Guidelines for Authorising Insurance Joint-Stock Companies for Health Insurance Business in Germany

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Guidelines for the authorisation of insurance joint-stock companies for the pursuit of health insurance as primary insurance undertakings within the Federal Republic of Germany

10.03.2017

I. Formation under the Stock Corporation Act

1. Presentation of the notarised record of formation (sections 23 et seq. of the Stock Corporation Act (
   Aktiengesetz
   –
   AktG
   )

Articles of formation (sections 23-27 of the
AktG
; cf.
II.3 below)

First supervisory board (sections 30 (1)-(3); 31 of the AktG ; cf.
III.1.a)aa) below)
First auditor (section 30 (1) of the
AktG
)

2. Presentation of the minutes of the first meeting of the supervisory board, with the appointment of the management board (section 30 (4) of the
   AktG
   ; cf.
   III.1.a)aa) below)

3. Presentation of the formation report (section 32 of the
   AktG
   )

4. Presentation of the formation audit report by the management board and the supervisory board (section 33 (1), section 34 of the
   AktG
   )

5. Where appropriate, presentation of the report produced by a court-appointed formation auditor (section 33 (2)-(5), sections 34, 35 of the
   AktG
   )

6. Presentation of a certified excerpt of the commercial register

The documents are to be submitted as copies or in notarised form to the Federal Financial Supervisory Authority ( Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin ).

II. Business plan (section 9 (1), (2), (3) of the
VAG
)

1. Establishment of the undertaking (section 9 (1) second half-sentence of the
   VAG
   )

Details of the organisational structure of the undertaking ( e.g. in the form of an organisational chart)

2. Territory of the envisaged business operations (section 9 (1) second half-sentence of the
   VAG
   )

Details of the registered office and the branches of the undertaking as well as details of the location of the insured risks ( cf.
section 57 (3) sentence 2 of the
VAG
) and thus of the territory of the envisaged business operations.

If risks located outside Germany are also to be insured, an explanation should already be provided here as to whether and, if so, in which states branches are to be established (on the term “branch”, cf.
section 57 (2) of the
VAG
) and in which states this is not envisaged (on the term “cross-border provision of services” cf.
section 57 (3) sentence 1 of the
VAG
).

For the business operations envisaged in another Member State of the European Union or in a signatory state to the Agreement on the European Economic Area (Member State or signatory state within the meaning of section 7 no. 22 of the VAG ), reference is made to the details/documents indicated in section 58 of the VAG (for the establishment of a branch) and section 59 of the VAG (for the commencement of cross-border provision of services) which are already to be sent as part of the authorisation procedure. For the business operations envisaged in so-called third countries – i.e. those which are neither Member States nor signatory states within the meaning of section 7 no. 22 of the VAG – the details/documents indicated in section 12 (3) of the VAG are likewise already to be submitted as part of the authorisation procedure.

3. Articles of formation (section 9 (2)
   no.
   1 of the
   VAG
   )

Application for authorisation of the articles of formation insofar as they do not relate to general insurance policy conditions (in this respect, note in particular sections 15 (1), 33 (1) of the VAG ; sections 23 (3)-(5), 25-27, 95, 108 (2) and (4), 109 (3), 110 (3), 179 (1) sentence 2 of the AktG ; cf. 1978 annual report of the German Federal Insurance Supervisory Office ( Geschäftsbericht Bundesamt für Versicherungen – GB

BAV
) p.
26 part 130, whose contents remain applicable, subject to section 188 of the VAG , new version (as the equivalent legal provision to section 34 of the VAG , old version)). The notarised minutes of the annual general meeting at which the amendments to the articles of formation necessary for pursuit of insurance business were resolved are to be attached to the application either as a copy or in notarised form.

In respect to the business name, a clearance certificate issued by the chamber of industry and commerce and, where appropriate, the competent judge in charge of the commercial register must be presented.

The authorisation will apply pursuant to section 10 (1) sentence 2 in conjunction with section 7 no.
22 of the
VAG for the territory of all
EU
Member States or
EEA signatory states. However, the business territory may only be expanded to include these states within the scope of freedom of establishment and freedom to provide services in accordance with sections 57-59 of the VAG (separate guidance notes are available upon request).

4. Classes of insurance (section 9 (2)
   no.
   2 of the
   VAG
   )

Details of the classes of insurance which are to be provided and information about the risks that are to be covered within an insurance class (section 9 (2) no. 2 first half-sentence of the VAG , also as part of the purpose of the undertaking within the meaning of section 9 (1) second half-sentence of the VAG ; on the classification of risks according to insurance classes, see Annex 1 to the VAG ; on the classification of risks according to insurance classes within the scope of accounting: see Annex 1 part C of the German Insurance Reporting Regulation ( Versicherungsberichterstattungs-Verordnung – BerVersV ) and Prölss, VAG - Kommentar (“VAG Commentary”), on section 9, old version), indicating the type of insurance cover and its purpose ( i.e. who is to be insured, and against what). If the insurance business is to be limited to certain groups of persons, where permissible under the German General Equal Treatment Act ( Allgemeines Gleichbehandlungsgesetz – AGG ), this fact is to added to the details of the purpose of the undertaking to be submitted within the meaning of section 9 (1) second half-sentence of the VAG .

In substitutive health insurance, the principle of segregation of business applies (section 8 (4) sentence 2 second half-sentence of the VAG ).

5. Reinsurance (section 9 (2)
   no.
   3 of the
   VAG
   )

Presentation of the basic features of reinsurance and the retrocession, taking into account each individual type of insurance (section 9 (2) no. 2 first half-sentence of the VAG ) as well as a policy overview for each envisaged reinsurance contract.

6. Own funds (section 9 (2)
   no.
   4 in conjunction with section 9 (3) of the
   VAG
   )

a) The primary insurance undertaking to be authorised must already, as of its authorisation, have eligible own funds of not less than the solvency capital requirement on the basis of the expected overall volume of business (section 9 (3) no. 4 of the VAG ). The basic own funds pursuant to section 89 (3) of the VAG in conjunction with section 95 of the VAG must at least be such that eligible basic own funds are available in the amount of the absolute floor of the minimum capital requirement (section 9 (2) no. 4 of the VAG ).

b) The minimum capital requirement is defined in section 122 of the VAG .
The absolute floor of the minimum capital requirement for health insurance undertakings is €2.5 million (section 1 (2) no. 1 of the Capital Resources Regulation ( Kapitalausstattungsverordnung – KapAusstV ).

The solvency capital requirement is to be calculated on the basis of the balance sheet and profit and loss account estimates to be presented for the first three financial years ( cf. II.8 below) in accordance with the provisions of the VAG (section 96 et seq. of the VAG ). The amount of the minimum eligible own funds to be maintained is to be calculated on the basis of the minimum capital requirement and the solvency capital requirement, whichever is greater.

In the interest of solid initial capital resources for the insurance undertaking which is to be authorised, BaFin emphasises that it is not sufficient if own funds merely reach the minimum amount required by law.

In case of an envisaged portfolio transfer, the portfolios of contracts to be transferred are to be included in the above-mentioned calculations.

c) An organisation fund (section 9 (2) no.
5 of the
VAG
, cf.
II.7 below) is to be set up to cover the expenses for the establishment of the administration and the network of agents.

d) The contribution of the own funds which are necessary to ensure that the primary insurance undertaking has sufficient eligible own funds and the contribution of the organisation fund to an account held by the company are to be documented by means of a confirmation issued by the institution holding the account. The contributed amount will be definitively available to the management board for its free disposal ( cf.
section 37 (1) sentence 2
AktG
).

e) If the undertaking is subject to additional supervision due to its membership of an insurance group (section 245 et seq. of the VAG ) or a financial conglomerate (within the meaning of the German Financial Conglomerates Supervision Act ( Finanzkonglomerate-Aufsichtsgesetz – FKAG )), the appropriateness of its own funds must also be documented at the level of the group (section 250 of the VAG ) or at the level of the financial conglomerate (sections 17, 18 of the FKAG ).

7. Organisation fund (section 9 (2)
   no.
   5 first half-sentence of the
   VAG
   )

The undertaking must document the availability of the funds necessary for the establishment of the administration and the network of agents (organisation fund) (section 9 (2) no. 5 first half-sentence of the VAG ).

The expenses for the establishment of the administration and the network of agents must be estimated. The underlying assumptions for the estimate must be stated, e.g. the planned administration structure, the channel of distribution, specific groups of policyholders, portfolios to be transferred and other key features.

The details in the estimate must be sufficiently presented and substantiated in relation to the individual expenses, in terms of their scope and their amount.

As a rule, the necessary expenses will comprise the expenses for the authorisation and the establishment of the undertaking (excluding commission expenses and other ongoing expenses for the insurance business, since these are to be included in the estimate of the profit and loss accounts for the first three financial years in accordance with section 9 (3) no. 1 of the VAG ( cf. II.8 below)).

The authorisation expenses include e.g. consulting and notary’s fees. However, registration and publication costs and associated notary’s fees are considered part of the formation expenses and are consequently subject to section 26 of the AktG .

The expenses for the establishment of the undertaking include e.g. expenses for operating and office equipment, organisational set-up expenses for registration and processing of transactions up to the accounting stage (these include expenses for purchasing the necessary technical literature and legal texts, as well as consulting costs), expenses for office staff and field service personnel (this includes training and retraining costs for existing employees) and expenses for the operating and office equipment for the (planned) offices.

The estimate of the above-mentioned expenses should not only include the expenses for the year of authorisation but also those for the establishment years which exceed the other ongoing expenses for insurance business, as listed in the estimate in accordance with section 9 (3) no. 1 of the VAG ( cf. II.8 below).

The specific amount of the organisation fund depends on the circumstances of the individual case. It is therefore not possible to specify generally applicable amounts.

The organisation fund is to be provided in full “while expressly waiving repayment, profit participation and interest”. BaFin must be issued with a declaration from the subscriber for the organisation fund in this respect. It is advisable to include this declaration in the certificate of formation ( cf. I.1 above).

BaFin is to be provided with proof of contribution of the organisation fund as well as contribution of the necessary funds for fulfilment of the own funds requirement ( cf. II.6 above). In addition to the expenses stated in II.7 and II.8, health insurers are required by law to pay a minimum profit participation to policyholders. In this regard, the shareholder has to issue the following declaration of commitment:

„Shareholder’s declaration of commitment
The shareholder undertakes towards
BaFin to make available the financial resources required to ensure that the allocation rates set out in section 150 and section 151 of the VAG in conjunction with the regulation issued in this respect comply with the stipulated minimum amount during the first five years by making allocations to the provision of premium refunds and to the provision for increasing age.”

8. Estimates for the first three financial years (section 9 (3) of the
   VAG
   )

Estimates of the balance sheet and the profit and loss account and, on this basis, estimates of the future solvency capital and minimum capital requirement are to be presented for the first three financial years. Furthermore, estimates of the financial resources likely to be available to cover the technical provisions and to comply with the minimum capital and the solvency capital requirement are to be presented. The estimates for the profit and loss account must show the commission expenses and the other ongoing expenses for insurance business, the expected premium income, the expected expenses for claims incurred and the expected liquidity position (section 9 (3) of the VAG ). The reinsurers’ shares are to be deducted from the expenses and income initially calculated on a gross basis. The calculation method serving as the basis for the estimates is to be indicated for the estimates of the solvency capital and the minimum capital requirement.

The estimates should be provided in the form of a (condensed) profit and loss account for each class of insurance. The underlying assumptions for the estimates are to be indicated.

If the estimates indicate that expenses which cannot be covered through the organisation fund will lead to a net loss for the financial year, even before its authorisation the undertaking is to be provided with further financial resources which at least prevent the eligible own funds from shrinking below the (estimated) solvency capital requirement or the absolute floor of the minimum capital requirement ( cf. II.6 above).

III. Other preconditions for authorisation

In addition, the following is to be submitted:

1. Details of the nature and scope of the business organisation in accordance with section 2, chapter 1, part 3 of the
   VAG
   .

This includes the following aspects:

a) Personnel (section 9 (4) no.
1 (a) of the
VAG
)

aa) Management board (senior management), other persons who effectively run the undertaking, supervisory board members, responsible actuary and additional persons who are responsible for other key tasks

The management board must consist of at least two members (sections 33 (1), 188 (1) sentence 1 of the VAG ) who must each be qualified in accordance with the requirements of section 24 (1) of the VAG (fit and proper). As well as the management board members, other persons who effectively run the undertaking (see section 24 (2) sentence 1 of the VAG ), the members of the supervisory board, the responsible actuary (for substitutive and non-substitutive health insurance pursued on a similar technical basis to that of life insurance) as well as the additional persons who perform other key tasks must be fit and proper (section 24 (1) and section 141 (1) sentences 2 to 4 of the VAG in conjunction with section 156 (1) and section 147 of the VAG )).

Pursuant to section 9 (4) no.
1 a) of the
VAG
, the details which are material for a fit and proper assessment must be submitted for all of the above-mentioned persons. However, for persons who perform other key tasks – this includes the four key functions prescribed by law (the independent risk control function pursuant to section 26 of the VAG , the compliance function pursuant to section 29 of the VAG , internal audit pursuant to section 30 of the VAG and the actuarial function pursuant to section 31 of the VAG ) – this only applies in regard to the persons responsible in this regard. Moreover, the undertakings may themselves decide whether they perform other key tasks. These may be the divisions to be identified by the undertakings which are of considerable significance for the undertaking’s business operations. If so, the above details are to be submitted for the responsible person. In regard to the specific details to be provided and the documents to be presented in this respect, see the relevant guidance notes on the fitness and properness of the individual persons indicated on BaFin’s website.

In regard to the permissibility of so-called multiple senior management positions, see section 24 (3) of the VAG : upon request, BaFin may authorise more than two senior management positions held by a single person in insurance undertakings, Pensionsfonds, insurance holding companies or special purpose insurance vehicles if these are undertakings in the same insurance group or group of companies (on the details, see the guidance note on the fitness and properness of senior managers pursuant to the VAG on BaFin’s website).

In regard to the permissibility of so-called multiple supervisory board positions and restrictions on positions, see in particular section 24 (4) of the VAG and section 100 (2) of the AktG (on the details, see the guidance note on the fitness and properness of members of management and supervisory bodies on BaFin’s website).

bb) Other expert personnel
The undertaking must have other expert personnel (office staff and field service).
BaFin must be provided with details of these personnel (number and qualifications). This requirement ultimately results from the obligation to estimate the expenses required for the establishment of the administration and the network of agents pursuant to section 9 (2) no. 5 first and second half-sentence of the VAG . This includes the expenses for office staff and field service personnel (including training and retraining costs for existing employees) (in this respect, cf. item II.7 above).

cc
) Independent trustees
Independent trustees are to be involved in the case of premium adjustments in health insurance pursued on a similar technical basis to that of life insurance (section 203 (2) of the German Insurance Contract Act (Versicherungsvertragsgesetz – VVG ) and section 155 (1) of the VAG ), of modifications to the general policy conditions (section 203 (3) of the VVG and section 157 (3) of the VAG ) and in the use of funds for the provision of premium refunds (section 155 (2) of the VAG ). Prior to the appointment of the trustees, their names must be submitted to BaFin , together with evidence of their qualification (section 157 of the VAG ).

dd) Guarantee Assets Trustee
Appointment of guarantee assets trustee and his deputy ( cf.
section 128 to 130 of the
VAG and relevant information on BaFin’s Website including Circulars).

b) Enterprise agreements (section 9 (4) no.
1 b) of the
VAG
)

Application for authorisation for the enterprise agreements within the meaning of section 9 (4) no.
1 b) of the
VAG indicated in sections 291, 292 of the
AktG
( cf.
section 12 (1) sentence 1 variant 3 of the
VAG
; see also Official Bulletin of the
BAV
(Veröffentlichungen des Bundesamts für Versicherungen – VerBAV ) 2001, 118: the insurance undertaking must maintain a certain decision-making scope of its own).

c) Contracts regulating the outsourcing of important functions or activities (section 9 (4) no.
1 c) of the
VAG
)

Presentation of contracts regulating the outsourcing of important functions or activities pursuant to section 9 (4) no. 1 c) of the VAG .

In regard to the basic contents of the contracts, reference is made to the provisions in section 32 (2) sentence 2, (4) of the VAG and Art. 274 no. 4 of Commission Delegated Regulation ( EU ) 2015/35 of 10 October 2014. Further details of the contents of the contracts should be agreed with the competent BaFin supervisor. Otherwise, reference is made to BaFin’s currently applicable announcements regarding the outsourcing of important functions or activities.

d) Business organisation in the broad sense of the term

Details of the general requirements for the business organisation (section 23 of the VAG ), remuneration (section 25 of the VAG ), risk management (section 26 of the VAG ), own risk and solvency assessment (section 27 of the VAG ), external ratings (section 28 of the VAG ), the internal control system (section 29 of the VAG ) and internal audit (section 30 of the VAG ).

2. Details of qualifying holdings (section 9 (4)
   no.
   2 of the
   VAG
   )

If qualifying holdings (section 7 no.
3 of the
VAG
) are held in the insurance undertaking, the details stipulated in section 9 (4) no.
2 of the
VAG must be provided. For the details and documents which are necessary for assessment of the requirements indicated in section 9 (4) no. 2 b) in conjunction with section 16 of the VAG , it is advisable to follow the guidance set out in section 9 of the German Holder Control Regulation ( Inhaberkontrollverordnung – InhKontrollV ). Otherwise, reference is made to BaFin’s currently applicable announcements regarding the control of qualifying holdings.

3. Close links (section 9 (4)
   no.
   3 of the
   VAG
   )

Any close links within the meaning of section 7 no.
7 of the
VAG with other natural persons or with undertakings must be indicated (section 9 (4) no.
3 of the
VAG
).

4. Compulsory insurance conditions (section 9 (4)
   no.
   4 of the
   VAG
   )

Presentation of compulsory insurance conditions ( cf.
section 193 (3) of the
VVG and section 23 and 110 of the German Social Security Code ( Sozialgesetzbuch XI – SGB XI)). Please see BaFin’s website for an overview of existing compulsory insurance.

5. Documentation for substitutive health insurance (section 9 (4)
   no.
   5 of the
   VAG
   )

a) Technical calculation basis

Presentation of the principles used for the calculation of premiums and technical provisions within the meaning of sections 341e to 341h of the German Commercial Code (Handelsgesetzbuch – HGB ) including actuarial assumptions, mathematical formulae, arithmetical derivations and statistical evidence.

b) General policy conditions

Presentation of the general policy conditions (overlaps exist regarding the duty to submit documentation pursuant to section 9 (4) no. 4 of the VAG ).

IV. Specific requirements in case of small insurance undertakings within the meaning of section 211 of the
VAG

If the insurance undertaking which is to be newly authorised is a so-called small insurance undertaking within the meaning of section 211 of the VAG , the following specific requirements apply:

1. Specific requirements under section 212 (3)
   nos.
   1 and 3 of the
   VAG

a) For the documents to be submitted for the business plan within the meaning of section 9 (2) no.
4 of the
VAG
, pursuant to section 212 (3) no.
1 of the
VAG details of those own-fund items pursuant to section 214 of the VAG which represent the absolute floor of the minimum capital requirement are to be provided. For small insurance undertakings within the meaning of section 211 of the VAG , solvency and minimum capital requirements will be determined in accordance with the provisions of section 213 of the VAG and the regulation issued in accordance with section 217 (1) no. 1 of the VAG .

b) The details of the nature and scope of the business organisation in accordance with section 2 chapter 1 part 3 of the VAG ( cf. item III.1.a) and d) above) need only be provided in relation to the managing directors, the members of the supervisory board and, where applicable, the responsible actuary (section 212 (3) no. 3 of the VAG ).

2. Documents to be presented for review of small insurance undertaking status

In order to be able to make use of the advantages indicated in item 1, it is, pursuant to section 211 (1) sentence 3 of the VAG , necessary for the supervisory review of whether the insurance undertaking to be newly authorised is a small insurance undertaking within the meaning of section 211 of the VAG that the declarations and documents indicated in BaFin’s announcement regarding the “Procedure for determination of small insurance undertakings within the meaning of section 211 of the VAG , as amended with effect from 1 January 2016 ( VAG 2016)” be submitted. The details of the gross premium income and the technical provisions must refer to the next five years.

However, pursuant to section 211 (4) of the
VAG
, upon request an insurance undertaking which would be considered a small insurance undertaking on the basis of the above-mentioned declarations and documents may not be treated as such.

Further guidance on technical issues

1. Consultation with
   BaFin is recommended before the joint-stock company is founded, in particular with regard to the following items: II.3 (articles of formation), II.4 (classes of insurance), II.6 (own funds), II.7 (organisation fund), II.9 (estimates for the first three financial years), III.1.a) and d) (personnel and business organisation), III.2 (holder of a qualifying holding) and IV (aspects associated with small insurance undertaking status).

2. The competent judge in charge of the commercial register should be consulted in advance regarding the registrability of the articles of formation, and in particular the business name, and
   BaFin must be notified of his/her consent.

3. Regarding items III.1.b) (enterprise agreements), III.1.c) (contracts on the outsourcing of important functions or activities) III.4 (compulsory insurance conditions) und III.5 (documentation for substitutive health insurance), timely presentation of the draft versions for review is advisable.

4. In order to speed up the process, it is helpful if all of the documents which may be relevant for a preliminary review are presented in duplicate.
   The documents may be submitted as completed.

5. Costs of the authorisation procedure
   In accordance with the German Regulation on the Imposition of Fees and Allocation of Costs Pursuant to the Act Establishing the Federal Financial Supervisory Authority ( Verordnung über die Erhebung von Gebühren und die Umlegung von Kosten nach dem Finanzdienstleistungsaufsichtsgesetz – FinDAGKostV ), BaFin will charge a fee pursuant to section 2 (1) in conjunction with the schedule of fees indicated in section 2 of the FinDAGKostV . Its value is stipulated in section 2 (1) in conjunction with no.
   6.2 of the
   FinDAGKostV and thus currently amounts to €10,000.

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