BaFin PPP Circular 05/2025 on the Prudent Person Principle for Insurance Undertakings under Solvency II

This translation is furnished for information purposes only. The original German text is binding in all respects. Page 1 of 26 Circular 05/2025 (VA) The Prudent Person Principle (PPP) of insurance undertakings under Solvency II (PPP Circular)

Page 2 of 26 Contents

1. Objectives of the Circular 4
2. Scope and definitions 4
3. Preliminary remarks and relationship of the Circular to the EIOPA Guidelines and other BaFin publications 4
4. Proportionality 6
5. Management of investment risk 6
6. Assessment of non-routine investments and investment activities 8
7. Security, quality, liquidity and profitability of the investment portfolios 8
8. Interests of the insureds and conflicts of interest 9 8.1. Investing assets in the interests of the insureds 9 8.2. Managing conflicts of interest and measures to avoid them 10
9. Unit-linked and index-linked contracts 12
10. Assets not admitted to trading on a regulated market 13
11. Derivative financial instruments (derivatives) 14 11.1. Definition and scope of the permissible use of derivatives and efficient portfolio management 14 11.2. Risk management requirements when using derivatives 16 11.3. Effective risk transfer in the case of hedging 17
12. Securitised instruments 18
13. Investment risk management policy 18
14. Liquidity risk management 20
15. Asset-liability management 21
16. Sustainability 23 16.1. Sustainability: General remarks 23 16.2. Considering sustainability risks 24 16.3. Consideration of potential long-term impacts on sustainability factors and modelling the sustainability preferences of insureds 25
17. Effective date of the Circular and withdrawal of interpretative decisions 26

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1. Objectives of the Circular This Circular provides guidelines on interpreting the provisions concerning the prudent person principle (PPP) in the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG) and in Delegated Regulation (EU) 2015/35 (IR (EU) 2015/35). It establishes a binding interpretation of these requirements for BaFin and hence ensures consistent application to all undertakings and groups. By following the application guidance set out below, undertakings can decide freely after due assessment of the circumstances, at their own responsibility and after consideration of the relevant risks, which specific arrangements are appropriate, taking into account the principles of proportionality and a principle-based approach.
2. Scope and definitions The Circular addresses the Solvency II supervisory regime. It applies to all primary insurers and reinsurers whose registered office is in Germany or in a third country in accordance with section 1 (1) no. 1 in conjunction with section 7 no. 33 or section 7 no. 34 in connection with no. 6 of the VAG (referred to hereafter as “undertakings”), unless they are death benefit funds in accordance with section 218 (1) of the VAG, Pensionskassen in accordance with section 232 (1) of the VAG or small insurance undertakings in accordance with section 211 of the VAG. This Circular does not apply to reinsurance undertakings that meet the conditions set out in section 165 (1) of the VAG, or to primary insurers and reinsurers that meet the conditions set out in section 343 of the VAG. This Circular also applies at group level, to the extent that the group supervision requirements under sections 245 et seq. in conjunction with section 275 (1) sentence 1 of the VAG apply. Insurance holding companies that themselves conduct primary insurance and/or reinsurance business also fall within the scope of this Circular, see section 293 (1) sentence 2 of the VAG. The term “management” refers to the management board of an undertaking. To the extent that undertakings under public law or undertakings in the legal form of the European Company (SE) or insurance holding companies and mixed financial holding companies that fall within the scope of this Circular do not have a governing body with this title, then the corresponding management body takes the place of the management board. In the case of branches of undertakings whose registered office is outside the European Economic Area, the authorised agent takes the place of the management board.
3. Preliminary remarks and relationship of the Circular to the EIOPA Guidelines and other BaFin publications Compliance with the prudent person principle set out in section 124 of the VAG is an important element of the undertaking’s own responsibility. The focus is on a standard of conduct rather than on quantitative regulatory rules. This means that the undertaking must always act prudently in all processes through which investment strategies are developed, adopted, implemented and monitored. This applies in light of the purposes for which the 1 2 3 4 5

Page 5 of 26 assets are being managed and the outcomes achieved. Prudence and skill in the asset management for which the undertaking is responsible, as well as an appropriate understanding of the risks associated with the investments, are essential requirements for complying with the prudent person principle and ensuring that the obligations arising from insurance contracts can be met at all times. EIOPA Guidelines 27 to 35 on the system of governance (EIOPA-BoS-14/253) clarify the prudent person principle laid down in section 124 of the VAG. In addition, EIOPA Guidelines 24, 25 and 26 on the system of governance clarify the requirements relating to the risk management policy for asset-liability management, investment risk and liquidity risk. BaFin is therefore basing its interpretation of the relevant provisions of the VAG and IR (EU) 2015/35 on the EIOPA Guidelines on the system of governance, including the explanations on those Guidelines With regard to the system of governance of undertakings, reference is made to the circular on the Minimum requirements under supervisory law on the system of governance of insurance undertakings under Solvency II (MaGo for SII IU), as amended. Specific requirements that BaFin imposes in other publications with regard to the prudent person principle or the system of governance of undertakings remain unaffected by the requirements of this Circular. This applies in particular to the following publications:  Interpretative decision of 23 October 2013, as most recently amended on 24 April 2014 – Notes on the use of external ratings and on making own credit risk assessments  Interpretative decision of 7 April 2017 – Treatment of sovereign risk under Solvency II in the context of the prudent person principle in the ORSA and as part of the own risk assessment  Interpretative decision of 28 March 2018 – Infrastructure investments – Treatment of risks under the prudent person principle  Circular 3/2016 (VA) – Trustee for monitoring the guarantee assets (Sicherungsvermögen)  Circular 6/2017 (VA) – Preparation and management of a register of assets  Circular 9/2023 (VA) – Fit and proper assessment of the professional qualifications and good repute of members of the management board in accordance with the Insurance Supervision Act  Circular 10/2023 (VA) – Fit and proper assessment of the professional qualifications and good repute of members of administrative or supervisory bodies in accordance with the Insurance Supervision Act  Circular 11/2023 (VA) – Fit and proper assessment of the professional qualifications and good repute of individuals responsible for key functions or who carry out key functions, in accordance with the Insurance Supervision Act Guidance Notice on Dealing with Sustainability Risks of 20 December 2019, as most recently amended on 13 January 2020, and Guidance Notice 01/2023 on Aspects of Conduct of Business Supervision for Savings Products are also not affected by the requirements of this Circular. 6 7 8 9

Page 6 of 26 4. Proportionality The principle of proportionality plays a significant role in the implementation of the prudent person principle. The requirements must be met in a way that is proportionate to the nature, scale and complexity of the risks inherent in the business of the undertaking (section 296 (1) sentence 1 of the VAG). The proportionality principle is therefore linked to the individual risk profile of the undertaking. Proportionality does not affect the question of whether the applicable requirements must be met. It only affects how requirements can be met. For example, a less pronounced risk profile can lead to easier implementation, whereas a more pronounced risk profile makes implementation requirements more demanding. The assessment of which arrangement can be considered to be proportionate can only be made in the specific context and is not static, but may evolve over time in response to changing circumstances. That is why the undertaking must examine whether and how the existing structures and processes can or must be enhanced. 5. Management of investment risk In accordance with section 124 (1) sentence 2 No. 1 of the VAG, undertakings may only invest their entire portfolio of assets in assets and instruments whose risks they can adequately identify, assess, monitor, manage, control and include in their reporting, and that they can adequately consider when assessing their solvency requirements in accordance with section 27 (2) No. 1 of the VAG. The following material risks in particular must be considered in the investment process: market risk, credit risk, concentration risk, liquidity risk and operational risk. The latter also includes the legal risks inherent in the investment, in particular complex fund rules and foreign legal rules, as well as risks that may result from changing legislation and court rulings). In accordance with section 124 (1) sentence 2 no. 7 of the VAG, assets must be adequately mixed and diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings, or geographical area and excessive accumulation of risk in the portfolio as a whole. For each type of investment, undertakings must define their own quantitative limits within their investment risk management policy (internal schedule of investments, see paragraph 96). The composition of the overall investment portfolio must at all times be the outcome of a well-structured, disciplined and transparent investment process. EIOPA Guideline 27 on the system of governance and the explanations on this Guideline must be observed. 10 11 12 13 14 15 16 17

Page 7 of 26 In accordance with EIOPA Guideline 27 on the system of governance, the specific risks of investments and derivative financial instruments can only be adequately identified, assessed, monitored, managed, controlled and reported if the undertaking does not depend solely on information provided by third parties, such as financial institutions, asset managers and rating agencies. In particular, the undertaking should develop its own set of key risk indicators and take into account the risks associated with the investments when making investment decisions The requirement set out in paragraph 18 also corresponds to the requirements of section 28 of the VAG. In accordance with section 28 (2) of the VAG, undertakings within the scope of Regulation (EC) No. 1060/2009 of the European Parliament and of the Council on Credit Rating Agencies (hereinafter referred to as the “CRA Regulation”) must comply with the obligations resulting from the CRA Regulation, as amended. In accordance with Article 5a(1) of the CRA Regulation, undertakings must make their own credit risk assessments and may not rely solely or mechanistically on ratings when assessing the creditworthiness of an undertaking or a financial instrument. With regard to the obligation to carry out own credit risk assessments, reference is made to the interpretative decision of 23 October 2013, as most recently amended on 24 April 2014, on the use of external ratings and making own credit risk assessments. With regard to investments in investment funds, the undertaking is only able to adequately identify, assess, monitor, manage and control the associated risks if it has knowledge of the investments contained in the fund and has examined them closely. Before acquiring an investment fund, the undertaking must analyse whether and which investments are suitable for implementing its investment strategy. All available information and documents must be available for the review. Depending on the type of investment fund, these include in particular: a) the fund rules or by-laws and the sales prospectus, as well as any investment guidelines and additional contractual agreements; b) information on the (actual) investment policy, investment restrictions, transferability and redemption options; c) information on leverage and short sales; d) information on the depositary; and e) annual and half-yearly reports. The contractual documents (fund rules or bylaws and any additionally agreed investment policies) should generally only permit investments that the undertaking actually intends to acquire and that are consistent with its investment strategy and investment risk management policy. Due diligence must be performed in order to exercise the care required when selecting investment funds and management companies. The following information must be obtained in particular, depending on the type of investment fund: a) structural information on the investment fund, e.g. company information, information on management and external service providers; 18 19 20 21 22

Page 8 of 26 b) information on risk measurement and risk management, the valuation process, performance, reporting and fees. Investments in investment funds must be verifiably analysed for legal and economic risks before acquisition and during the term of the investment. The undertaking must at all times be in a position to quantify the impact of an investment on its portfolio and must continuously monitor its exposure to investment funds to ensure compliance with the investment strategy and the requirements of the risk management policy. Depending on the type of investment fund, this will require comprehensive periodic reporting by the relevant management company to the undertaking. The monitoring procedure must be documented transparently. 6. Assessment of non-routine investments and investment activities Reference is made to EIOPA Guideline 28 on the system of governance with respect to non￾routine investments or investment activities. The aspects described there, including the explanations on EIOPA Guideline 28, must be observed. The characteristic of non-routine investments or investment activities is that they do not occur frequently. This is the case in particular with innovative investments, complex investments and investments of investment activities involving large volumes. Each undertaking must define and document which investments or investment activities are non-routine. The use of derivatives is not considered to be routine unless they are standardised derivative transactions that are entered into regularly by the undertaking. In accordance with EIOPA Guideline 28 of the system of governance, before performing any investment or investment activity of a non-routine nature, the undertaking should carry out an assessment of its ability to perform and manage the investment or investment activity, among other things. It must identify and assess the risks specifically related to the investment or the investment activity and the impact of the investment or the investment activity on the undertaking’s risk profile. The undertaking must establish a new product process (NPP) or a non-routine investment process (NIP) for this purpose. The assessment of non-routine investments and investment activities must be documented. The management board must be informed if a non-routine investment or investment process is associated with a material risk or a material change in the risk profile. 7. Security, quality, liquidity and profitability of the investment portfolios In accordance with section 124 (1) sentence 2 no. 2 of the VAG, all assets must be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole; The requirements listed in EIOPA Guidelines 29 and 30 on the system of governance 23 24 25 26 27 28 29 30 31

Page 9 of 26 and the explanations on these Guidelines must be observed. The security, quality, liquidity and profitability of the portfolio as a whole must be regularly reviewed. The undertaking may only invest in investments that help ensure the level of security, quality, liquidity and profitability the undertaking is aiming for at portfolio level. This applies both to directly and indirectly held investments. It is not possible in all cases to avoid a deterioration in individual characteristics at portfolio level in order to improve other characteristics. For example, a higher degree of security and quality is often associated with lower profitability. However, the negative impact must not outweigh the positive impact. The level of security, quality, liquidity and profitability the undertaking is aiming for in relation to the portfolio as a whole must be documented in the investment risk management policy (see section 13 of this Circular). If one or more of these characteristics is or are significantly undershot at the individual investment level, these investments must be kept to a prudent level. However, these investments must not impair the security, quality, liquidity and profitability of the portfolio as a whole. For this reason, the undertaking must disclose the extent to which the target level for an individual characteristic may be undershot, provided that the other characteristics are met at portfolio level. This is a requirement for assessing the extent to which individual investments must be maintained at a prudent level if a characteristic is undershot. Compliance with these principles must also be ensured for investments that could be offered to the undertaking in a secured event (or by other means, e.g. conversion, etc.). In this case, the same procedure should be followed as for an existing investment. With regard to the profitability characteristic, the undertaking must define the target returns it wishes to achieve with its investments, taking into account its underwriting commitments. In achieving its target returns, the undertaking must carefully consider whether the risk associated with an investment is appropriate and tolerable in the relevant market environment. If necessary, the target returns must be reviewed, taking the commitments into account. 8. Interests of the insureds and conflicts of interest 8.1. Investing assets in the interests of the insureds The prudent person principle requires explicit consideration of the interests of policyholders and beneficiaries (hereinafter referred to as “insureds”). In accordance with section 124 (1) sentence 2 no. 3 of the VAG, this applies to assets held to cover technical provisions. 32 33 34 35 36 37 38 39 40

Page 10 of 26 The undertaking must analyse which investments it intends to acquire are broadly in the interests of the insureds. The interests of the insureds will focus in particular on the undertaking’s ability to discharge its contractual obligations at all times. However, they will also be significantly determined by the nature and scope of the underlying insurance products and contracts. In the case of life insurance products, for example, where the insureds participate in investment performance, conflicts of interest may also arise as a result of this participation in investment performance. The undertaking must document its understanding of the interests of the insureds in connection with the investment of assets in its investment risk management policy (see paragraph 104). 8.2. Managing conflicts of interest and measures to avoid them If, when assets are invested, conflicts arise between the interests of the undertaking or the holders of a qualifying holding on the one hand and the interests of the insureds on the other, the undertaking must ensure that the investment is made in the interests of the latter, in accordance with section 124 (1) sentence 2 no. 4 of the VAG. The lawmakers have therefore made a clear decision in favour of the insureds. EIOPA Guideline 31 on the system of governance and the explanations on this Guideline must be observed. Except in the case of unit-linked and index-linked life insurance, policyholders generally have little or no influence on the undertaking’s specific investment activities. They must be able to rely on the undertaking investing assets in their interests in the event of conflicts of interest and on the undertaking following any published investment policy. The undertaking must ensure this through appropriate measures and processes. For example, the undertaking may develop its own policy on conflicts of interest or integrate corresponding measures into existing processes. The measures and processes implemented by the undertaking should be reviewed regularly and revised if necessary, which may also be done as part of existing update processes. To ensure that investments are made in the interests of the insureds, the undertaking must examine which investments are exposed to conflicts of interest in accordance with section 124 (1) sentence 2 no. 4 of the VAG. This applies to both avoidable and, where applicable, unavoidable conflicts of interest. In a first step, the undertaking must therefore identify areas and/or situations in which conflicts of interest may arise when investing assets within its own company. It may be useful to define general characteristics and specific fact patterns of conflicts of interest. Potential starting points include the type of assets (asset classes), the debtor, the probability of default, the volatility and liquidity of the investment, and the costs associated with the investment (internal costs incurred by the insurer or asset manager). The next step is to determine what impact these conflicts of interest may have on the insureds and on the undertaking itself. 41 42 43 44 45 46 47

Page 11 of 26 Measures and specific procedures for managing conflicts must be defined in advance to ensure that assets are invested in the interests of the insureds in the event of conflicts of interest. The defined measures and specific courses of action must be monitored continuously and updated as necessary. Measures taken in response to conflicts of interest arising within the undertaking must be documented. The undertaking must determine on an undertaking-specific basis which employees or bodies are subject to disclosure and reporting requirements and at what intervals (regularly and/or on an event-driven basis). The undertaking should also define the recipients of the defined disclosure and reporting requirements. In this context, the undertaking should specify in particular when and how insureds will be informed of any conflicts of interest. This can be done, for example, by means of a publicly accessible statement, for instance on the undertaking's website – possibly in conjunction with reports already published there. Conflicts of interest in connection with the investment of assets may generally arise if assets of the undertaking are invested directly or indirectly in companies belonging to the same group. In order to ensure that the undertaking acts in the interests of the insureds in such cases, it must ensure that the transaction in question is conducted on an arm’s length basis. It would be questionable, for example, if the undertaking sold securities to an intra-group counterparty at prices that are not in line with market conditions or granted loans to companies within the group at prices that are not in line with market conditions. A conflict between the interests of the undertaking or its shareholders and those of the insureds may arise if the undertaking is pressured to invest in bonds of a group company whose risk/return profile is less favourable than that of potential alternatives. If the insurance portfolio consists of contracts with guarantees and contracts without guarantees, a one-sided focus on assets that yield returns at least equal to the guarantee may harm the interests of the other insureds. When investing in affiliated companies, provided that these are not asset holding companies, and in strategic investees, it can initially be assumed that this is done predominantly in the interests of the undertaking or its shareholders. In this case, the undertaking must assess the extent to which these investments also serve the interests of the insureds, taking into account the relevant business model (primary or reinsurance business, holding company function) and the insurance class (life or property insurance). An investment in an affiliated company that also serves to improve its position, for example in the case of a life insurance undertaking or a Pensionskasse, may be in the interests of the insureds in justified cases. If the investment serves to increase the guarantee assets (Sicherungsvermögen), the undertaking must document that the investment is not contrary to the interests of the insureds. Conflicts of interest may also arise if the undertaking acquires investment assets from an asset management company belonging to the same group. If the undertaking’s interest in this case is, for example, to provide the asset management company with financial resources, it is in principle possible that prices and/or investment fees are not in line with market conditions or that the investment assets include unreasonable and/or opaque costs. The undertaking should therefore address any potential conflicts of interest and implement 48 49 50 51 52 53

Page 12 of 26 appropriate measures (see paragraph 50) to ensure that such cases are resolved in the interests of the insureds. Conflicts of interest may also arise if the undertaking outsources investment or investment management to an asset manager or asset management company in accordance with the statutory requirements and the conditions set out in the MaGo for SII-IU. The undertaking should therefore implement appropriate measures when selecting an asset manager or asset management company to ensure that the interests of the insureds are taken into account. When outsourcing the investment or investment management to an asset manager or asset management company within the same group, the undertaking should document the considerations that were decisive for the selection. This does not apply to the direct acquisition of funds by the undertaking, as the direct acquisition of fund units – whether in open- or closed-ended funds – by the undertaking does not constitute outsourcing in the course of asset management. If the undertaking has outsourced investment or investment management to an asset manager or asset management company, it should also monitor the performance of the investment funds, e.g. using a suitable benchmark. Conflicts of interest may also arise between the shareholders of the undertaking and the interests of the insureds if, for example, the undertaking is subject to increased return expectations by its shareholders. In such cases, the undertaking must implement appropriate and adequate measures to ensure that any conflicts of interest are resolved in the interests of the insureds. 9. Unit-linked and index-linked contracts EIOPA Guideline 32 on the system of governance and the explanations on this Guideline must be observed in respect of unit-linked and index-linked contracts (= life insurance for the account and at the risk of policyholders). In accordance with EIOPA Guideline 32 on the system of governance, the undertaking should ensure that its investments of unit-linked and index-linked contracts in particular are selected in the interest of the insureds, taking into account any disclosed strategic objectives. This applies in the first instance to all products where the selection of funds or indices is not made by the insureds. The undertaking should document the criteria used to make the selection and how any contractual arrangements and knowledge of the needs of the insureds (e.g. the risk appetite of the insureds) are implemented in practice. In the case of external funds, the selection of the asset management company and the characteristics of the selected funds must be addressed (fund rules, benchmark, management fees and other costs, historical performance, size, liquidity, fungibility, etc.). If corresponding analyses have already been carried out and documented as part of the product approval procedure requirements, reference may be made to these. See also Guidance Notice 01/2023 on Aspects of Conduct of Business Supervision for Savings Products (see paragraph 9) for more information. 54 55 56 57 58

Page 13 of 26 Conflicts of interest may arise if the undertaking receives rebates (kickbacks) from an asset management company. As a rule, it is not in the interests of policyholders if these payments influence the selection of funds. Incentives and remuneration received by the undertaking from an asset management company for unit-linked contracts entitled to bonuses are allocated to the other result of the portfolio entitled to bonuses (see section 8 of the Minimum Allocation Regulation (MindZV)) in connection with the calculation of the minimum allocation to the provision for bonuses and rebates (see section 4 (1) of the Minimum Allocation Regulation). Further details can be found in the relevant Interpretative decision of 22 December 2009 on minimum allocation in unit-linked life insurance. As a result, at least half of the incentives and remuneration received are allocated to the minimum allocation to the provision for bonuses and rebates. In addition, section C.II.3 of Guidance Notice 01/2023 on Aspects of Conduct of Business Supervision for Savings Products applies in respect of kickbacks. In the case of products where the fund is selected by the insureds, investment management within the undertaking must be organised in such a way that the contractual provisions (e.g. on the calculation of the purchase and redemption prices of the units) can be complied with. In the possible event of a fund being closed or redemption possibly being restricted at any time, appropriate procedural precautions must be taken, for example to inform and educate policyholders. The undertaking must ensure that unit-linked and index-linked contracts do not result in additional investment risks that could lead to other insureds being unfairly disadvantaged. The undertaking must therefore determine what additional risks may potentially arise from these contracts and what processes and measures it will use to ensure that other insureds are not disadvantaged. Dynamic hybrid products may involve high liquidity requirements due to reallocations within the fund investment. Under certain circumstances, these may trigger the realisation of hidden liabilities. To mitigate the resulting risks, investment allocation in the guarantee assets (Sicherungsvermögen) may be shifted to a greater extent towards liquid and short-term investments with lower potential returns. Reallocations to guarantee assets (Sicherungsvermögen) harbour the risk that extensive new investments will be required there at an unfavourable point in time. High reallocation volumes from dynamic hybrid products are also associated with corresponding transaction costs. Additional liquidity risks may also arise from increased cancellations of unit-linked contracts due to underlying non-tradable units. The potential negative effects of such effects on other contracts must be monitored and quantified. In case of doubt, material disadvantages for the profit participation of other contracts must be offset from funds of the undertaking if they cannot be avoided by other measures, e.g. the appropriate design of reallocation algorithms. 10.Assets not admitted to trading on a regulated market In accordance with section 124 (1) sentence 2 no. 6 of the VAG, investments and assets that are not admitted to trading on a regulated market must be kept at prudent levels. 59 60 61 62 63

Page 14 of 26 If an undertaking uses assets that are not admitted to trading on a regulated market or complex products that are difficult to value, this exposure requires particularly careful consideration of the products themselves due to their high complexity and intricacy. This also applies if the assets are held indirectly, e.g. via investment funds. The undertakings must implement appropriate assessment procedures for the assets and products referred to in paragraph 64. In the case of investment funds, if appropriate assessment procedures are carried out by the asset management company of the investment fund, it is sufficient that the undertaking has satisfied itself that the assessment procedures are appropriate and, accordingly, has reviewed the asset management company’s assessment policies when selecting the asset management company. With regard to the appropriateness of the assessment procedures, the undertaking must ensure in particular that the assessment procedures are consistent with the fair value principle laid down in section 74 (2) of the VAG. EIOPA Guideline 33 on the system of governance and the explanations on this Guideline must be observed. Assets admitted to trading, but not traded or traded on a non-regular basis, must be treated similarly to those assets not admitted to trading on a regulated market. For example, assets may be listed on stock exchanges where, despite being included in a regulated market, they are not actively traded. This means that there are no prices that have been determined by supply and demand. An asset is considered to be traded on an non-regular basis if, despite being listed, a price is determined less than once a month. Merely the regular quotation of a price by a market maker is not sufficient. Rather, there must be an assessment as to whether regular trading actually takes place. Trading on the markets must be monitored continuously by the undertakings for this purpose. Restrictions on the availability of individual assets must not impair the objectives specified in paragraphs 31 and 32 at portfolio level. As a general principle, the undertaking must specifically ensure that assets not admitted to trading on a regulated market are also transferable (e.g. through an unrestricted assignment option) in order to protect the interests of the insureds. Complex and structured products that are not admitted to trading on a regulated market or are not traded regularly must be divided into their constituent components for the purposes of assessment and risk assessment, as it is otherwise not possible to quantify and necessarily identify the risks inherent in the products. 11.Derivative financial instruments (derivatives) 11.1. Definition and scope of the permissible use of derivatives and efficient portfolio management In the following explanations on the permissibility of using derivatives, it should be noted that the rules applicable to derivatives also apply to derivatives embedded in structured products. 64 65 66 67 68 69

Page 15 of 26 In the case of derivatives acquired for life insurance contracts where the investment risk is borne by the insureds, the following explanations apply only to the extent that they are used to cover guaranteed benefits under those contracts. In accordance with section 15 (1) sentence 2 of the VAG, derivatives may only be used by primary insurance undertakings for hedging against price or interest rate risks in connection with existing assets or future purchases of securities, as well as for generating additional returns from existing securities, without causing the possibility of underfunding in respect of the guarantee assets (Sicherungsvermögen) on settlement. Furthermore, the use of derivative financial instruments is only permitted in accordance with section 124 (1) sentence 2 no. 5 of the VAG if they “help reduce risk” or “facilitate efficient portfolio management”. Arbitrage and short sales are prohibited. In addition to hedging transactions, primary insurance undertakings may only use derivatives for the hedges of future purchases of securities and for generating increased returns from their existing direct portfolio. The requirements of EIOPA Guideline 34 on the system of governance and the explanations on this Guideline must be observed. Efficient portfolio management refers to the use of derivatives for the purpose of improving the security, quality, liquidity or profitability of the portfolio without significantly impairing the undertaking’s risk profile or exposing it to significant additional risks (e.g. unlimited or excessive losses) through a significant increase in the leverage of the portfolio. The undertaking must appropriately document how the use of derivatives for efficient portfolio management does not impair the security, quality, liquidity and profitability of the portfolio. The strategies used by the undertaking and the way in which efficient portfolio management will be achieved through the use of derivatives must be documented. It must be possible to demonstrate that the overall benefits of using derivatives more than offset any significant negative impact on a single characteristic. Examples of efficient portfolio management include: Example A: An undertaking intends to take a long position in a specific index and, to do so, buys a futures contract with the corresponding index as the underlying, instead of itself replicating all the individual securities in the index with the corresponding weightings. In this case, the objective of efficient portfolio management is to minimise costs. Example B: An undertaking intends to reinvest the cash flow from a debt instrument maturing in six months in advance in the form of shares. As the undertaking expects the equity markets to rise during this period, it buys a six-month future on the relevant equity index. In this case, the undertaking is conducting efficient portfolio management to hedge future purchases of securities. Example C: An undertaking invests in high-quality equities as a long-term investment. To generate an additional return, the undertaking sells call options (“out of the money”) on the equities in its 70 71 72 73 74 75

Page 16 of 26 portfolio. In this case, the undertaking is conducting efficient portfolio management to increase returns. Example D: An undertaking enters into a binding transaction to buy or sell debt instruments. The terms (e.g. price, term, interest rate) are agreed when the contract is entered into, but the value date of the transaction is in the future. In this case, the undertaking is freeing itself from future capital market liquidity and market price developments and is conducting efficient portfolio management in the form of a forward purchase or sale. 11.2. Risk management requirements when using derivatives Because of the increased complexity and potentially high risk associated with derivatives and similar instruments, there are specific requirements for the undertaking's risk management system and the skills of the employees responsible. Section 26 (5) no. 3 VAG therefore requires the risk management system to cover derivatives in particular in the area of investments. The use of derivatives must be consistent with the investment strategy and risk management policy. The undertaking must address the risks arising from derivative transactions comprehensively and thoroughly and document this appropriately and verifiably. The internal guidelines for the NPP or NIP must be observed for derivatives or derivative classes and types that are used for the first time (see paragraph 28). The undertaking must ensure that the NPP and NIP specifically consider the following points:: a) risk identification and assessment: including consideration of any potential threat to the liquidity situation and the coverage of technical provisions by collateral or margin requirements b) risk monitoring and management: including compliance with the investment strategy and risk management policy, monitoring of concentration risks, i.e. of the maximum permissible limits per counterparty/group, netting agreements, collateral management c) integration into the reporting system: including consideration of the requirements of the European Market Infrastructure Regulation (EMIR) d) Accounting, tax and legal treatment For documentation purposes and to mitigate legal risks, it has proven advisable to use recognised master agreements, such as the German Master Agreement for Financial Derivatives Transactions or the ISDA Master Agreement of the International Swaps and Derivatives Association (ISDA). Using derivatives for hedging purposes can lead to significantly increased or additional risks, e.g. due to an overall increase in counterparty credit risk. These risks are allowed to arise, but must already have been assessed in advance. If the undertaking intends to use derivatives for 76 77 78 79 80 81

Page 17 of 26 hedging purposes, it must consider the potential additional risks arising from their use. It may not use derivatives if it determines that it cannot assess these risks in advance. This must be appropriately documented. The performance of derivatives must be monitored. This should not be limited to measuring the results of using derivatives in terms of value performance. Rather, the efficiency of using derivatives must also be monitored. The undertaking must review whether the value of the derivatives has developed as calculated by the underlying model, and whether the objectives pursued by using the derivatives are being achieved. The procedures used to monitor the performance of the derivatives must be documented. 11.3. Effective risk transfer in the case of hedging In addition to performance monitoring, evidence of the effect of a derivative on the security, quality, liquidity and profitability of the portfolio, documentation of the rationale and evaluation of the investment strategy, evidence of effective risk transfer must be provided. The effectiveness of using derivatives is understood to mean the achievement of the intended objectives. If derivatives are used to mitigate risk, there is a significant risk in hedge effectiveness and, in particular, in whether using derivatives achieves the intended effect and does not give rise to significant other risks. A distinction can be made between qualitative and quantitative approaches when determining the effectiveness of risk transfer. Qualitative approaches are generally used for reasons of practicality. Assumptions about the effectiveness of a hedging relationship can be made between the asset to be hedged and the derivative. A condition is that the undertaking is actually exposed to the risk it is seeking to hedge and that there is no significant basis risk. Evidence of effective risk transfer can be provided by demonstrating a clear economic relationship between the specific risk and the derivative. The specific risk may only relate to part of the risks of the portfolio being hedged. One example of this is hedging currency risks without hedging interest rate and equity risks. Similarly, the specific risk may relate only to individual market scenarios. Examples of this are the risk of currency devaluation or the risk of an equity market crash. The specific risk may also relate to a risk associated with the general investment strategy. One qualitative approach, for example, is to compare the key characteristics of individual securities or the portfolio and derivative. If the key contractual features relating to the specific risk are consistent – with a corresponding counteracting effect – and the derivative does not give rise to any significant new risks, it can be assumed that the hedging relationship is effective and that effective risk transfer is therefore taking place. In addition to qualitative evidence, quantitative evidence can also be provided. If qualitative evidence does not demonstrate effective risk transfer, quantitative evidence may actually be required. 82 83 84 85 86 87 88

Page 18 of 26 To be able to assess whether the intended level of hedging is achieved, the undertaking can examine, for example, the extent to which the hedging instrument and the hedged item, taken together, would result in a significant impact on profit or loss if there were a change in market conditions relevant to the hedged risk. In the case of an effective hedge and effective risk transfer, the effect should be as small as possible. 12.Securitised instruments The rules and requirements relating to investments in securitisation positions are set out in Article 254 et seq. of IR (EU) 2015/35. The requirements of EIOPA Guideline 35 on the system of governance and the explanations on this Guideline must also be observed. Any misalignment between the interests of originators or sponsors that repackage loans into tradable securities and other financial instruments and the interests of undertakings investing in those securities or instruments must be avoided. The interests of the undertaking and the interests of the originator or sponsor should be aligned with regard to the securitised assets. The explanations on EIOPA Guideline 35 on the system of governance contain measures that the undertaking could take to ensure the alignment of interests. The measures shown there should not be seen as exhaustive. Depending in particular on the volume, structure and nature of the insurance business conducted and the nature and extent of the securitisations carried out or intended, the undertaking may take alternative measures and/or cumulative measures in addition to those already mentioned in the explanations on EIOPA Guideline 35 on the system of governance to ensure that there are no conflicts of interest. This applies in particular if the measures specified in the explanations on EIOPA Guideline 35 on the system of governance cannot be implemented in individual cases, for example, if the information required here is not available. However, the undertaking must ensure that interests are aligned at all times. In doing so, it may determine at its own discretion the measures and precautions it will take to ensure that interests are aligned. 13.Investment risk management policy The investment risk management policy must contain the information necessary for the operational management of investments and must take into account not only the guarantee assets (Sicherungsvermögen), but also the assets as a whole. The risk management policy must cover at least the points listed in EIOPA Guideline 25 on the system of governance. The explanations on EIOPA Guideline 25 must also be observed. Reference to special documentation is permitted. The required disclosure of the level of security, quality, liquidity, profitability and availability the undertaking is aiming for in relation to the portfolio as a whole requires a description of the undertaking’s own classifications, which can be based, for example, on appropriate metrics. The interactions between the individual characteristics mentioned in this paragraph and portfolio aggregation must be taken into account. 89 90 91 92 93 94 95

Page 19 of 26 Internal quantitative limits must be defined for each type of investment and exposure in which the undertaking is invested or intends to invest, compliance with which ensures the level of security, quality, liquidity, profitability and availability the undertaking is aiming for (internal schedule of investments). The definition and, where applicable, aggregation of a type of investment must be specific to the undertaking. The independent risk management function (IRMF) assesses and monitors whether the internal investment limits are appropriate in light of the commitments. The investment risk management policy must explain the procedure to be followed if one or more limits are breached. This must include a suitable escalation process that specifies, among other things, that breaches of limits must be documented promptly, including the measures taken, and that the effectiveness of the measures must be assessed. The process must also include the procedure to be followed in the event of a repeat breach of limits. The identification, assessment, monitoring and management of investment risks must use appropriate and recognised methods that are tailored to the risk profile. Taking methodological freedom into account, the understanding of the methods used must be demonstrated on request by the responsible member of the management board, through the responsible management levels below the management board, down to the responsible operational level. The management board only needs a general understanding of the material methods so that it can respond appropriately to the results, whereas all methods used must be mastered at the operational level. The investment risk management policy must specify the necessary review processes for investment risk and how these are adequately documented. This must describe how the undertaking ensures that investment decisions are always made in accordance with the investment principles and procedures approved by the management board. The investment risk management policy also takes account of the financial market environment. The financial market environment includes all relevant external factors that influence the value, return, security, liquidity and availability of investments held by the undertaking or that it intends to acquire. The undertaking must also describe in the investment risk management policy the conditions under which assets may be pledged or accepted as collateral. It must take into account the extent to which securities offered in this way meet the requirements of the internal schedule of investments. This applies to repo transactions, securities lending, collateral transactions and other hedging transactions. The extent to which the business practices described above comply with section 15 of VAG must also be documented. When describing the relationship between market risk and other risks (including credit risk, concentration risk, liquidity risk, operational risk and underwriting risk), the undertaking must define the scenarios that it considers to be material and unfavourable (stress test) In connection with the description of the procedures for the adequate assessment and review of investments, the frequency of the review of the adequacy of the portfolio in relation to the portfolio of insurance-related contracts and the criteria used to assess adequacy must also be 96 97 98 99 100 101 102 103

Page 20 of 26 defined. The procedures for monitoring the performance of the investments must also be described. In addition, the risk management policy must describe what is understood by the interests of the insureds and how assets should be selected in the interests of the insureds. This applies in particular to investments in unit-linked and index-linked contracts. 14.Liquidity risk management With regard to liquidity risk (see section 7 no. 19 of the VAG), the undertaking’s risk management policy must cover at least the points listed in EIOPA Guideline 26 on the system of governance. In addition, the explanations on EIOPA Guideline 26 with regard to liquidity risk management must be taken into account. Among other things, liquidity risk management involves determining expected cash inflows and outflows up to the relevant reference dates. These cash flows result in particular from investment activities, primary insurance business and ceded and assumed reinsurance business. So that the sources of the relevant cash flows can be identified, cash flows are generally recorded net (gross presentation). Expected cash inflows and outflows must be compared (analysis of potential liquidity gaps). Any imbalance between incoming and outgoing cash flows is the difference between the expected cash inflows and outflows on the relevant reference dates (liquidity surplus or liquidity deficit). The ratio of expected cash inflows, including cash funds realisable during the period (sources of liquidity), to expected cash outflows (liquidity requirements) at the reference dates represents the relevant liquidity coverage ratio. Both the liquidity surplus or deficit and the liquidity coverage ratio must be calculated. Liquidity risk management must also include unit-linked and index-linked contracts. To manage liquidity risk, the specific requirements for capital redemption operations must also be taken into account (see point 3 of the Collective administrative act on capital redemption operations of 7 September 2010 and section 2.3 of Circular 8/2010 (VA) – Guidance on single-premium life insurance policies and on capital redemption operations). Liquidity stress tests must also be performed to be able to determine an appropriate liquidity reserve. Unfavourable events relating to both assets and liabilities must be taken into account. Liquidity risk management also takes the liquidity level into account. The liquidity level indicates the ratio of cash funds available within a certain period (the “maturity band”) to total investments. It is helpful for this purpose to allocate appropriate liquidity codes (as classification characteristics) to all investments to indicate their level of liquidity. The requirement in EIOPA Guideline 26 on the system of governance to identify alternative funding tools and their costs (at least by type, e.g. overdraft interest, brokerage fees, issuance costs, legal advice costs) in the risk management policy applies without exception; i.e. not only when a liquidity shortfall has occurred. When selecting alternative financing tools, the prohibition on borrowing under section 15 (1) of the VAG must be observed. 104 105 106 107 108 109 110 111 112

Page 21 of 26 If liquidity surpluses are intended to be transferred between undertakings belonging to the same group – either currently or in stress situations – both horizontally and vertically, groups must identify and consider any legal or economic restrictions in this regard in advance as part of their liquidity analysis. In the case of cash pooling agreements aimed at pooling liquidity within the group and achieving efficient cash management, the arm's length principle must be observed (see paragraph 50). In addition to the risk that pool members may receive remuneration that does not reflect market rates of interest, the risks relating to liquidity and availability (e.g. the time required to convert assets into cash and timing restrictions on the withdrawal of funds) must be given appropriate consideration. 15.Asset-liability management The risk management system includes effective asset-liability management (ALM), which is defined as the coordinated management of the risk arising from fluctuations in the economic value of assets and liabilities. In addition to this economic perspective of fair values, undertakings must also take into account the accounting perspective of carrying amounts, depending on their individual ALM objectives. The starting point for structuring ALM is therefore the undertaking’s individual ALM objectives. This means that the undertaking must first determine the objectives it wishes to achieve with its ALM, i.e. in particular the risks it intends to manage with it. As a rule, both business management and prudential considerations play an important role here. Nevertheless, the nature, scale and complexity of the risks to which the undertaking is exposed must be taken into account when deriving ALM objectives. The coordinated management referred to above does not necessarily mean that assets and liabilities must offset each other in terms of the risk factors under consideration. On the contrary, an undertaking may deliberately allow such mismatches to occur in line with its risk strategy and the limits derived from it. An effective ALM process must be established as part of ALM. The ALM process must be clearly defined and suitable for monitoring and managing the asset and liability positions of the undertaking so as to ensure that the assets invested are appropriate to the undertaking’s liabilities and risk profile. The following general principles must be observed with regard to the ALM process: a) The objectives of ALM must be developed consistently from the requirements of the risk strategy. The objectives of ALM must be clearly defined. Because of the different underwriting commitments, the importance attached to ALM may differ depending on the class of insurance involved. Company-specific target or control parameters must be defined in order to operationalise the objectives of ALM. b) As part of ALM, all material risks that may arise from the assets and liabilities of an undertaking must be identified and captured, together with their origins and interactions. Risks arising from embedded options or guarantees issued must also be taken into consideration. 113 114 115 116 117 118

Page 22 of 26 c) It is not sufficient to merely estimate the risks on the basis of empirical data or past experience. Rather, a forward-looking analysis must be prepared that incorporates assumptions about the future development of the environment and the undertaking. A suitable observation period must be chosen. As a rule, both short- and long-term analyses must be prepared. More long-term projections are necessary to reveal the effects of subtle trends. d) In the risk analysis, the risk exposure level must be quantified using suitable ALM methods. The effects of alternative investment portfolios and risk policy instruments on the target parameters must also be examined. The methods used must reflect the objectives of ALM. For longer-term projections, it may be sufficient to consider a smaller number of targets. e) Among other things, the risk analysis must include sensitivity analyses of the portfolio under a range of capital market scenarios and investment conditions (in particular changes in the bond, equity, real estate and currency markets over various time horizons) as well as the effects on the cover for the technical provisions. f) The assumptions made in the course of ALM must be plausible. As with the methodologies, they must be reviewed regularly and adapted if necessary. g) The results of the ALM analysis must indicate concrete alternative courses of action and include recommendations to the responsible members of the management board. There are various management options, e.g. hedging the identified risks, asset reallocation, defining internal limits or using derivatives, as well as a possible adjustment of profit participation or products. h) The decision on measures to be initiated is the responsibility of the responsible members of the management board. Decisions that depart from the recommendations of the ALM analysis must be justified and documented transparently. If necessary, the management rules implemented in the model must be reviewed and adapted. i) To monitor the implementation of measures, as a minimum target/actual comparisons must be made between the targets and the outcomes actually achieved. The reasons for material deviations must also be analysed in the course of this process. In addition, the effects of the measures initiated must be reviewed. The measures must be corrected if necessary. The findings obtained from the control process must be included in the next planning phase. j) The procedure for the ALM process, the objectives, the assumptions made in the course of the analysis, the methods and management rules applied, and the results and measures resolved must be documented transparently. k) To allow the strategic investment policy be verified or the effects of changes in general conditions or strategic decisions to be adequately assessed and analysed, an ALM analysis or an ALM process walk-through must be performed at regular intervals (as a rule, once a year). l) The information and results generated by ALM must be communicated as part of an appropriate reporting process to those areas that are involved in the individual process steps (including the IRMF).

Page 23 of 26 m) The ALM process must be anchored within the organisation. This includes both interfaces to those units that are responsible for calculating the underwriting commitments and to those units that are responsible for investment, as well as to other areas involved in ALM. The responsibilities and allocation of roles within the ALM process must be clearly formulated, unambiguously defined and communicated in the undertaking, and must be documented transparently. A risk management policy must be drawn up for ALM. This must cover at least the points listed in EIOPA Guideline 24 on the system of governance. The explanations on this Guideline must also be observed. 16.Sustainability 16.1. Sustainability: General remarks In accordance with Article 275a of IR (EU) 2015/35, sustainability risks (see paragraph 121) must be included in the prudent person principle. As part of the prudent person principle, the undertaking must also take a forward-looking approach to sustainability factors (see paragraph 121) in its investment strategy and investment decisions and, where appropriate, reflect the sustainability preferences of its customers. This section contains guidance to help undertakings implement the mandatory requirements of Article 275a of IR (EU) 2015/35. It also describes approaches that have proven helpful in practice. The undertaking may, at its own discretion, decide whether to use these or other approaches. The decisive factor is to ensure that sustainability risks and factors are taken into account appropriately in accordance with the prudent person principle. The term “sustainability risk” refers to an event or condition in environmental, social or governance areas that, if it were to occur, could have actual or potential negative impacts on the value of the investment or liability (see Article 1(55)(c) of IR (EU) 2015/35). The term “sustainability factors” refers to environmental, social and employee matters, respect for human rights and the fight against corruption and bribery (see Article 1(55)(d) of IR (EU) 2015/35 in conjunction with Article 2(24) of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector). In accordance with Article 275a of IR (EU) 2015/35, the concept of double materiality applies to the prudent person principle in this respect. In the case of investments, both the financial risks for the undertaking (outside-in perspective, see section 16.2) and the impact on people and the environment (inside-out perspective, see section 16.3) must be taken into account. Taking sustainability risks and factors into account in investment decisions is highly complex. To ensure a structured approach to managing sustainability risks and factors, the undertaking must incorporate them into its investment strategy. In doing so, it should specify its objectives in relation to sustainability risks and factors, appropriately describe processes (e.g. scenario analyses, ESG screening, engagement procedures) and undertaking-specific commitments (e.g. exclusions, reduction targets, transition plans based on key performance indicators (KPIs)), and define areas of responsibility and accountability. 119 120 121 122

Page 24 of 26 In accordance with the prudent person principle, the freedom to invest remains fundamentally intact, including with regard to sustainability considerations. The undertaking must consider impacts on the investment principles of security, quality, liquidity and profitability of the portfolio. Integrating sustainability considerations into investment decisions should aim to manage risks appropriately and align the investment strategy with long-term returns. The limited availability of current, reliable and transparent data on sustainability risks and factors represents a challenge. In order to comply with its duty of care, the undertaking must develop appropriate processes to ensure that the influence of sustainability risks and factors on future performance is assessed as accurately as possible. This includes, for example, selecting data and rating providers based on appropriate, transparent criteria. A comparison of available data may also be helpful. In the course of the expected gradual improvement in data availability and quality, the undertaking should review its processes for the use and quality assurance of data at appropriate intervals and amend them if necessary. 16.2. Considering sustainability risks The undertaking must be able to adequately identify, assess, monitor, manage and control the sustainability risks of its investments in accordance with section 124 (1) sentence 2 no. 1 (a) of the VAG and include them in its reporting. It must have processes and methodologies in place to assess the materiality of sustainability risks to its investments. This requires a short-, medium- and long-term perspective. Only the appropriate means in each case should be used to do this. For example, it is possible that not all methodologies need to be used for short-term liquid investments. The potential impacts of material sustainability risks on the security, quality, liquidity and profitability of the investment portfolio must be taken into account. In addition to physical risk factors, transition risks driven by political, regulatory and technical developments can also affect an investment. For example, property can be damaged by extreme weather events. On the other hand, it can also lose value and/or liquidity if it does not meet climate and biodiversity protection or climate change adaptation requirements. Reputational and legal risks must also be taken into account, for example when marketing “sustainable” financial products. Another example is risks that may arise from the use of external ESG data and ratings, for example because of the methodology used. In its risk assessment, the undertaking should also consider the impact of secondary effects. For example, negative “systemic” environmental events can adversely affect the overall economy to such an extent that the value and liquidity of collateral received are reduced. Another example is operational disruptions in certain sectors of the economy due to adverse sustainability impacts on companies in which the undertaking is invested. ESG screening prior to investment and in the existing portfolio, based on suitable internal and external data and ratings, can provide useful insights. Where appropriate, separate screening processes can be developed for individual asset classes. To enable a forward￾123 124 125 126 127 128

Page 25 of 26 looking assessment, issuers’ transition targets and plans should also be included in ESG screening processes and their implementation kept under review. If there are material sustainability risks, their impact must be assessed in both the short and long term using appropriate undertaking-specific stress tests. In particular with regard to material climate change risks, scenarios from various providers are already available that the undertaking can use for guidance if necessary, e.g. those of the Network for Greening the Financial System (NGFS). Where appropriate and possible, the assessment should also be quantitative. The undertaking must take measures to incorporate in its risk/return assessment the risk of stranded assets arising from developments and events related to sustainability risks. Both physical and transition risk factors must be taken into account. Options include exclusions, reduction targets, engagement processes (see paragraph 134) and the proactive value enhancement of assets (e.g. improving the energy efficiency of property, taking biodiversity into account when investing in agriculture, forestry and water management). 16.3. Consideration of potential long-term impacts on sustainability factors and modelling the sustainability preferences of insureds Sustainability factors can affect the risk/return characteristics of investments, both in individual portfolios and at the macroeconomic level. The potential long-term impact of investment strategies and decisions on sustainability factors must therefore be considered. This can be done, for example, by using published data on the most significant principal adverse impacts (PAIs) and reports on the taxonomy alignment of economic activities. Considering potential long-term impacts on sustainability factors does not mean sacrificing financial returns, investing exclusively in assets with sustainability targets, or excluding non￾sustainable investments. The undertaking must develop appropriate strategies to consider potential reputational and legal risks. These can arise, for example, from:  breaches of regulatory requirements  breaches of voluntary commitments made by the undertaking  undertaking or product-related “greenwashing”, e.g. through misleading marketing  investment decisions in connection with principal adverse impacts (PAIs)  communication problems regarding the undertaking’s own sustainability strategy (e.g. definition of a sustainable investment, long-term engagement strategies) To mitigate legal and reputational risks, the undertaking should carefully examine (potential) investments with regard to their sustainability impacts and compatibility with regulatory requirements and the undertaking's own commitments, and ensure comprehensive, fact￾based transparency. Employees should be made aware of reputational risks. 129 130 131 132 133

Page 26 of 26 One potential approach within the investment strategy is engagement/stewardship. This involves an undertaking engaging directly with the companies in which it is invested to promote the transition to greater sustainability, either bilaterally or as a member of an engagement initiative. This can help mitigate investment risks and secure assets in the long term. This can help mitigate investment risks and secure assets in the long term. To prevent the emergence of additional greenwashing and reputational risks, the undertaking should regularly review the impact of its engagement activities on its risk profile within an appropriate period of time and, where necessary, take measures to ensure that the activities are consistent with its investment strategy, risk management and communication. The creation of specialised units with clear tasks and responsibilities can help improve the quality and success of engagement. When making investment decisions that aim to contribute to the sustainable transformation of the economy, the European Commission’s Recommendation (EU) 2023/1425 of 27 June 2023 on facilitating finance for the transition to a sustainable economy can be taken into account. If the sustainability preferences of insureds are implemented in the development and distribution of an insurance product, the undertaking must ensure the transparency, reliability and effective integration of sustainability preferences into the investment strategy. 17.Effective date of the Circular and withdrawal of interpretative decisions The administrative practice described in this Circular is effective as at the date of publication of the Circular. At the same time, the following interpretative decisions are withdrawn upon publication of this Circular:  Interpretative decision of 21 December 2015 – Interpretative decision on the prudent person principle  Interpretative decision of 14 July 2017 – The use of derivative financial instruments in the context of the prudent person principle (section 124 of the VAG)  Interpretative decision of 13 July 2020 – Investment decisions in the interests of policyholders and beneficiaries and management of conflicts of interest in the context of the prudent person principle (section 124 (1) sentence 2 nos. 3 and 4 of the VAG) 134 135 136 137