The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has published a consultation paper outlining amendments to the circular relating to the investment of guarantee assets of insurance companies (Kapitalanlagerundschreiben – the “Circular”). The Circular shall specify the German investment ordinance (Anlageverordnung – the “Investment Ordinance”) which has been effective since 22 April 2016 and applies to smaller insurance companies (annually premium income of less than 5 million Euro) pension and death funds.

One of the main reasons for the amendments to the Circular was the need for an adjustment to the new regulatory framework; not only for insurance companies but also for investment vehicles and financial services. The amendments were needed due to the introduction of a vast amount of European Directives in recent years and therefore German legislation is needed to align with these Directives to ensure there is no lacuna in the law. The amendments also add new particulars within the Circular and/or to expand existing statements and requirements. The following is a brief overview:

• In the context of Art.5a of the CRA-Regulation ((EU) 462/2013) insurance companies are obliged to carry out their own credit risk assessments and shall not rely solely or automatically on external ratings.
• The Circular sets out several requirements for the process of investments in investment funds. The insurance company has, for example, to thoroughly analyse whether the investment fits and/or aligns with the investment strategy. Further it is explicitly stated that the insurance company has to execute due diligence for such an investment.
• The statements in respect of Asset Backed Securities (ABS) and Credit Linked Notes (CLN) are comprehensively amended. Notably, ABS’ and CLN’s shall be deconstructed to identify the material features and the inherent risks of the particular instrument.
• The Circular also addresses the current low-interest environment and allows investment in capital investments which bear no or even negative interest. However, the requirements in respect of the security of such an investment rise, which means that especially sovereign bonds should qualify for that exemption from the principle of profitability.

BaFin will accept comments on the consultation paper until 31 January 2017. To make it easier for clients and contacts to understand the proposed changes to the Circular we have created a comparison version (in German) of the consultation paper.

In addition Bafin has published another consultation paper regarding the use of derivative instruments and the investment in structured products. This circular will only be applicable to smaller insurance companies as well as pension and death funds. The consultation period for that circular will end on 31 January 2017 as well.