Corporate governance of insurers in Germany. German National Report: World Congress of the International Insurance Law Association (AIDA) 2018

Abstract

Corporate governance is the set of rules, be they legal or self-regulatory, practices and processes pursuant to which an insurance undertaking is administrated. Good corporate governance is not only key to establishing oneself and succeeding in a competitive environment but also to safeguarding the interests of all stakeholders in an insurance undertaking. It is insofar not surprising that mandatory requirements on the administration of insurance undertakings have become rather prolific in recent years, in an attempt by regulators to protect especially policyholders against perceived risks hailing from improperly governed insurance undertakings. In Germany this has been regarded by many undertakings as an overly paternalistic approach of the legislator, especially considering that the German insurance sector has experienced for decades if not centuries a remarkably low number of insolvencies and that German insurers were neither the trigger nor the (especially) endangered actors in the financial crisis commencing in 2007. Notwithstanding the true core of this criticism, that the insurance industry was taken to a certain degree hostage by the shortcomings within the banking sector, the reform of German Insurance Supervisory Law via implementation of the Solvency II-System has brought many advances in the sense of better governance of insurance undertakings and has also brought to light many deficiencies that the administration of some insurance undertakings may have suffered from in the past, which are now more properly addressed.

Full text

ABHANDLUNG
https://doi.org/10.1007/s12297-020-00467-9
ZVersWiss
Corporate governance of insurers in Germany. German
National Report
World Congress of the International Insurance Law Association
(AIDA) 2018
Jens Gal
© The Author(s) 2020
Abstract Corporate governance is the set of rules, be they legal or self-regulatory,
practices and processes pursuant to which an insurance undertaking is administrated.
Good corporate governance is not only key to establishing oneself and succeeding in
a competitive environment but also to safeguarding the interests of all stakeholders
in an insurance undertaking. It is insofar not surprising that mandatory requirements
on the administration of insurance undertakings have become rather prolific in recent
years, in an attempt by regulators to protect especially policyholders against per-
ceived risks hailing from improperly governed insurance undertakings. In Germany
this has been regarded by many undertakings as an overly paternalistic approach
of the legislator, especially considering that the German insurance sector has expe-
rienced for decades if not centuries a remarkably low number of insolvencies and
that German insurers were neither the trigger nor the (especially) endangered actors
in the financial crisis commencing in 2007. Notwithstanding the true core of this
criticism, that the insurance industry was taken to a certain degree hostage by the
shortcomings within the banking sector, the reform of German Insurance Supervi-
sory Law via implementation of the Solvency II-System has brought many advances
in the sense of better governance of insurance undertakings and has also brought to
The present is for the most part an unaltered, only partially updated and amended version of a report
answering the questionnaire “Corporate Governance of Insurers” developed by Jan-Juy Lin in
preparation of the World Congress of the International Insurance Law Association (AIDA) 2018.
The structure of the present, hence, follows this questionnaire, which also explains why only certain
aspects of corporate governance of insurers are addressed. For better legibility, are included in every
section some introductory remarks that do not directly answer a question but rather set the scene.
At the moment of preparation of the report, Priv.-Doz. Dr. Jens Gal, Maître en droit was
as a Juniorprofessor entrusted with a chair for European Insurance (Supervisory) Law at
Goethe University, Frankfurt, and he currently holds a so-called Entlastungsprofessur at
Goethe University.
J. Gal ()
Johann Wolfgang Goethe-Universität, Frankfurt am Main, Theodor-W.-Adorno-Platz 3, 60629 Frankfurt
am Main, Germany
E-Mail: gal@hof.uni-frankfurt.de
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J. Gal
light many deficiencies that the administration of some insurance undertakings may
have suffered from in the past, which are now more properly addressed.
1 General
Under German (Insurance) Corporate Law and especially German Insurance Super-
visory Law the term governance is given a larger meaning than just the ultimate
responsibility of the executive board for the steering of the undertaking and the re-
sponsibility to supervise and check such steering activity by the supervisory board.
Rather, one assumes governance to be a top down-construct requiring the im-
plementation of a “three lines of defence”-concept. It is thus for the executive
board to structure the organisation of the undertaking in such a way—and for the
supervisory board to make certain this is done in an effective manner—that the
insurance undertaking is endowed with an internal control and management system
(with an internal hierarchy) principally based on the four eyes-approach as the first
line of defence to check the compliance etc. of the daily work of all employees
(e.g. concerning distribution, underwriting, regulation of insured events, complaints
handling, accountancy, reinsurance, capital investments, personal matters, IT). As
a second line of defence supervisory law requires the creation of three so-called key
functions—such requirement has in a reduced extent existed in Germany for several
years now, since the enactment of sec. 64a VAG old version in 2008 and the issuance
of the MaRisk VA circular by the German supervisory authority BaFin1in 2009, and
has been reinforced by the transformation of the Solvency II Directive into German
law—i.e. the independent risk management function, the compliance function and
the actuarial function. These functions in their turn, this is especially true for the
two former, control if the governance system (on the lower level and globally, this
means the former two also supervise indirectly the executive board [and the super-
visory board]), is effective concerning the aspects they “supervise”. As a third line
of defence an insurance undertaking is to create a fourth and (generally) last key
function in the form of an internal audit function. This function audits the under-
taking (as a whole) and especially also tests for the effectiveness of the other key
functions. In the present we will, however, in line with the questionnaire focus on
governance issues on the highest level of the executive board and supervisory board
unless a more global focus seems appropriate.
1.1 Available corporate governance models
In your jurisdiction, what corporate governance models are available to insur-
ance companies? In case multiple models are available, describe the main dif-
ferences and the allocation of management and monitoring powers among the
relevant bodies/committees and which model is generally or ideally adopted by
insurance companies.
1Rundschreiben 3/2009—Aufsichtsrechtliche Mindestanforderungen an das Risikomanagement.
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Corporate governance of insurers in Germany. German National Report
In Germany, insurance may be tendered only by certain types of corporations
(excluding the fact that the freedom of service and the freedom of establishment es-
pecially afforded to insurance undertakings established in other Member States of the
EU and the EEA may allow other types of corporations to sell insurance or provide
cover within Germany). Only undertakings incorporated in the form of an Aktienge-
sellschaft (AG; joint-stock company), a Societas Europaea (SE; [European] joint-
stock company), a Versicherungsverein auf Gegenseitigkeit (VVaG; insurance asso-
ciation on mutuality)oranöffentlich-rechtliches Versicherungsunternehmen (public
insurance company) may provide such financial services.
In view of the declining practical importance of public insurance compa-
nies—many of which are now constituted as Aktiengesellschaften and no longer
as institutions incorporated under public law—we will focus on the available
governance system for the other three types of corporations.
Insurance undertakings that are incorporated as Aktiengesellschaften are by law
required to implement a dualistic model (also called two-tier system) with the con-
stitution of a Vorstand (in the following executive board)andanAufsichtsrat (in the
following supervisory board). While the size and the election modalities of the su-
pervisory board may differ especially in relation to the size and employment figures
of the insurance undertaking in question, the creation of a supervisory board per se
is not contingent on the principle of proportionality.
Where an insurance undertaking is incorporated in Germany in the form of an SE,
which in practice remains an exception in the insurance sector,2the founders have an
option between a dualistic system (two-tier system) and a monolithic system (one-
tier system). As for the moment, where an SE has been chosen, most have opted for
the two-tier system, turning it rather unnecessary to elaborate on the possibility of
the one-tier system.
As concerns the Versicherungsverein auf Gegenseitigkeit (VVaG), German law
requires the corporate governance to be virtually identical to that of an Aktienge-
sellschaft, i.e. it requires an executive board and a supervisory board and thus a du-
alistic model.3
1.2 Regulatory sources addressing corporate governance
What are the main sources of regulation addressing corporate governance of
companies (and in particular of insurance companies)? e.g., statutes, regula-
tions, other rules/recommendations issued by national and supranational super-
visors/regulators, self-regulation, codes of best practice, codes of ethics.
Concerning Aktiengesellschaften the non-optional dualistic model and the consti-
tution of the executive respectively supervisory board and the rights and duties of its
members are provided by secc. 76 et seqq. respectively secc. 95 et seqq. AktG (Joint-
2Though there are notable exceptions in reinsurance, e.g. Hannover Rück SE, but also in direct insurance,
e.g. Allianz SE or ARAG SE; cp. Ko rdges in: Looschelders/Michael (eds.), Düsseldorfer Vorträge zum
Versicherungsrecht 2012, pp. 83–101.
3But see infra at I.4. the special rules for so-called small VVaG.
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J. Gal
Stock Companies Act). Sec. 107 AktG furthermore obligates all joint stock compa-
nies to implement a governance system partitioned in an internal control system and
a risk management system. This provision is, however, rather without importance
for insurance companies since they are subject to more elaborate specifications by
insurance regulatory law.4
Concerning Versicherungsvereine auf Gegenseitigkeit the executive and supervi-
sory board and the rights and duties of its members are regulated by secc. 184, 188
and 189 Versicherungsaufsichtsgesetz (VAG; Insurance Supervisory Act)whichin
their turn declare applicable mutatis mutandis most of the aforementioned provisions
of the AktG.
The construction and constitution of the governing bodies (including the option
between a monistic and dualistic model) of a SE are regulated in artt. 38–51 Eu-
ropean Company Regulation,5secc. 15 et seqq. SE-Ausführungsgesetz (SEAG; SE-
Implimentation Law6) and concerning employee participation in the management of
the company in the provisions of the SE-Beteiligungsgesetz (SEBG; SE-Participa-
tion Law7).
Irrespective of the type of corporation an insurance undertaking has chosen, the
supervisory minimal requirements of the governanceof an insurance undertaking are
regulated by secc. 23–34 VAG (which transpose artt. 40–50 Solvency II Directive8
into national law), artt. 258–275 Solvency II Delegated Reg.9, the EIOPA Guide-
lines on the System of Governance10 and the MaGo-circular issued by the German
supervisory authority BaFin11 (some governance aspects are also clarified by in-
terpretative decisions of BaFin, e.g. Interpretative Decision on the Remuneration
System, or by explanatory leaflets, e.g. Explanatory Leaflet on the Fitness and Pro-
priety of Key Function Holders or of Executive Board Members or of Supervisory
Board Members).
Additionally, German Insurers often follow the rules of the soft-law instrument
of the (German) Corporate Governance Kodex12; such insurers whose shares are
publicly traded must annually declare if they oblige by the rules of this codex. In
4See infra.
5Council Reg. (EC) No. 2157/2001 on the Statute for a European Company (SE), in: OJ of 10.11.2001,
L 294/1.
6Gesetz zur Ausführung der Verordnung (EG) Nr. 2157/2001 des Rates vom 8. Oktober über das Statut
der Europäischen Gesellschaft (SE), in: BGBl. vom 28.12.2004, S. I-3657.
7Gesetz über die Beteiligung der Arbeitnehmer in der Europäischen Gesellschaft (SE-Beteiligungsge-
setz—SEBG), in: BGBl. vom 28.12.2004, S. I-3686.
8Directive 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), in: OJ of 17.12.2009, L 335/1.
9Commission Delegated Regulation (EU) 2015/35 supplementing 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), in: OJ of 17.1.2015, L 12/1.
10 EIOPA-BoS-14/253.
11 Rundschreiben 2/2017 (VA)—Mindestanforderungen an die Geschäftsorganisation von Versicherung-
sunternehmen.
12 Deutscher Corporate Governance Codex (in der Fassung vom 16. Dezember 2019), in: BAnz Amtlicher
Teil vom 20.03.2020, B3.
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Corporate governance of insurers in Germany. German National Report
comparison to what German insurance undertakings are legally required concerning
their governance system, the codex, however, bears little practical importance. Under
the organisation of the German Insurance Association (GDV) many insurers have
also adhered to the Code of Conduct for the Distribution of Insurance Products and
the more recent Code of Conduct for Data Protection which regulate also some
governance aspects.
1.3 Insolvency due to poor corporate governance
In your jurisdiction, are you aware of any insolvency or distress of an insurer
directly attributable to poor corporate governance standards or practices or fail-
ure to adequately implement and apply such principles? If so, please identify
the main triggers of the insolvency.
Over the course of the last century, insolvencies or corporate crises have been
rather rare in the German insurance sector (during the 20th century the last insol-
vency of a bigger German insurer dated back to 1929 with the Frankfurter Allge-
meine Versicherungs-AG). Where an insolvency occurs, this will usually also have
some relation with poor or sub-optimal corporate governance albeit not necessarily
in the direct sense. One could hence argue that it is not the distressed life insurance
undertaking’s fault that we are currently witnessing a low interest rate environment.
One could, however, ask if a sound management should not have previsioned the
possibility of such a low-for-long stress situation (at the latest when such a situation
occurred in Japan, beginning in the late 1980s, lasting until the early 2000s, and
severely threatening many Japanese life insurers) forcing the insurers to overthink
their guaranteed interest rates or at least the guaranteed level at a much earlier mo-
ment. In principle, however, corporate distress of insurers will more likely be the
direct result of adverse market situations rather than negligent governance, as can
be seen e.g. in the insolvency of the small transport insurer East-West Assekuranz
(Berlin) in the summer of 2017.
1.4 Proportionality principle in connection with corporate governance
In your jurisdiction, is corporate governance regulation applied according to the
nature, scale and complexity of an insurer’s business? If yes, please describe
any significant differences and rationale for the differences.
The so-called Verhältnismäßigkeitsgrundsatz is one of the founding principles
of German administrative (and constitutional) law and has served as (one of) the
inspiration(s) for the establishment of the principle of proportionality in EU-law
in general and in the Solvency II insurance supervisory system in particular. This
principle applies, generally, to the application of all provisions which are not fully
rule-based buthaveatleastaprinciple-based element and thus afford a certain
margin of discretion. For the German supervisory authority, the necessity to apply
the principle of proportionality is now explicitly provided by sec. 296 subsec. 1
VA G .
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J. Gal
In the application of the proportionality principle, one must distinguish two situ-
ations: First, where a provision is drafted in a rule-based manner, it is the legislator
or regulator, which is obligated to observe the proportionality principle. There are
hence several black letter rules that have a built-in proportionality principle. For
example, a Versicherungsverein auf Gegenseitigkeit may be declared by BaFin to
be a mutual society whose operations are limited to a certain range of business,
territory or group of persons (so-called small VVaG) which by operation of law,
sec. 210 VAG, dispenses them inter alia from the obligation to establish a supervi-
sory board. The same applies also to the delegated legislator, i.e. the Commission in
conjunction with EIOPA on the European level and the Federal Ministry of Finance
which are supposed to establish all legal rules in application of the principle of
proportionality. More commonly—this is at least the abstract concept of the whole
Solvency II-System—the rules will, however, remain principle-based which means
that their application and result will be in general subject to the principle of propor-
tionality. Hence, the undertakings’ duties concerning corporate governance are to be
established while paying heed to the nature, scale and complexity of its business.
How the proportionality principle may come into play in creating stricter or more
lenient supervisory obligations can e.g. be observed in sec. 23 subsec. 1 VAG (which
transposes art. 41 of the Solvency II Directive):
All insurance undertakings shall have in place a system of governance, which is
effective and proper, and which is appropriate in view of the nature, scale and
complexity of its business. Other than providing for the observance of legal,
regulatory and supervisory requirements the system of governance must ensure
a sound and prudent management of the business. Other than the observance
of the requirements provided for by this chapter the system shall especially in-
clude an adequate transparent organizational structure with a clear allocation
and appropriate segregation of responsibilities and an effective internal com-
munication system.
In this subsection there is hardly a term which is not broad (and vague) and
thus open to interpretation, which serves at the same time as a trigger for the
application of the principle of proportionality. In many instances, the Commission,
EIOPA or BaFin have, however, concretised some aspects of certain elements of
the governance system. These concretisations have often been phrased in the form
of minimal standards (or expectations). Here, the principle of proportionality could
no longer alter the obligation for the undertaking (at least if the concretising rule is
itself proportional and thus “constitutional”).
1.5 Examples of corporate governance structures and practices best
implemented through self-regulation
Please provide specific examples of corporate governance structures and prac-
tices that are better implemented through self-regulation rather than through
legal or supervisory requirements.
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Corporate governance of insurers in Germany. German National Report
Generally, it seems more appropriate that the legislator or regulator/supervisor
limits itself to minimal requirements concerning corporate governance since the set-
ting of legal obligations encroaches on the freedom of the executive body to manage
the business under application of the business judgment rule according to its proper
needs. In view, however, that within the insurance industry the interest of several
other stakeholders must be considered, i.e. the policyholders, insured, beneficiaries,
owners, employees, and the public at large concerning the functioning of an effec-
tive insurance market, it also seems appropriate that these minimal requirements are
more encompassing than in other economic sectors.
There nevertheless exist areas that should rather remain outside the scope of le-
gal governance requirements and should best be addressed by self-regulation. As
an example, the German insurance law historically left it for the insurers to de-
cide whether to implement an internal or external complaint handling mechanism
(nowadays they are by law required to at least have an internal complaint han-
dling mechanism). This freedom to self-regulate made it possible for the German
insurance industry to create a very consumer friendly Ombudsman procedure.13 The
Ombudsman may be petitioned by any aggrieved policyholder and the decisions are
up to an amount of 10,000 Euros fully binding on the insurer while the policyholder
always remains free to petition the courts. Under German constitutional law such
a mechanism could probably not have been provided by statute because of its par-
ticular character of passing only one-sided binding decisions (and thusly depriving
the insurer of their legal judge). Other examples might be the question, how much
green or sustainable investments an insurer makes. While sustainability considera-
tions should very well be part of any sound business management—and be it only to
hedge technical insurance risks caused by climate change or to hedge investments in
businesses potentially harmful to the environment (which might become problematic
due to changing perceptions of investors)—the concrete investment decision under
such considerations should be outside the scope of legal requirements. It should
hence be for the undertakings to decide on an appropriate level of green or sustain-
able investments which could be institutionalised by self-regulation,14 which would
allow insurers to distinguish themselves on the market and attract policyholders that
put a large premium on green finance.
1.6 Difficulties in implementing supranational corporate governance principles
In case your jurisdiction was recently requested to implement domestically cer-
tain corporate governance principles set forth by supranational regulations, de-
scribe the main obstacles and problems (if any) that resulted from such process.
13 Cf. Gal in: Ünan, Alternative Dispute Resolution Systems Regarding Private Insurance, Istanbul 2014,
pp. 9–44.
14 To give an example, the market has established the German Sustainability Codex (Deutscher Nach-
haltigkeits Kodex, DNK) which has been underwritten by several insurers. Insurers, of course, remain free
to establish and advertise their own standards, which some have done.
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J. Gal
If one were to regard the EU as a supranational body—which goes against com-
mon wisdom which perceives it as a confederation of states sui generis—much could
be said concerning the problems in transposing the Solvency II System into national
law and in implementing it into practice. Especially the preparatory phase for the
application of Solvency II, during which the old VAG representing the Solvency I-
System remained in force, but undertakings needed to be made ready for the im-
mediate entering into force of the Solvency II System without any legal transition
period created a host of dogmatic and practical problems.15
If one considers the difficulties in implementing corporate governance principles
by other truly supranational bodies, the problems are now rather reduced. Since
Solvency II is in general regarded on the international level as one of the best
practices of insurance supervisory law, it appears rather unlikely that international
standards are created that are not at least roughly in line with the German standards.
Further, the new regulatory regime is for the most part principle-based. By this
way, the system is flexible enough to allow the supervisor to concretise duties
on the supervisory level, be it for certain undertakings (e.g. GSIIs) or be it for
certain aspects of governance for all undertakings. If such is not possible, especially
if the alteration appears to be material and thus requiring legislative action, the
Solvency II System is flexible in the sense that it applies the so-called Lamfalussy
Procedure, which allows many legislative alterations to be taken by the Commission
in conjunction with EIOPA. If this flexibility is good news for the principle of
democracy is another question.
1.7 Differences in the corporate governance of insurers in comparison to other
companies
Are there any significant differences between general corporate governance
rules and the specific rules governing insurance companies?
The differences in legal governance requirements for insurers in comparison to
other companies are vast. While other financial sectors, especially banking, are
equally densely regulated, such is not true for other sectors, especially the real
economy. The most pronounced example for this is the regulatory requirement to
establish the four key functions, i.e. the independent risk management function, the
compliance function, the actuarial function and the audit function, a requirement
germane to the insurance (and banking) sector. Equally, the regulation on how and
when outsourcing of relevant functions may be operated is not in the same way
applied to undertakings of other sectors. Lastly, the ORSA procedure that insurance
(and banking) undertakings must implement do not have an equivalent in other
sectors.
15 Cp. for the problems involved with this transition period via the backdoor e.g. Wandt/Gal in: Dreher/
Wandt (eds.), Solvency II in der Rechtsanwendung 2013, pp. 147–179 (174 et seqq.).
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Corporate governance of insurers in Germany. German National Report
2 Fitness and propriety of board members
The idea that an effective and appropriate management of an undertaking first and
foremost requires certain persons to be fit and proper to be able to safeguard such, is
not a new concept under German law, neither for the insurance sector nor for other
sectors. As such, in order to receive a concession to open a business, German Trade,
Commerce and Industry Regulation have for a long time submitted the applicant
(at least for certain trades) to a fit and proper test. In the insurance industry, this
principle was turned into a black letter rule by sec. 8 subsec. 1 no. 1 VAG old
versioninreactiontothefirst-generation European insurance directives, which,
however, only requested the executive board members to be fit and proper (with
the fit and proper test being a little bit different than it is today). In 1994 this was
altered by inclusion of sec. 7a VAG old version into roughly the fit and proper test
we know today, however, still only applicable to the executive board members. In
2008, sec. 64a VAG old version was introduced, which broadened the principle to
apply to supervisory board members, which in turn was concretised by the MaRisk
VA circular16 issued by BaFin in 2009. What has truly changed since 2016 in the
insurance sector with the entering into force of sec. 24 VAG, are the persons that are
submitted to such a fit and proper test. (i.e. also key function holders and possibly
senior management) and the standard required to be considered fit.
2.1 Regulatory requirements of fitness and propriety of board members
Are there any laws or regulations already adopted or any proposals in your
jurisdiction, relating to the qualification and composition of board directors in
an insurance company? If so, please explain.
Concerning the composition of the executive board of Aktiengesellschaften sec. 76
subsec. 2 AktG only requires there to be one director or for companies with a cor-
porate capital of more than 2 million Euros at least 2 directors (unless the articles of
association provide otherwise). In this regard the four-eye-principle applies (only) in
principle to the executive board. Companies may, however, choose there to be more
directors. Most insurers make use of this option and partition the executive board in
resorts. For the Versicherungsverein auf Gegenseitigkeit sec. 188 subsec. 1 phrase 1
VAG requires the executive board to consist of at least two persons (without excep-
tions). Concerning the supervisory board of an Aktiengesellschaft sec. 95 phrase 1
AktG requires there to be at least three members. The provision, however, affords
the company the possibility to provide for more members under the condition that
the number can be divided by three (the latter only applies where employment par-
ticipation rules in the supervisory board apply) and that the number does not exceed
certain maximum numbers in relation to the corporate capital; the absolute maxi-
mum is twenty-one members. For the supervisory board of Versicherungsvereine auf
Gegenseitigkeit basically the same applies by virtue of sec. 189 subsec. 1 VAG, with
the exception that only an absolute maximum number is set (i.e. twenty-one) and
16 Rundschreiben 3/2009—Aufsichtsrechtliche Mindestanforderungen an das Risikomanagment.
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J. Gal
there are no relative maximums in relation to the size of the corporate capital and the
number must always be dividable by three. Where employment participation regu-
lation applies (i.e. more than 500 employees) the exact (minimal) number—and of
course the nomination modalities—of members of the supervisory board are altered
irrespective of the corporation form chosen.
As for the qualification of the members sec. 24 subsec. 1 VAG—setting the fit
and proper-requirements—applies. This provision requires:
All Persons who effectively run the insurance undertaking or have other key
functions must be personally proper and professionally fit. Professional fit-
ness requires professional qualifications, knowledge and experience that enable
a sound and prudent management of the undertaking. This requires appropri-
ate theoretical and practical knowledge of the insurance business as well as, in
the case of the transferal of executive functions, adequate management expe-
rience. Adequate management experience is in principle to be assumed, where
a three-year employment in a managing function at an insurance undertaking
of comparable size and line ofbusinessisproven.[...]
This requirement is amended (and superseded) by the higher-ranking art. 273 of
the European Solvency II Delegated Reg. which reads:
Insurance and reinsurance undertakings shall establish, implement and main-
tain documented policies and adequate procedures to ensure that all persons
who effectively run the undertaking or have other key functions are at all times
fit and proper within the meaning of Article 42 of Directive 2009/138/EC.
2. The assessment of whether a person is fit shall include an assessment of the
person’s professional and formal qualifications, knowledge and relevant experi-
ence within the insurance sector, other financial sectors or other businesses and
shall take into account the respective duties allocated to that person and, where
relevant, the insurance, financial, accounting, actuarial and management skills
of the person.
3. The assessment of whether members of the administrative, management or
supervisory body are fit shall take account of the respective duties allocated to
individual members to ensure appropriate diversity of qualifications, knowledge
and relevant experience to ensure that the undertaking is managed and overseen
in a professional manner.
4. The assessment of whether a person is proper shall include an assessment of
that person’s honesty and financial soundness based on evidence regarding their
character, personal behaviour and business conduct including any criminal, fi-
nancial and supervisory aspects relevant for the purposes of the assessment.
These requirements are than further concretised on the supervisory level by the
EIOPA Guidelines 11 and 12 of the Guidelines on System of Governance (EIOPA-
BoS-14/253):
“Guideline 11—Fit requirements
1.42. The undertaking should ensure that persons who effectively run the undertaking
or have other key functions are ‘fit’ and take account of the respective duties
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Corporate governance of insurers in Germany. German National Report
allocated to individual persons to ensure appropriate diversity of qualifications,
knowledge and relevant experience so that the undertaking is managed and
overseen in a professional manner.
1.43. The ASMB should collectively possess appropriate qualification, experience
and knowledge about at least:
a) insurance and financial markets;
b) business strategy and business model;
c) system of governance;
d) financial and actuarial analysis;
e) regulatory framework and requirements.
Guideline 12—Proper requirement
1.44. When assessing whether a person is ‘proper’, the undertaking should consider
that the period of limitation of the relevant criminal or any other offence is
lapsed based on national law.”
On the national level the requirements are further concretised by BaFin’s MaGo-
circular17 which for the fit and proper standard in turn declares applicable the Ex-
planatory Leaflets on the Fitness and Propriety of executive and supervisory board
members18. The latter set out in much detail the standard to be observed, the cir-
cumstances to be disclosed and evaluated, and the evaluation standard to be applied.
2.2 Circumstances influencing the independence of board members
In your opinion, what factors, conditions, or incentives might weaken the inde-
pendence of the board of directors or individual members of the board?
In light of their function, both executive and supervisory board’s members can
never be fully independent. This follows out of the fact that they often are in a po-
sition to balance diverging interests of different stakeholders. An executive board
member, for example, must take into account the shareholders’ interest of max-
imising profit while balancing this off against the policyholders’ interest of optimal
protection (e.g. making especially prudent capital reservations for future insured
events). For supervisory board members that serve as employee representatives this
conflict is even more marked, since their main purpose of being is the adequate
representation of the employees in the management—or rather the supervision of
the management—of the undertaking. Such threats to the independence of the board
members are, however, hedged by the (supervisory) law making these persons and
the undertaking liable for the appropriate management of the undertaking and thus
binding them to the supervisory goals. Since supervisory action would harm the
17 Rundschreiben 2/2017 [VA]—Mindestanforderungen an die Geschäftsorganisation von Versicherung-
sunternehmen.
18 Merkblatt zur fachlichen Eignung und Zuverlässigkeit von Geschäftsleitern gemäß VAG and Merk-
blatt zur fachlichen Eignung und Zuverlässigkeit von Mitgliedern von Verwaltungs- und Aufsichtsorganen
gemäß VAG.
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interests of all stakeholders in a comparable manner, this conflict is to a certain
degree neutralised.
Supervisory law, thus, focuses not on abstract threats to the independence out of
the function of the board member, but on concrete circumstances out of the person
of the member that endanger his or her independence. In this regard circumstances
that call into question the independence of the board member in a permanent manner
hinder their propriety and thus their execution of the function. Certain threats to the
independence may, however, only require the disclosure (within the company) and
appropriate actions through internal guidelines or other instruments to effectively
contain the conflict of interest. As a rule, all personal circumstances or economic
activities that are suitable to call into question the independent execution of his or
her executive or supervisory function by the member are to be considered. Such
a conflict of interest may, for example arise where members of the executive and the
supervisory board are related to each other or to senior management or key function
holders. If such hinders the execution of the function altogether is to be assessed on
a case by case basis. It is furthermore in principle inadmissible—other for supervi-
sory board members elected as representatives of the employees—for supervisory
board members to be employees of the undertaking in question. Furthermore, the
independence is for all members called into question if an undertaking of the mem-
ber or one of his or her relatives has an economic relationship with the insurance
undertaking in question that can be assessed as creating an economic dependence.19
One particular threat to independence that has caught the public’s interest since
the financial crisis is the remuneration of board members (especially the variable
part of the remuneration) and the execution of a multitude of board functions (in
different undertakings). German law sets concrete limits (and requirements) for all
these factors to contain the risk.
Regarding the remuneration of board members, secc. 87 and 113 AktG set con-
crete guidelines and limits for all Aktiengesellschaften (for publicly traded stock
companies, the shareholder meeting may vote on the system of remuneration of the
executive board members pursuant to sec. 120 subsec. 4 AktG). Per secc. 188 et seq.
VAG these rules also apply to Versicherungsvereine auf Gegenseitigkeit. Other than
these corporate law rules, German supervisory law provides for further requirements
of the remuneration system for board members. Sec. 25 subsec. 1 VAG regulates the
remuneration system to having to be appropriate, transparent, and aimed at a sustain-
able development of the undertaking. This does not imply a regulatory maximum for
the remuneration, nor does it force the undertaking to remunerate its executive board
members with a mixed, i.e. fixed and variable, salary, nor does this mean that the
remuneration of supervisory board members cannot contain a variable component.
This is for the most part a question of proportionality and it is for the undertaking to
make certain, that the concrete remuneration system does not create false incentives.
Where, however, variable components are used (and these variable components at-
19 See for this in detail No. II.3. Merkblatt zur fachlichen Eignung und Zuverlässigkeit von Geschäftsleit-
ern gemäß VAG and Merkblatt zur fachlichen Eignung und Zuverlässigkeit von Mitgliedern von Verwal-
tungs- und Aufsichtsorganen gemäß VAG.
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Corporate governance of insurers in Germany. German National Report
tain a certain amount) art. 275 Solvency II Delegated Reg. sets certain limits. In this
case, said rule provides:
(a) where remuneration schemes include both fixed and variable components,
such components shall be balanced so that the fixed or guaranteed component
represents a sufficiently high proportion of the total remuneration to avoid em-
ployees being overly dependent on the variable components and to allow the
undertaking to operate a fully flexible bonus policy, including the possibility of
paying no variable component;
(b) where variable remuneration is performance-related, the total amount of the
variable remuneration is based on a combination of the assessment of the per-
formance of the individual and of the business unit concerned and of the overall
result of the undertaking or the group to which the undertakings belongs;
(c) the payment of a substantial portion of the variable remuneration compo-
nent, irrespective of the form in which it is to be paid, shall contain a flexible,
deferred component that takes account of the nature and time horizon of the un-
dertaking’s business: that deferral period shall not be less than three years and
the period shall be correctly aligned with the nature of the business, its risks,
and the activities of the employees in question.
Concerning the last litera, BaFin has taken the position that in general the term
“substantial portion of the variable component” is for the remuneration of executive
board members to be understood to mean at least 60% of the variable component. By
this way, the board member is incentivised to not aim for the short- but at least the
mid-term gains of the undertaking. Where the flexible component seems irrelevant
in relation to the fixed component (i.e. does not exceed 20%) or is “insubstantial”
in total (i.e. below 35,000 C), the payment must not be mandatorily deferred.
The limits regarding the maximum amount of mandates of board members, are
intended to make certain, that every member has sufficent time available and that
the insurance industry does not become overly intermingled. A person that already
serves on the executive board of two insurance undertakings may, pursuant to sec. 24
subsec. 3 phrase 1 VAG, not exercise such function on a third board. Wheremandates
on executive boards of undertakings belonging to the same group are concerned, the
supervisory authority may grant permission. For supervisory board members, the
maximum number of supervisory board seats (on undertakings under supervision of
BaFin) pursuant to sec. 24 subsec. 4 phrase 2 VAG is five mandates (for this calcu-
lation are qua legem not considered mandates on supervisory boards of undertakings
belonging to the same group). Also, to safeguard the independence of the supervi-
sory board, former executive board members cannot immediately switch from one
board to the other but must respect a waiting period. Additionally, only a maximum
of two of the members of the supervisory board may be former executive board
members (sec. 24 subsec. 4 phrase 1 VAG).
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2.3 Means of the insurance company to ensure fitness of board members
individually and the boards collectively
How does an insurance company ensure that individual board members and the
board collectively have enoughknowledge to monitor and oversee the activities
of the insurer appropriately, particularly where specific expertise is needed?
An appropriate corporate governance structure does not only include a cross
supervision of particular function holders by each other (and the supervisory au-
thority) but should (or under German law must) include a regular (annual) self-
assessment of all board members. Out of the results of the self-assessment and the
global assessment on the functioning of the boards and its members must also be
established individual (and global) development plans. These plans should identify
for individual members specific education measures that either aim at safeguarding
their personal fitness or to establish the corporal fitness of the board in question in
a particular area, where a deficit has been identified. In light that all board members
are under a perpetual duty to undertake education measures to safeguard their fit-
ness such can in principle be enforced by the undertaking (or as a last measure by
the supervisory authority in threatening the removal of the particular member). In
general, undertakings should, however, already in their nomination practices place
importance on an appropriate composition of their boards, since it would e.g. be
rather difficult for a member coming from another profession to build up in short
time the necessary knowledge in financial and actuarial analysis.
2.4 (Non-)diverging standard of fitness and propriety for executive and non-
executive board members
Are there significant differences in terms of requirements and duties between
executive and non-executive members of the board of directors of an insurer?
Under the German dualistic model, the management of the insurance company is
the unencumbered prerogative of the executive board. The supervisory board’s duty
and right is the supervision of the executive board’s management of the company in
the past and the advisement of the same for the future without any executive func-
tion. Whilst the proper-requirement follows, pursuant to the understanding of the
legislator, a uniform standard that applies in the same way to all persons submitted
to supervision in the same way, such is not true for the fit-requirement. Here a func-
tion specific approach is followed. One marked divergence between executive and
supervisory board members can be seen in sec. 24 subsec. 1 phrase 3 VAG which
requires executive board members, in order to be fit, to have acquired appropriate
management experience. Such is not requested from supervisory board members. In
a more general sense, it is assumed that the requirement of fitness for the average
supervisory board members must remain below the threshold for executive board
members. Otherwise only executive board members of other undertakings or former
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Corporate governance of insurers in Germany. German National Report
executive board members would be eligible, which would undermine the legislative
goal of diversity and heterogeneity within the board.20
2.5 Compensation of fitness by relying on external expertise
In your jurisdiction are there any black letter rules or general principles that en-
able directors to rely upon external opinions when addressing issues or aspects
where specific expertise in needed?
German supervisory law provides for explicit rules, on how the outsourcing of
(important) functions must be operated and supervised by the insurance undertaking;
sec. 32 VAG, art. 274 Solvency II Delegated Reg., Guideline 14 of EIOPA Guide-
lines on the System of Governance (EIOPA-BoS-14/253); no. 13 MaGo-circular21.
From this one can take that the performance of outsourced functions remains ulti-
mately the responsibility of the executive board and it remains obligatory for the
supervisory board to supervise that the outsourcing is properly administrated. It re-
mains, however, a not decisively settled question (in the field of corporate liability
law but also supervisory law) to what extent an outsourced function must be con-
trolled (the same applies to the general question regarding the extent to which one
may rely on the expertise of a third person). It is common ground that the board at
least needs to exercise a feasibility control.22 Thus, blind trust would always be non-
compliant behaviour. There is, however, a marked tendency to demand much more
than a mere feasibility test. In the field of outsourcing in the insurance sector, for
example, BaFin requires undertakings that wish to outsource important functions to
(strongly) consider the creation of an outsourcing (key) function within their under-
taking which would imply the employment of a person possessing the expertise to
fully control the external provider of the outsourced function.
2.6 Role of the supervisory authority in assessing the qualifications and
activities of the board members and possible means of intervention
Describe the extent and scope of supervisors’/regulators’ intervention with ref-
erence to the qualifications and to the activities of the board of an insurer.
In a first instance, the supervisory authority may deny approval to the applica-
tion to tender insurance in Germany where the applicant’s executive or supervisory
board members exhibit circumstances that raise doubts as to their fitness and propri-
20 See Dreher in: Prölss/Dreher [eds.], VAG, sec. 24 para. 72.
21 Rundschreiben 2/2017 [VA]—Mindestanforderungen an die Geschäftsorganisation von Versicherung-
sunternehmen.
22 The full test as provided by the ISION-decision of the German Bundesgerichtshof (BGH NJW-RR 2011,
1670) requires the external expert to be qualified and independent, the external opinion needs to be based
on complete facts, needs to back the intended measure, and needs to address potential contradictions and
explanatory gaps, and as such needs to stand up under a thorough feasibility test. Finally, the reliance on the
expert opinion can only exempt the board member from liability by application of the business judgment
rule if the expert was granted complete information and access to relevant documentation.
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ety (sec. 11 subsec. 1 no. 2 VAG). For an already licensed undertaking there is the
obligation to inform the supervisory authority of all new nominations of board mem-
bers (in advance) with all information necessary to assess their fitness and propriety
(sec. 47 no. 1 VAG). These persons are furthermore under constant supervision of
BaFin and may be cautioned for misconduct and, inter alia, if the fit or proper-
requirements are no longer met, BaFin may even request the removal of the person
from its function and may prohibit that person from the execution of its function
(sec. 303 VAG).
2.7 Regulation pertaining to the governance of subsidiaries
Are there any special rules and regimes applicable to the governance of sub-
sidiaries belonging to an insurance group, also in terms of information flows?
The Solvency II-System also addresses regulatory requirements of insurance
groups. These provisions address particular duties in all three pillars of Solvency II,
i.e. quantitative, qualitative, and transparency requirements. Hence, there are also
particular provisions requiring the creation of a group internal governance and infor-
mation system, not only in relation to subsidiaries but to other related undertakings
as well. The observance of these requirements is also especially supervised not only
on a national level but through the so-called supervisory colleges in which the group
supervisor (usually the national supervisor of the [main] participating insurer [par-
ent]) and all national supervisors of related undertakings and EIOPA cooperate in
the supervision of the group as a whole.
3 Risk management
Whilst the handling of risk has always been the core business of insurance undertak-
ings, many were in the past too exclusively focused on the evaluation and handling
of their technical insurance risk. At the latest since the beginning of the works on
the Solvency II project, even the last insurer has come to realise that it does not only
need to manage other peoples’ risks but also their proper ones. This was a lesson
maybe harder learned in Germany than in other countries since the German market
has experienced so few insolvencies, implying that the industry and its partakers
must have been doing something right. In a rapidly changing market environment,
it, however, appears paramount that insurers take a more active and transparent
approach in the identification, avoidance, minimalization or neutralisation of risks.
3.1 Currently biggest risk challenge for insurance
In your opinion, what is the biggest risk challenge (e.g. regulation, capital stan-
dard, pricing, interest rate, cyber, terrorism, etc.) facing the insurance industry
today in your jurisdiction?
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Corporate governance of insurers in Germany. German National Report
It appears a little simplistic to identify one most prominent risk that threatens
the insurance industry as a whole. One has to distinguish between different insur-
ance classes and different kinds of insurance undertakings. German life insurance
undertakings, in particular, are currently probably the most threatened by the low
interest rate environment in conjunction with the high guarantees in older contracts
in their portfolio and the new risk-based capital standard. Small, very regional Ver -
sicherungsvereine auf Gegenseitigkeit, a speciality of the German market, albeit
historically often very robust financially, are currently very pressured by the regu-
latory requirements. To give an example: such a small insurer has to create the four
key functions, which may imply that they have to employ more people in governance
capacities than in the rest of the company. While the proportionality principle can
afford some alleviation in that respect, the minimal requirements might often be of
a kind to drain resources of an hitherto stable and robust insurance undertaking.
Whilst the evolution of regulation was often perceived as a burden, some insurers
have come to realise that it has also served as a protection against competition from
financial start-ups. It is, however, clear that this just postpones the inevitable. If one
wants to pinpoint one risk that threatens all insurers equally it would probably be
cyber in a large sense. In so far, it is for the insurance industry to prepare for the
implications of big data, for the growing importance of alternative distribution chan-
nels, for the increased expectation of policyholders to communicate via numerous
channels, for competition from new forms of risk transfer mechanisms and the like.
3.2 Implementation risk of (pending) future regulation
What specific laws or regulations, actual or pending in your jurisdiction, will
present significant implementation risk challenge toward the insurance indus-
try?
Insurance Supervisory Law in Germany (and in all of Europe) has experienced
an unprecedented overhaul in the last few years. The transition from Solvency I to
Solvency II is now, however, for the most part accomplished. Insofar there appear
to be no further implementation risks (other than some detail problems, which were
partly discussed in the present) hailing from insurance regulatory law. Whilst many
of the recalibrations of the supervisory system appear to have been necessary, one
should not forget that insurance undertakings engage in activities that are often very
long-term in nature (esp. life insurance but [to a lesser degree] also health insurance
and the like). In order to properly structure and price its products and plan its
investments, the insurance industry is especially dependent on regulatory stability
and predictability. Insofar one might hope for insurance regulation to enter a period
of tranquillity, instead of the almost Trotskyite state of permanent revolution in
which it remained in recent years. Insofar the biggest risk would be an overzealous
and hasty attempt to prepare a transition to a future Solvency III-System. This is,
however, not to say that regulatory projects from other areas of the law might not
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pose very noticeable challenges for the insurance industry, such is for example the
case regarding the compliance with the reformed rules on data protection.23
4 Ethics and corporate social responsibility
Insurance has in Germany, as presumably in most parts of the world, always suf-
fered from a bad public image in comparison to the important role it plays in the
functioning of the financial system and the welfare system. This is largely due to the
fact that insurance (i.e. the assumption of a risk in exchange for a premium) is an
invisible legal product that cannot be touched and perceived by the customer. Many
insured thus feel unduly wronged by their insurer where they suffer damages but do
not receive benefits or only reduced benefits. The rational of many consumers is in
such a case that they have faithfully paid their premium for many years without ever
having received anything in return and that at their moment of need they are left
hanging. What many consumers cannot grasp, is that they have constantly received
performance by the insurer which assumed their contractually defined risks. The
problem with assessing the ethical standard of insurers is thus one of perspective.
The customer will usually assume a deontological perspective, in which he or she
considers his or her personal situation and the rejection of the insurer to “help”
him or her on what he or she perceives as overly formal grounds, as unethical. The
undertaking—and its employees—on the other hand will usually assume more of
a utilitarian perspective, as their duty is not only to the individual policyholder but
to the “community at risk” and other stakeholders.
4.1 The influence of business ethical standards and corporate social
responsibility standards on behaviour in insurance companies
Please provide any concrete examples where business ethical standards and/or
corporate social responsibility standards have been applied and have changed
the behaviors of the insurance company.
Corporate social responsibility and ethical standards, focused on the individual
undertaking, play a much less pronounced role in Germany than for example in the
US. This is due to the fact, to give one example, that German employees enjoy a more
complete protection and inclusion than their American counterparts. Constitutionally
guaranteed union freedom, salary tariff practices, the right to form works councils
and their participation rights, the employees’ representatives’ participation within the
supervisory board and many employeeprotection provisions in German Employment
Law (e.g. prolonged sick pay, long minimal vacation times, maximum work hours,
23 Regulation (EU) 2016/697 of the European Parliament and of the Council on the protection of natural
persons with regard to the processing of personal data and on the free movement of such data, in: OJ of
4.5.2016, L 119/1 and German laws accompanying this General Data Protection Regulation have of course
created difficulties in all industries that deal with the processing and transferal of person-related data; this,
however, also attaches to insurance.
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Corporate governance of insurers in Germany. German National Report
restrictive termination protection, long maternity leave) force German (insurance)
undertakings to safeguard a level of corporate responsibility that many of the most
socially responsible American companies would not even consider. It is, thus, little
surprising that German undertakings found it unnecessary to establish or underwrite
specific corporate social responsibility standards. Nevertheless, there are today many,
who have established such standards. But this especially applies to larger German
undertakings which are active on a global level, who either wish to telegraph their
high standards to the outside world or are under a legal obligation to do so, for being
active in a country that requires such.
All of the above is, of course, not to say that German insurance undertakings in
general do not follow certain ethical convictions but just that such are usually not
standardised within the undertaking in the form of an ethical codex.
If one wants to give one example, where an ethical standard has influenced in-
surance behaviour in Germany’s insurance sector one could mention the Code of
Conduct for the Distribution of Insurance Products prepared under the auspices of
the German Insurance Association (GDV). One has to keep in mind that the Ger-
man insurance industry has always relied heavily on independent insurance agents
to distribute its products. Such a distribution system is especially prone to create
problems in safeguarding the proper advisement, counselling, and information of
potential policyholders. In the past, Germany suffered several minor and bigger
scandals regarding improper incentives offered to insurance intermediaries and re-
sulting systematic miscounselling of policyholders (especially regarding the transfer
of cover [in life insurance]) against their own interest. Even though the established
ethical standard for the distribution of cover did little more than reiterate what insur-
ers were already obligated to do under insurance supervisory and insurance contract
law, i.e. provide themselves proper council, advise and turn over all legally required
information or make certain that the insurance intermediary fulfils their duty for
them and its proper duty to counsel, advise, and turn over all legally required infor-
mation. Nevertheless, the creation of this ethical standard helped to clarify the legal
requirements and make many insurers look closer at their distribution system and
alter it in favour of compliant or over-compliant behaviour.
A comparable influence may be attributed to the Code of Conduct for Data Pro-
tection (by Insurers) also established by GDV. This codex, in its changing iterations,
has certainly aided in making insurers ready to the steadily increased standard of
data protection exacted by law. Whether the standard ever required the underwrit-
ing member undertakings to grant a level of data protection that would turn them
into market leaders of good practice remains, however, dubious. In view of previous
practices—where insurers of the past very liberally exchanged information with each
other concerning policyholders, with little regard to the policyholders’ interest—the
codex must, nevertheless, be applauded for bringing insurance practice more into
line with general legal standards.
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4.2 Regulation aiming at the protection of policyholders or financial consumers
In your jurisdiction, are there any specific laws or regulations already adopted
or any proposals, or any arrangements in place in the governance system, relat-
ing to the protection of policyholders’ and/or financial consumers’ interests?
In a way the complete insurance supervisory law is aimed at the protection of the
policyholder. Sec. 294 subsec. 1 VAG declares that the protection of policyholders
and beneficiaries of insurance benefits is the main goal of supervision to be given
prime importance by the supervisory authority. However, insurance supervisory law
aims at the protection of the globality of policyholders and not the individual pol-
icyholder (or investor). Individual protection thus remains to be the domain of the
ordinary courts, however, with the particularity that all financial sectors have cre-
ated an Ombudsman procedure24 that is intended to protect the individual (also,
an aggrieved consumer may lodge a complaint with BaFin which may ease in the
protection of said policyholder). Some governance supervisory requirements, fur-
thermore, aim at bettering the position of the individual policyholder, for example
by requiring all insurance undertakings to establish an appropriate internal complaint
system. That notwithstanding policyholder protection remains to be afforded for the
most part by the rules applicable to the insurance contract (right of withdrawal etc.).
4.3 Corporate social responsibility (CSR) report or a global sustainability
initiative (GSI) report in the insurance industry
In your jurisdiction, is an insurance company required to produce an annual
Corporate Social Responsibility (CSR) report or a Global Sustainability Initia-
tive (GSI) report? If so, what context needed to be disclosed in these reports?
The German legislator has transposed in the spring of 2017 the European CSR-
directive (Corporate Social Responsibility Directive25).26 Pursuant to this rule,
German insurers, though there are exceptions concerning the size of the insurer,
must enrich the annual management report (Lagebericht)orgroup report (Konz-
ernbericht) with a non-financial declaration or must create a separate non-financial
report. The content of this non-financial declaration is first the business model (for
insurance undertaking this is not a new requirement) and second at least the fol-
lowing aspects: environmental, social and employment matters, respect for human
rights, as well as anti-corruption and bribery matters.27
24 See supra I.5.
25 Directive 2014/95/EU of the European Parliament and of the Council amending Directive 2013/34/EU
as regards disclosure of non-financial and diversity information by certain large undertakings and groups,
in: OJ of 15.11.2014, L 330/1.
26 Gesetz zur Stärkung der nichtfinanziellen Berichterstattung der Unternehmen in ihren Lage- und Konz-
ernberichten (CSR-Richtlinie-Umsetzungsgesetz), in: BGBl. vom 18.4.2017, S. I-802.
27 See sec. 289c Handelsgesetzbuch [HGB; Commercial Code] in connection with sec. 341a subsecc. 1a
and 1b HGB. There is also a German Sustainability Codex (Deutscher Nachhaltigkeits Kodex, DNK)which
has been underwritten by several insurers (see supra).
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Corporate governance of insurers in Germany. German National Report
5Disclosure
As much as in the judiciary—where, according to the famous dictum of Lord Hewart,
justice must not only be done but seen to be done—good governance of an insurance
undertaking requires transparency to garner the trust of all parties concerned. An
insurance undertaking should aim at utmost transparency on three distinct levels:
internally, towards the supervisory authority, and towards the public. What concerns
internal transparency, this requires the implementation of an internal information
network and precise guidelines on what sort of information must be disclosed, in
what way, and to whom, which is in itself an integral part of a well-functioning
governance system. Contrarily, supervisory transparency is intended to put the su-
pervisory authority in a position, to enable it inter alia to evaluate if the undertaking
pays heed to all qualitative requirements in the concrete administration of the under-
taking. Lastly, by also being required to disclose certain information to the public,
which enables potential shareholders to evaluate if the undertaking is administrated
in a way to garner investment interest and potential or current policyholders to assess
if the undertaking is administrated in a way to invite trust, the market is activated
as a corrective mechanism.
5.1 Necessary mechanisms for the safeguarding of transparency regarding the
governance structure
In your opinion, what mechanisms shall be in place or considered in an in-
surance company to ensure the transparency of its governance structure? (e.g.,
the articles of association, the organization chart, any existing committees, the
major shareholders, the ethical standard, corporate social responsibility, etc.)
One rather important question is, how an insurance undertaking should make
its governance structure transparent, which would at the same time also put the
administration under self-induced pressure to respect the governance structure inter-
nally. Considering the rather rapid change that insurance regulation has exhibited in
the last years, it appears rather problematic to provide for precise requirements for
transparency of the governance structure in the articles of association. Such a line
of action would rather require insurance undertakings to having to alter their arti-
cles in a very high frequency. Transparency should, thus, be safeguarded by other
means such as certain inclusions concerning the governance structure and princi-
ples within supervisory and public reports and permanent disclosures on the website
of the undertaking. As such it seems desirable, on the one hand—much of this is
required by German law—, that the supervisor but also the public has permanent
access to at least the key information on the undertaking and its governance. Such
information should include (as a bare minimum) the articles of association, an or-
ganizational chart of the undertaking and the group structure—if it is included in
one—, on the persons of function holders (requiring to disclose publicly all poten-
tial conflicts of interests that these persons need to disclose annually internally [and
to the supervisor] seems to be rather overburdening), and the existing committee-
structure. The choice to disclose precise information permanently to the public on
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their website concerning the major shareholders should be left to the undertaking
(and the shareholder) unless a disclosure seems necessary pursuant to the amount of
the share. To the supervisory authority, however, such disclosure must be made at
least in Germany (and quite understandably so), since these major shareholders are
also submitted to a fit and proper standard. If, on the other hand, insurance under-
takings wish to make public the ethical standard or corporate social responsibility
standards which they follow should be completely up to them, since the adherence
to ethical or social standards, which are not enforced by the legislator by basing
concrete enforceable legislation on them, should be outside the purview of the law.
It should, thus, be for the undertaking to decide if it wishes to advertise with the
fact that it holds itself to a higher standard than the law requires. If such disclosure
is made, the nonadherence to such standards may (and should), however, have legal
implications.
5.2 Governance practices best ensured by transparency and minimal level of
governance requirements
Are there any governance practices that, in your opinion, can best be achieved
through disclosure rather than through specific supervisory requirements?
Which governance practices should be mandatory for an insurance company?
As highlighted above, transparency and governance should not be seen as two
exclusive but rather as two interlinked concepts. It is hence, on the one hand, a ques-
tion of (good) governance to make certain that mandatory disclosures are properly
made and what kind of voluntary disclosures are rendered public. On the other hand,
an effective transparency policy can further the governance of the undertaking by
positioning it in a favourable spot on the market. Nevertheless, the question remains
if under certain circumstances it would not be better to require undertakings only to
render public certain particular aspects of their governance rather than obliging the
undertakings directly to structure the governance system in a certain way.
The question of how an undertaking is governed should, in every liberal society,
in principle be the inviolable freedom of the director and in last instance of the
owners of the undertaking. Thus, every regulatory system should err on the side of
not requiring a certain kind of governance (except for setting general principles) but
rather only requesting transparency of certain governance related facts. In reality,
financial supervision, especially due to (perceived) negative developments in the
banking sector, has taken another turn. Nevertheless, the rule should apply that the
regulator should only provide for mandatory structural governance instruments if
the intended (important) goal cannot be achieved by requiring the undertaking to
disclose certain facts to the public. This, however, requires an informed public, since
markets would only “punish” bad governance if they can perceive it. The legislative
choice of what goals may be equally achieved by relying on a market corrective, thus
depends on the market in question. The factors to be considered here are for example:
Is there a sufficient amount of competition (allowing a policyholders to switch
from badly governed to well governed insurers); are there appropriate consumer
or policyholder protection associations; do (large) investors take into account bad
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Corporate governance of insurers in Germany. German National Report
governance, where such does not threaten the short- or medium-term returns on the
investment but rather (exclusively) endangers policyholders’ rights in the long-run;
is there a well-informed media coverage (with adequate financial expertise); and is
the public at large sufficiently educated in financial matters and the management
of an undertaking. In many instances experience has shown that a laissez-faire-
approach, requiring only transparency, seems inapt to bring about an appropriate
level of protection of policyholders in the insurance sector (even though these are
often lessons transferred from the banking to the insurance sector). Such should,
however, not be seen as carte blanche to legislators and supervisory authorities
which remain under a constant duty to assess whether or not more leeway should
be given to undertakings.
5.3 Interrelation between general rules on market abuse and transparency and
insurer specific regulation
What is the interplay between market abuse regulations and other disclosure/
transparency rules applicable to listed insurers and industry specific rules ap-
plicable only to insurance companies?
It is one of the main criticisms of the Solvency II-System that it does not address
the interrelation between the insurance supervisory (transparency) requirements and
those from other legal fields. Insofar an undertaking remains obligated to fulfil inde-
pendently their disclosure duties under commercial, accounting and capital market
law, which especially concerning quantitative requirements may imply transparency
according to rather diverging accounting standards (e.g. HGB-accounting, IFRS, US-
GAPP, Solvency II). In other areas, Solvency II has aimed at bringing its standards
in line with other transparency requirements (e.g. market abuse transparency, money
laundering, terrorist financing). Nevertheless, insurance undertakings will often be
obligated to make different disclosures to different addressees.
6 Outlook
In respect of the corporate governance of insurers, please describe your criti-
cisms on the system in your jurisdiction, any recommendations for the future,
and/or the main challenges which insurance undertakings encountered.
In general, the Solvency II-Reform has put into place a very appropriate corporate
governance regulation system for the insurance sector. This appears state of the
art. Other than the described instruments and structures, this especially applies to
the regulatory requirement to implement an Own Risk and Solvency Assessment-
Process (ORSA). The main criticism of the current system rather hails from the
concrete application of the regulation within the supervision of undertakings, where
many market participants feel that the proportionality principle is not applied in an
appropriate manner. Whether this is a problem of the (in many respects still) current
“transition period” or a permanent situation, however, remains to be seen.
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J. Gal
Funding Open Access funding provided by Projekt DEAL.
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