The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) has issued a new guidance notice aiming to ensure that life insurance savings products provide customers with appropriate value for money and that conflicts of interest are avoided in the distribution of these products. 

Focus on the product approval process

The guidance notice focuses on the product approval process. Life insurers are required to ensure that their products offer value for money, and they must set up the processes required by law for this purpose (section 23 (1a) to (1c) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), Delegated Regulation 2017/2358).

These products must meet the needs of those customers whom the insurer has determined as the target market. If the insurer has set return targets for this target market, it must be sufficiently likely that the products will achieve these targets. Insurers are required to test the products to ensure this likelihood. When determining return targets, they are expected to differentiate between nominal investment performance (i.e. a positive return after costs) and real performance (i.e. a positive return after costs and inflation).

The requirements set out in the guidance notice regarding distribution remuneration (section 48a of the VAG, Delegated Regulation 2017/2359) are designed to avoid inappropriate incentives in the distribution of insurance products. For example, excessively high commissions may have an effect on the way intermediaries provide advice to policyholders – to the detriment of the policyholders.

Risk-based supervision

BaFin takes a risk-based supervisory approach. This means in particular that BaFin will closely examine those insurers whose savings products have a very high reduction in yield compared to the rest of the industry.

BaFin will also closely examine insurance companies whose expenses for insurance intermediaries are notably high. If necessary, BaFin will consider supplementary criteria such as the lapse rate or, in the case of unit-linked life insurance, any reimbursements paid to sales partners by investment managers.

The guidance notice provides insurance companies with a concise summary of what BaFin requires of them. BaFin will be presenting its supervisory approach separately on its website.

BaFin has already begun to examine three companies according to its risk-based supervisory approach. In addition, BaFin has identified six companies for this year that are likewise to undergo a detailed examination.

Target group

The “Guidance Notice on Aspects of Conduct of Business Supervision for Savings Products” is aimed at German and foreign life insurance companies that are subject to BaFin’s supervision, fall within the scope of the Insurance Distribution Directive (IDD) and offer savings products. In the guidance notice, BaFin points out to life insurers what they must take into account for these products when implementing the requirements of the IDD.

The content of the guidance notice is in line with and builds on the work of the European Insurance and Occupational Pensions Authority (EIOPA) regarding product oversight and governance.