Germany: new rules for the business of (re)insurance companies from so-called third countries

Authorisation requirement for (re)insurance business of third country (re)insurance companies

In its official journal of 15 July 2016, BaFin informed insurance and reinsurance companies with head offices in so-called "third countries" (i.e. countries not part of the EU or EEA) that new requirements for their (re)insurance business in Germany have applied since 1 January 2016. Section 67(1) sentence 1 VAG provides in this respect that such third country (re)insurers generally require a licence from BaFin in order to conduct insurance or reinsurance business in Germany. In order to obtain such a licence, the establishment of a German branch office is in fact necessary.

Exception for reinsurance business from equivalent third countries

On its web pages, BaFin does, however, also point out that Section 67(1) sentence 2 VAG provides an exception for (re)insurance companies that wish to conduct only reinsurance business in Germany. According to this exception, the requirement for authorisation and the establishment of a branch office does not apply if (re)insurance companies from third countries conduct only reinsurance business in Germany by providing cross-border services and if the European Commission has decided in accordance with Article 172(2) or (4) of the Solvency II 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 the Solvency II Directive.

The European Commission has thus until now decided only that the solvency regime for reinsurance activities in (i) Switzerland (full equivalence), (ii) Bermuda (full equivalence with the exception of rules on captives and special purpose insurers) and (iii) Japan (temporary equivalence) have to be regarded as equivalent. With regard to third countries, therefore, only (re)insurance companies with head offices in Switzerland, Bermuda and Japan may conduct reinsurance business on an (active) cross-border basis without a necessity to obtain a licence and to establish a branch office. The respective equivalence decisions taken by the European Commission can be found on the website of EIOPA.

Reinsurance business from non-equivalent third countries

(Re)insurance companies from third counties without such equivalence decision (i.e. currently all third countries other than Switzerland, Bermuda and Japan) may in contrast to this conduct reinsurance business free from any local licensing requirements and German (re)insurance supervision only under the exemption of home-foreign insurance or better correspondence insurance ("Korrespondenzversicherung").

BaFin's guidance concerning correspondence insurance in the reinsurance sector

However, BaFin's view, published recently on its web pages concerning correspondence insurance in the reinsurance sector, is remarkable and ought to give rise to further discussions and considerations. Insofar BaFin has set out the following:

"Insurance by correspondence, which is not subject to authorisation, applies to reinsurance business if, at the instigation of an undertaking domiciled in Germany, a reinsurance contract is concluded by correspondence with a primary insurer or reinsurer domiciled abroad without one of the parties being assisted by a professional intermediary in Germany or a professional intermediary domiciled abroad but acting as intermediary in Germany."

According to this guidance, BaFin refers essentially to its former understanding of the term intermediary ("Mittelsperson") as the decisive criteria for the licensing requirement in Section 105(2) sentence 1 VAG old version. Apparently BaFin interprets the term insurance intermediary broadly. Pursuant to the guidance, apparently the involvement of reinsurance brokers on the side of the German cedants also triggers the authorisation requirement under the new Section 67(1) VAG. This applies according to the guidance irrespective of whether a broker in Germany or a broker domiciled abroad but acting as intermediary in Germany is involved. Applying this view, third country (re)insurance companies from non-equivalent third countries without a licensed German branch office could actually be forced to reject business offered to them by reinsurance brokers "acting" in Germany, as referred to by BaFin in its guidance, in order to avoid unauthorised reinsurance business.

BaFin's guidance can be questioned

The fact, however, that the legislature actually deleted the intermediary criteria in Section 67(1) VAG completely and indicated that the change should establish a similar legal situation to that in the banking sector suggests that the BaFin's approach is at least not entirely correct.

For the banking sector, BaFin has recognized in a leaflet that even if a customer approaches a domestic intermediary in order to conclude a contract with a third country company abroad, this would be deemed passive cross-border business free of supervision. Only if either a contractual relationship (e.g. framework contract, co-operation agreement) or the factual arrangement of the business relationship would suggest that the third country company uses the domestic intermediary as distribution network would the licence requirement apply.

It can be concluded from this, that – within the framework of banking supervision – BaFin considers, with regard to whether an authorisation requirement applies, on whose behalf an intermediary is involved in a transaction with a third country company. Applied to the area of insurance supervision, it should therefore be relevant that a reinsurance broker is basically involved on the side of the ceding German insurance company.

With regard to the described understanding of BaFin, however, considerable risks remain with regard to a broker involvement pending further clarification.