Conduct of reinsurance business in Germany by insurance undertakings situated in a third country (2024)

Introduction

Insurance undertakings (primary insurers and reinsurers) from third countries, i.e. countries that are not member states of the European Union or signatories to the Agreement on the European Economic Area, are subject to authorisation and must establish a German branch office if they wish to carry on primary insurance or reinsurance business in Germany. The requirements for the authorisation application and the establishment of a branch office are based in particular on the provisions of sections 68 and 69 of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG).

Section 67 (1) sentence 2 first half-sentence of the VAG provides an exemption for insurance undertakings that wish to carry on solely reinsurance business in Germany. According to this exemption, the requirement for authorisation and the establishment of a branch office does not apply if primary insurers or reinsurers from third countries carry on solely reinsurance business in Germany through provision of cross-border services and if the European Commission has decided in accordance with Article 172(2) or (4) of Directive 2009/138/EC that the solvency regimes for reinsurance activities carried out by undertakings in the relevant country are equivalent to the regime described in that Directive.

The following information refers only to the conduct of reinsurance business by third-country insurance undertakings.

Impact on existing and new business

The provisions of section 67 ff. of the VAG applicable to third-country undertakings came into force on 1 January 2016. Reinsurance contracts entered into on or before 31 December 2015 can be executed and run-off without authorisation. If the renewal of a reinsurance contract between a German insurer and a third-country insurer requires a contractual agreement between the parties (in particular regarding key elements such as the scope of cover or premiums), reinsurance contracts concluded on or after 1 January 2016 are subject to authorisation requirement (section 67 (1) sentence 1 of the VAG) or exemption (section 67 (1) sentence 2 of the VAG). This must be taken into account for the annual renewals of reinsurance contracts.

Exemptions from the authorisation requirement

Carrying on reinsurance business in Germany does not only include the execution of legal transactions, but also the main steps leading up to signing the contract as well as the performance of the contract. The decisive element is whether the third-country insurance undertaking deliberately targets the German market (e.g. advertisment of specific products, an Internet presence targeted at the German market, employees of the third-country insurance undertaking visiting customers with the aim of concluding reinsurance contracts) in order to offer reinsurance contracts to German insurers or to initiate such business.

Deliberate targeting is also the case if the third-country insurance undertaking uses intermediaries situated in Germany or abroad to contact German insurers or to provide offers to the German market. It should be borne in mind that intermediaries situated abroad may also carry out intermediary activities in Germany (for example as underwriter or by being involved in the conclusion of the contract, by cooperating in the performance of the contract or by providing detailed information on reinsurance solutions offered).

A third-country insurance undertaking is also considered to be conducting business in Germany if it deliberately targets the German market by concluding contracts with German insurers on a regular basis.

If reinsurance contracts are concluded by correspondence, however, the authorisation requirement laid down section 67 (1) sentence 1 of the VAG does not apply. Insurance by correspondence (Korrespondenzversicherung), which is not subject to authorisation, applies to reinsurance business if, at the instigation of an insurance undertaking situated in Germany, a reinsurance contract is concluded by correspondence with an insurer situated abroad without one of the parties being assisted by a professional intermediary in Germany or a professional intermediary situated abroad but acting as intermediary in Germany.

The crucial element here is that the initiative to conclude the reinsurance contract must come from the German insurer. This is not the case, however, if the initiative of the German insurer is based on activities carried out by a third-country insurance undertaking which consitute the conduct of business in Germany.

Another important requirement is that the reinsurance contract must be concluded by way of correspondence. This is assumed to be the case if the contracting parties make use of the usual methods of communication such as telephone, fax, e-mail or post.

In compliance with the principles applying to the conduct of business in Germany, German insurance undertakings may, on their initiative, authorise a third party to prepare and/or conclude a reinsurance contract. This applies in particular to cases where a German insurer uses an intermediary situated in Germany or abroad in order to establish contact with a particular third-country insurance undertaking which, according to the above-mentioned criteria, does not conduct business in Germany. The criteria for conducting business in Germany are considered fulfilled, however, if an intermediary situated in Germany and abroad offers contracts on behalf of a German insurer to a third-country insurance undertaking to which it maintains an ongoing business relationship, or to a third-country insurance undertaking which deliberately targets the German market by other activities for other German insurers carried out on a regular basis.

Furthermore, a third party may, with the involvement of third-country insurance undertakings, advise a German insurer regarding the development of reinsurance solutions, provided that the third-country insurance undertaking concerned does not deliberately target the German market through this third party.

Conducting reinsurance business from the undertakings registered seat

If the conditions laid down in section 67 (1) sentence 2 first half-sentence of the VAG are fulfilled, third-country insurance undertakings may conduct reinsurance business in Germany without authorisation. Equivalence decisions pursuant to Article 172(2) or (4) of Directive 2009/138/EC are decisive in this regard. Such equivalence decisions are also based on the provisions stipulated in Title I of Directive 2009/138/EC. Decisions of the European Commission pursuant to Article 227 or Article 260 of Directive 2009/138/EC have no relevance with regard to section 67 (1) sentence 2 first half-sentence of the VAG.

In this context it has to be noted that third-country insurance undertakings are not permitted to conclude and perform contracts when a branch having its head office in another country that is a member state of the European Union or a signatory to the Agreement on the European Economic Area or another third country is involved.

Aspects of risk management and calculation of the solvency capital requirements

Insurance undertakings must take adequate account of risks arising from reinsurance relationships with third-country insurance undertakings. Risk management systems must include all the risks the insurance undertakings are exposed to and, pursuant to section 26 (5) sentence 1 no. 6 of the VAG, must in particular cover reinsurance and other risk mitigation techniques. This also includes reinsurance contracts with third-country insurance undertakings. In this regard, it is of particular importance to also assess the creditworthiness of the relevant third-country insurance undertaking and to take into account the specific legal and default risks.

The insurance undertakings must also assess whether the specific requirements for the eligibility of reinsurance contracts with third-country insurance undertakings as a risk mitgation technique for the calculation of the basic solvency capital requirement pursuant to Article 211(1) and (2) of the Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 are fulfilled.

Powers of intervention and consequences under criminal law

German and foreign insurance undertakings should bear in mind that, under the conditions set out in section 308 (1) sentence 1 of the VAG, the supervisory authority may also order third-country insurance undertakings to cease conducting business immediately and run-off the business without delay. Pursuant to section 308 (4) of the VAG, the powers of the supervisory authority in accordance with section 308 (1) of the VAG also apply in relation to undertakings and persons stated in section 308 (3) of the VAG, if it is determined or if facts justify the assumption that these undertakings or persons are involved in initiating, concluding or perfoming such business; this applies in particular in relation to undertakings which enter into or mediate contracts for undertakings within the meaning of section 308 (1) of the VAG, and undertakings which carry out functions or activities for such undertakings.

Please note that the operation or commencement of reinsurance business without the authorisation required pursuant to section 67 (1) sentence 1 of the VAG is considered a criminal offence punishable with imprisonment (section 331 (1) and (3) of the VAG), regardless of whether the lack of authorisation is due to intent or negligence.