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Saturday, 4th October 2025 |
| Germany’s reporting regime a big challenge |
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| The capital investment reporting regime is not only a challenge for the German insurance industry, but also for providers of financial products and their specialised service providers. Those aiming to supply the German market should consider these requirements at the earliest stages of development in order to best promote their product, write Joachim Kayser and Grozdana Sijanski. |
Introduction
German insurers are subject to a diverse array of periodical or event-driven information, notification and reporting requirements to the Federal Financial Supervisory Authority in Germany (BaFin). However, the reporting requirements of German insurers should also be of interest to providers of investment products, on which insurance companies have to report.
Information and reporting requirements regarding investment assets
German insurers must always determine whether the respective investment is acquirable in principle, i.e. whether it can even be considered as being eligible for the restricted asset category. | | Joachim Kayser |
They must ensure that the investment principles of Sec. 54 Para. 1 of the Insurance Supervision Act (VAG) as well as the provisions of the Ordinance on the Investment of Restricted Assets of Insurance Undertakings (AnlV) are always adhered to. In this context, a number of circulars have to be observed.
In circular R 11/2005 (‘circular’) the Bafin released directives and guidelines regarding the information and reporting requirements of all investments.
Accordingly, the most significant reports include the quarterly report on the composition of investments (Nw 670), the quarterly (semi-annually in the case of re-insurers) report on the book and fair value of investments and the coverage of the actuarial liabilities (Nw 671) as well as the quarterly report on financial innovations within the investments (Nw 673). Sorted by asset class Nw 670 serves as an overview. As far as special asset classes are concerned, Nw 670 is substantiated in Nw 673
(as well as in further appendices to the circular).
The forms and templates attached to the circular consist of a table or a list of criteria and are explained more thoroughly in the Bafin’s explanatory notes.  | | Grozdana Sijanski |
According to the circular presently in force, German insurers must file, among other things, the following appendices:
• Under the appendix ‘Funds’, the insurer substantiates the indications in Nw 670 by reporting in depth on its investments in special fund units, investment corporations with variable capital and investment companies according to Sec. 2 Para. 1 No. 15-17 AnlV. As to the question of whether those investments are generally eligible, the investment circular R 15/2005 (A.III.9.) is applicable. Within the framework of this appendix, the insurer is required, for example, to comment on the transparency of the respective asset structure and to provide an account of all assets of the fund based on a look-through approach.
• Under the appendix ‘Hedge Funds’, the insurer reports on its investments in this asset class. As to the question of whether those investments are generally eligible for the restricted assets of an insurance company, the circular R 7/2004 is applicable.
• Under the appendix ‘Structured Products’, the insurer reports on each new investment in structured products sorted by types of investments (actuals). The information that has to be provided by the insurer includes statements on investments’ essential features (e.g. performance), on whether the product is a simple or complex structure as well as to its derivative elements and their mode
of action.
• In addition, the appendices ‘ABS&CLN’, “Participations”, ‘Real Estate’, ‘Affiliated Companies’ as well as ‘Intermixture’ and ‘Diversification’ are worth mentioning.
Adaptation of the circular as a result of the amendment of AnlV
According to the most recent information an amendment to the AnlV is expected in Spring 2009. This should coincide with an adaptation of the reporting requirements substantiated in circular R11/2005.
At the time of the finalisation of this article we had a draft of the circular and its appendices at hand. It is notable that, according to this draft, there will no longer be separate forms for ‘Structured Products’, ‘ABS&CLN’ as well as ‘Hedge Funds’. Instead, only one appendix ‘Product Innovations’ is planned. With this new appendix the insurer is supposed to report on investments in: ‘structured products, which are linked to hedge funds or hedge fund indices” (A), “structured products which are linked to commodity risks” (B), ‘Asset Backed Securities and Credit Linked Notes and other investments which serve the purpose of transferring credit risk (C)’ and ‘structured products according to circular 3/99 (D)’. Assets which can be formally attributed to several asset types, should be attributed to the more special asset type. In the case of products which are linked to several risks a ranking should be assigned so that multiple reporting can be excluded.
Furthermore the draft of a new appendix ‘Funds’ is also currently being developed. From the perspective of the Federal Investment and Asset Management Association (BVI) the new rules require significant implementation and adaptation efforts by the investment companies and data providers. In this context, an extension of the transitional period for the implementation has
been requested.
Look-through approach requirement
In the case of German insurers, capital investments are subject to qualitative and quantitative restrictions. They must observe special inter-mixture and diversification quotas as well as the so-called risk capital quota.
Diversification is to be understood as the allocation of investments of all kinds to different originators (debtors) or, in the case of real estate, to different objects, as necessary for risk diversification.
The inter-mixture of assets is aimed at limiting typical risks for certain investments by offsetting risks between different investments and thereby creating greater safety for the entire portfolio.
Certain asset classes are summarised under the term ‘risk capital’. A German insurer is not permitted to invest more than 35 per cent of its restricted assets into risk capital. This risk capital quota includes receivables on subordinate liabilities (Sec. 2 Para. 1 No. 9 AnlV); fully paid-up shares which are included in a regulated market or are admitted for official trading at a stock exchange or included in a regulated market in a country outside the EEA and the member states of the OECD; other fully paid-up shares, participating interests in a limited liability company, limited partnership and participating interests as silent partner within the meaning of the Commercial Code provided that the undertaking fulfils determined criteria and investments in units of investment funds with an investment policy which corresponds to the investment policy of a fund with additional risks pursuant to the German Investment Act.
When calculating the special inter-mixture and risk capital quotas direct investments are equated with indirect investments. Indirect investments represent, for instance, assets which an insurer holds through interests in a foreign investment fund. Indirect investments of the insurer are to be proportionately allocated to the respective special inter-mixture quotas by means of the look-through approach assessment at the insurance company level. Thus the different types of investments are reflected and a more realistic consideration of the actual existing risk investments is achieved.
Pursuant to Sec. 3 Para. 4 S. 2 AnlV, a precise determination of the special inter-mixture and risk capital quota requires a transparent asset structure of the respective fund. Transparency requires that an insurance company will be informed of the composition of the investment assets in a timely manner.
Should a fund not be transparent, the provisions of the BaFin allow for a look-through approach assessment if the prospectus contains quantitative limits on the respective investments. These limits can be laid down in the contractual terms, investment guidelines, the articles of association of an investment fund or in a side letter.
BVI data sheet for VAG-Reporting
The BVI has developed a data sheet in cooperation with the the Association of German Insurers (GDV) and the BaFin, which details the breakdown of the fund assets into the most important positions. The BVI has supplemented this data sheet with notes on the VAG-Reporting in accordance with the reporting circular and clarified the general framework of the VAG-Reporting.
The investment companies transfer the data listed in the BVI data sheet to the insurers and thereby support them in their compliance with the requirements resulting from the circular including its appendix “Funds”. For the purpose of the look-through approach assessment, the current BVI data sheet divides the investment funds into different asset types and allocates the different types to the special inter-mixture quotas using a particular key. Within the framework of the upcoming changes it should be noted that the BVI data sheet including the notes can only be updated after the final version of the AnlV and reporting circular with its appendix ‘Funds’ are available.
Considerations for providers of financial services software
The German insurers will only be able to fulfil their reporting requirements within the timeframe provided by the legislator if the providers of the appropriate software affect the changes in the software in due time. To that extent, the capital investment reporting by German insurers, also represents a severe test and challenge for providers of financial services software. The adaptation to short-term legal changes necessitates that they actively appreciate and understand the upcoming legal changes and the implementation thereof in their software.
The goal should be to allow for the implementation of new requirements to be made by means of flexible configuration options, which do not require a change in the software’s source code.
Conclusion
The capital investment reporting regime is not only a big challenge for the German insurance industry itself, but also for providers of financial products and their specialised service providers.
It remains to be seen however, to what extent the providers of investment products which are eyeing German insurers as prospective investors, are aware of the extensive reporting requirements of these investors. In our opinion, the providers should consider these requirements at the earliest stages of product development in order to best promote their product to the German insurance industry. Seamless reporting not only offers a real added value to insurers, but can also impact their investment decisions in favour of a specific provider. |
Joachim Kayser is tax partner and Grozdana Sijanski is manager tax & legal services - financial services for PricewaterhouseCoopers Germany based in Frankfurt.
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