Supervisory law for investors (Solvency II/VAG, AnlV, ...)

Together with pension funds, (large) insurance companies are the most important investors in special funds; around a third of the assets of open-ended special funds, or a good 550 billion euros, come from the insurance industry.

When the Solvency II Directive came into force in 2016, this important market was regulated across Europe. It focuses on risk-based solvency regulations for the capital adequacy of insurance companies and qualitative requirements for the risk management of insurance companies as well as extended disclosure requirements.

The directive follows a three-pillar approach:

• Pillar I concerns the amount of the Minimum Capital Requirement (MCR) and the amount of the Solvency Capital Requirement (SCR) in relation to the Eligible Own Funds (EOF).
• Pillar II deals with the risk management system and primarily contains qualitative requirements, for example regarding the qualifications of the management boards of insurance companies.
• Pillar III regulates the reporting obligations of insurance companies: on the one hand, reporting obligations to supervisory authorities and, on the other, information to be published.

It also contains regulations on the supervision of insurance groups.

In accordance with the Solvency II Directive, insurance companies must comply with the Solvency Capital Requirement (SCR). This standardised EU formula takes into account the main risks of insurance companies' business activities.
The own funds are intended to protect insurance companies from insolvency and ensure that they can honour their insurance contracts and pay out customers even in poor economic conditions. Depending on the type of assets in which insurance companies invest, these must be backed by different levels of equity.
Insurance companies therefore need to know the individual assets they have invested in; if these are bundled in investment funds, e.g. in a special AIF with fixed investment conditions, it is necessary to look through this fund shell. Accordingly, the so-called look-through approach includes the procedures provided for by Solvency II for determining the market risk capital of investment funds.

Solvency II Solvency II Delegated RegulationGerman Insurance Supervision Act (VAG) 

Regulatory Update on Solvency II

In order to meet the requirements as an “interface” between supervisors and insurers and to support insurance companies with the requirements for SCR calculation and reporting obligations, the investment industry of several countries has created the so-called "Tripartite Template (TPT) for Solvency II Asset Data Reporting". This EU fund data sheet supports and improves the exchange of data on the composition of fund portfolios between investment management companies and insurance companies.

Tripartite Template (TPT)

While "large" insurance companies are subject to Solvency II and its principle-based regulation, so-called "small" insurance companies continue to be regulated only by the VAG (Insurance Supervision Act). According to § 215, "the assets of the security assets under § 125 [...] are to be invested, taking into account the nature of the insurance business conducted and the company structure, in such a way as to achieve the greatest possible security and profitability while ensuring the insurance company's liquidity at all times, and while maintaining an appropriate mix and diversification." These investment principles for the security assets are further specified by the Investment Regulation (AnlV) and the Capital Investment Circular (AnlV-RS). In practice, in the structuring of funds for institutional investors, AnlV and AnlV-RS are of enormous importance because, before investments, questions regarding the eligibility/qualification for the respective items in § 2 paragraph 1 of the AnlV and the quotas of the AnlV must be clarified.

To adapt national legislation to the changes in the Solvency II Directive, an amendment to the VAG must be made by the beginning of 2026 at the latest. These adjustments also affect small insurers, as the changes to the Solvency II Directive aim to exempt them from some regulations.

Versicherungsaufsichtsgesetz (VAG) AnlV Kapitalanlagerundschreiben

The following graphic provides an overview of fund investments under the AnlV:

“Versorgungswerke” in the form of the numerous professional pension institutions (Versorgungswerke) for physicians, public accountants, tax advisers, attorneys, and similar professions in the federal states hold significant importance as institutional investors. These institutions, established as public law corporations, are supervised by the respective federal states or the competent state ministries. Although the professional pension institutions do not fall directly within the scope of application, in practice, the rules of the Investment Ordinance (Anlageverordnung – AnlV) and the Capital Investment Circular are applied indirectly by virtue of state law.

By way of example, the statutes of a pension institution for professionals may stipulate that the "assets of the pension institution, insofar as they are not required to cover current expenditures, shall be invested in accordance with the principles set out in Section 215 (1) of the Insurance Supervision Act (Versicherungsaufsichtsgesetz – VAG), as amended." Accordingly, the governing bodies of these pension institutions apply the provisions of the AnlV and the Capital Investment Circular indirectly.

AnlV Kapitalanlagerundschreiben

In many cases, occupational pension schemes are financed through direct insurance, pension funds or pension funds. The latter two are referred to for supervisory purposes as "institutions for occupational retirement provision" (in short: IOPRs). Direct insurance is offered by life insurance companies and is subject to Solvency II for supervisory purposes.

IORPs are subject throughout Europe to the EU Directive 2016/2341 (IORP II Directive, or Institutions for Occupational Retirement Provision Directive), which replaced the old directive from 2003. The IORP II Directive was transposed into German law by an amendment to the Insurance Supervision Act (VAG Part 4) on 13 January 2019 and has been in force since this date. According to § 1 (1) No. 1 of the Investment Ordinance (AnlV), the following applies to the implementation of the directive via pension funds: "This Regulation applies to the investment of guarantee assets of (a) Pensionskassen within the meaning of section 232 of the Insurance Supervision Act,, ...", why the more specific legal framework of the Investment Ordinance (AnlV) and BaFin’s Investment Circular 11/2017 for capital investments of pension funds apply.

IORP II Directive German Insurance Supervision Act (VAG) AnlV Capital Investment Circular

Further information on the supervisory framework IORP II can also be found on the website of the “Arbeitsgemeinschaft betriebliche Altersversorgung e.V.” (aba): Website of aba on IORP II issues

The financing of occupational pension schemes in many cases is carried out through the implementation vehicles of direct insurance, pension funds, or pension schemes (Pensionskassen). The latter two are, from a supervisory law perspective, classified as “Institutions for Occupational Retirement Provision” (IORPs), referred to in German as Einrichtungen der betrieblichen Altersversorgung (EbAV). Direct insurances are offered by life insurance companies and are subject to the supervisory framework of Solvency II.

For IORPs, the applicable legal framework across the European Union is Directive (EU) 2016/2341—commonly referred to as the IORP II Directive—which replaced the previous directive from 2003. The IORP II Directive was transposed into German law through an amendment to the Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG Part 4), which entered into force on 13 January 2019.

The regulatory framework for pension funds is also being further specified at ordinance level. However, the Regulation on the supervision of pension funds (PFAV) is applicable and not the Investment Ordinance (AnlV). The provisions of the PFAV on investment principles, investment management and forms of investment are similar to those of the AnlV, but the bottom line is that they are more liberal and less rigid overall. There are significant differences to the provisions for primary insurance companies and domestic pension funds, in particular with regard to the requirements for the mix of the various forms of investment (§ 18 PFAV). In this respect, pension funds have greater freedom of investments. BaFin’s Investment Circular 11/2017 contains a section "C. Separate notes on the investment of the guarantee assets of domestic pension funds".

IORP II Directive German Insurance Supervision Act (VAG) AnlV Capital Investment Circular

Further information on the supervisory framework IORP II can also be found on the website of the “Arbeitsgemeinschaft betriebliche Altersversorgung e.V.” (aba): Website of aba on IORP II issues

Banks are also important institutional investors and, therefore, clients in (special) investment funds, accounting for approximately 11% of the assets of special funds. They are subject to numerous banking supervisory regulations. The Basel III framework, formalized in December 2010 by the Basel Committee on Banking Supervision with the document "A global regulatory framework for more resilient banks and banking systems," was implemented at the European level through the CRD IV/CRR legislative package. This package consists of a directive (CRD IV) and a regulation (CRR), which replaced the previous capital requirements directives. The CRD IV/CRR legislative package came into force on January 1, 2014. As part of the national implementation of CRD IV, the CRD IV Implementation Act significantly amended the German Banking Act (KWG) and the associated regulations (including SolvV and GroMiKV). The CRR is directly applicable.

Since 2016, drafts for the revision of the directive (then CRD V), regulation (then CRR II), and the Bank Recovery and Resolution Directive (BRRD) have been discussed. The so-called EU Banking Package, which includes CRD V, CRR II, BRRD II, and SRMR II, was published in the Official Journal of the European Union on June 7, 2019, and came into effect on June 27, 2019.

Banks or credit institutions have reporting obligations regarding capital requirements, capital deduction items, the countercyclical capital buffer, liquidity coverage requirements (LCR), risk-bearing capacity, large exposures, and the KVG million-loan reporting. KVGs are at the interface between funds and banks as investors in funds.

As with Solvency II and the calculation of SCR, KVGs also have (indirect or possibly contractual) obligations in bank reporting to determine risk weights under the CRR. This is done using the look-through method to determine the risk weight for investment units under the standard approach according to Article 132 paragraph 4 CRR in connection with the calculation of credit risk (Part 3 Title II Chapter 2 CRR) within the framework of reporting to institutions.

With the adoption of CRD VI and CRR III on May 31, 2024, the final Basel III requirements were incorporated into EU law. The implementation rules include changes to the standard and IRB approaches to clarify and standardize the calculation of risk-weighted assets (RWA). Additionally, a new framework for operational risks is being introduced, considering losses due to internal errors or external events. These measures are intended to improve the capital adequacy and stability of banks.

Furthermore, it was agreed to enhance banks' resilience to ESG risks, strengthen and harmonize bank supervision and risk management across the EU, especially regarding EU-licensed branches of third-country banks, and protect the independence of banking supervisory authorities.

CRR III will be binding for affected institutions from January 1, 2025, while CRD VI must be transposed into national law by member states by January 10, 2026.

Banking Package 2021

In October 2021, the adoption of a package to amend the Capital Requirements Regulation (then CRR III), the Capital Requirements Directive (then CRD V), and capital requirements in the area of resolution marked the beginning of the review of EU banking regulations. The drafts propose changes that build on the previous regulation of banking supervision following the 2008 banking crisis and aim to extend these regulations to address the challenges of post-pandemic economic recovery and ecological transformation.

The package consists of the following three core elements:

• Implementation of Basel III – Strengthening Resilience to Economic Shocks: The package implements the international Basel III agreement, considering the specifics of the EU banking sector, such as low-risk mortgages.
• Sustainability – Contribution to the Green Transition: The new regulations require banks to systematically identify, disclose, and manage sustainability risks (environmental, social, and governance risks or ESG risks) as part of their risk management.
• Stronger Enforcement Tools – Ensuring Solid Management of EU Banks and Better Protection of Financial Stability: The package provides stronger enforcement tools for the supervisory authorities overseeing EU banks.

The draft report of the Economic and Monetary Affairs Committee (ECON) of the European Parliament on CRR, accompanied by numerous amendments, was published on May 23, 2022. The BAI also published a position paper focusing on the assessment of the impact on equity positions and subordinated debt and capital instruments other than shares. With the entry into force of CRR III and CRD VI on July 29, 2024, the guidelines agreed upon in Basel III were fully implemented into EU law.

CRD IV CRR CRD V CRR II CRD VI CRR III KWG SolvV GroMiKV

EU-Banking Package