the VAG [German Insurance Supervision Act], insurance undertakings must notify the BaFin [Federal Financial Supervisory Authority] of interests they acquire—for stock holdings or other shares, however, only if the holding threshold of 10 % is exceeded—by the end of the month following the transaction.⁵⁹ The equivalent applies under sec. 54d, para. 4, sent. 1, no. 3 in conjunction with sent. 2 of the VAG [German Insurance Supervision Act] for investments in an affiliated company as defined by sec. 15 of the AktG [German Stock Corporation Act]. Sec. 54, para. 4 of the VAG [German Insurance Supervision Act] applies in accordance with sec. 113, para. 1 of the VAG [German Insurance Supervision Act] to pension funds but not to reinsurance undertakings.

Comparable disclosure obligations with respect to investment activity are not found in the proposed Solvency II directive. However, art. 35, para. 1, sent. 1, 2 (a) in conjunction with art. 36 of the Draft Solvency II prescribes an obligation for disclosure of information on the supervisory assessment of “capital management”. Details on the content of the disclosure can be expected at the second level of the Lamfalussy process, according to the explanatory text.⁶⁰ Since compliance with the investment requirements within the meaning of Chapter VI, Section 6 in art. 36, para. 2 (d) of the Draft Solvency II is explicitly mentioned as a subject-matter of insurance supervision, the specifics in the Commission’s implementation regulations—based on previous experience with the Lamfalussy process⁶¹—will in all likelihood be extensive.⁶²

Sec. 88, para. 2 of the VAG [German Insurance Supervision Act] requires the managing board of an insurance undertaking to notify the supervisory authority immediately of the inability to make payment or of over-indebtedness of the undertaking. The disclosure obligation gains justification from the particular point of insolvency law for insurance undertakings which, under sec. 88, para. 1 of the VAG [German Insurance Supervision Act], in deviation from sec. 113, para. 1 of the German Bankruptcy Act, sets forth that only the BaFin [Federal Financial Supervisory Authority]—and not management—can petition for the insolvency proceeding. The rule applies accordingly to re-insurance undertakings and pension funds under sec. 121a, para. 1 and sec. 113, para. 1, respectively, of the VAG [German Insurance Supervision Act].⁶³

The pending requirements in the seventh chapter of the framework directive for Solvency II will shift the timing forward for the current requirement for disclosure of a basis for insolvency by the insurance undertaking to the supervisory authority. Under art. 136, para. 1 of the Draft Solvency II, insurance and reinsurance undertakings must inform the supervisory authority immediately upon ascertaining that the Solvency Capital Requirement is no longer covered, or if a threat exists that such a situation could arise within the next 3 months. Art. 137, para. 1 contain stipulations with identical wording with regard to insufficient funds for the Minimum Capital Requirement. The future situation, in which even an over-extension with the mere capability to bring about insolvency for the undertaking within 3 months would be cause for mandatory disclosure to the supervisory authority, could empower the supervisory authority to avert an actual insolvency of the undertaking through supervisory reorganization measures. In contrast, under the current disclosure concept, notification is not likely to reach the BaFin [Federal Financial Supervisory Authority] until “the horse has already bolted from the stable”.

Shareholding undertakings, meaning direct insurance and reinsurance undertakings who are parent companies of a direct insurance or reinsurance undertaking, have a qualified holding in such in accordance with paragraph 2, number 1, or belong to a horizontal business group, are subject to additional supervision, known as “solo-plus supervision”, under sec. 104a, para. 1, no. 1 of the VAG [German Insurance Supervision Act]. It does not, however, require any formal, group-specific disclosures for shareholding direct insurance and reinsurance undertakings. This is due to the fact that all undertakings that are part of a group in the configurations described are individually required to make disclosures.