Insurance Supervision Under the VAG and Solvency II

How insurance supervision works in Germany

Insurance supervision in Germany is based on the Insurance Supervision Act (Versicherungsaufsichtsgesetz, VAG) of 2016, which implements the EU Solvency II Directive, and on directly applicable EU rules such as the Solvency II Delegated Regulation. BaFin supervises primary insurers and reinsurers with their head office in Germany, insurance groups and, to a limited extent, foreign insurers operating through branches or on a services basis. Smaller public-law insurers whose activities are limited to one federal state may be supervised by state authorities. Solvency II rests on three pillars: quantitative capital requirements, qualitative governance requirements and supervisory reporting and public disclosure.

Since 2023 the Solvency II framework has been under review. The amending Directive (EU) 2025/2 must be transposed by 29 January 2027 and applied from 30 January 2027 (Directive (EU) 2025/2). Together with the new Insurance Recovery and Resolution Directive, it is being implemented in Germany by a law amending insurance supervision, which the Bundestag adopted on 25 September 2026 (Bundestag, 25 September 2026).

Licensing of insurers

Insurers with their registered office in Germany need a licence from the supervisory authority to conduct business (§ 8(1) VAG). A licence may be granted only to stock corporations, including the European Company (SE), mutual insurance associations (Versicherungsvereine auf Gegenseitigkeit) and public-law corporations and institutions (§ 8(2) VAG), and the head office must be in Germany (§ 8(3) VAG). A reinsurer is licensed only to conduct reinsurance business. The principle of separation of lines also applies: life and non-life business may not generally be combined in one primary insurer, and health insurance that substitutes statutory health insurance is subject to special rules.

A licence application must include a business plan describing the classes of insurance, the reinsurance strategy, own funds and the projected solvency position, together with information on managers, key function holders and shareholders with qualifying holdings. Acquirers of qualifying holdings in an existing insurer must pass an owner control procedure under §§ 17 and 18 VAG; see our insight on BaFin owner control procedures. Insurers licensed in other EEA states can operate in Germany through branches or the freedom to provide services, subject to German general good rules and BaFin's host-state supervision of conduct.

Governance and key functions

Insurers must have an effective and proper business organisation appropriate to the nature, scale and complexity of their activities, ensuring sound and prudent management (§ 23(1) VAG). Persons who effectively run the undertaking or hold other key tasks must be reliable and professionally qualified (§ 24(1) VAG), and the appointment of managers and key function holders must be notified to BaFin with the facts needed to assess their qualification (§ 47 no. 1 VAG).

The VAG requires four key functions:

• a risk management function as part of an effective risk management system integrated into decision-making (§ 26 VAG);
• a compliance function within an effective internal control system (§ 29 VAG);
• an internal audit function that is objective and independent and reports directly to the management board (§ 30 VAG);
• an actuarial function that coordinates and validates the calculation of technical provisions (§ 31 VAG).

The risk management system includes the own risk and solvency assessment (ORSA), which must be carried out regularly and without delay after any material change in the risk profile, and must be an integral part of business strategy (§ 27 VAG). The ORSA report is submitted to BaFin. Remuneration policies, written policies on each governance area, approved by the management board and reviewed at least annually, and contingency plans complete the governance framework.

Outsourcing and ICT

An insurer that outsources functions or insurance activities remains responsible for complying with all supervisory requirements (§ 32(1) VAG). Outsourcing must not impair the proper performance of the functions, the management board's ability to steer and control, or BaFin's audit and control rights.

For important functions and activities, the insurer must also avoid material impairment of governance quality, undue increases in operational risk and threats to continuous and satisfactory service to policyholders, and it must secure information and instruction rights by contract (§ 32(3), (4) VAG). The intention to outsource important functions or insurance activities must be notified to BaFin in advance, together with the draft contract (§ 47 no. 8 VAG).

ICT services are additionally governed by DORA, which has applied to insurers and reinsurers since 17 January 2025, including its contractual requirements for ICT third-party services; see our insight on DORA ICT risk rules. In practice, insurers maintain integrated outsourcing and ICT registers, align their outsourcing policy with DORA and review intra-group service agreements, which are subject to the same rules as outsourcing to third parties.

Solvency capital, reporting and disclosure

Insurers must at all times hold eligible own funds at least equal to the Solvency Capital Requirement (SCR) and eligible basic own funds at least equal to the Minimum Capital Requirement (MCR) (§ 89(1) VAG). The SCR is calibrated to a one-year value-at-risk at a 99.5 per cent confidence level and can be calculated with the standard formula or an approved internal model. Technical provisions are valued on a market-consistent basis as the sum of a best estimate and a risk margin. Long-term guarantee measures, such as the volatility adjustment and the matching adjustment, together with transitional measures, are important for German life insurers with traditional guaranteed products.

Insurers report quantitative templates and narrative reports to BaFin and publish an annual solvency and financial condition report (SFCR). If the SCR is breached, the insurer must inform BaFin and submit a realistic recovery plan; a breach of the MCR triggers stricter measures up to withdrawal of the licence. Insurance groups are supervised at group level with their own solvency calculation, governance requirements and group SFCR, and BaFin generally acts as group supervisor where the ultimate parent insurer is German.

The Solvency II review and German insurance supervision

Directive (EU) 2025/2 amends Solvency II in several areas. According to the Bundestag's summary of the German implementing act, the changes give insurers more room for capital investment, better reflect long-term business, ease reporting for small and non-complex undertakings, increase attention to sustainability risks, introduce new macroprudential tools, strengthen group supervision and improve cooperation between supervisors on cross-border activity. The directive also sets a cost-of-capital rate of 4.75 per cent for the risk margin as of 30 January 2027 and introduces a procedure for classifying small and non-complex undertakings.

The same German act transposes the Insurance Recovery and Resolution Directive and places the new insurance resolution authority within BaFin. Our insight on the Insurance Recovery and Resolution Directive explains pre-emptive recovery planning and resolution tools. As of the Bundestag's report of 25 September 2026, the act still had to complete the remaining parliamentary and publication steps; insurers should check the Federal Law Gazette for the final text and entry into force.

Portfolio transfers, run-off and restructuring

Insurance supervision also shapes transactions. Any contract by which the portfolio of a primary insurer is to be transferred, in whole or in part, to another insurer requires the approval of the supervisory authorities responsible for the companies involved (§ 13(1) VAG). Approval is granted if the interests of the insured are safeguarded and the obligations under the policies are shown to be permanently capable of fulfilment. Portfolio transfers are used for group reorganisations, the sale of closed books of life or non-life business to specialised run-off consolidators and the exit from particular lines.

Run-off transactions are an established tool for life insurers with high legacy guarantees and for non-life insurers with legacy liabilities that seek capital relief or operational simplification. Buyers must demonstrate to BaFin that they can manage the transferred portfolio for its entire duration, including the administration of policies, the investment of assets backing the liabilities and the fair treatment of policyholders.

Alternatives to a portfolio transfer include reinsurance solutions such as loss portfolio transfers and adverse development covers, a sale of the shares in the insurer, which triggers an owner control procedure, and measures under the Transformation Act (Umwandlungsgesetz), such as mergers and hive-downs. Each route has different consequences for policyholders' rights, tax, accounting and the time needed for approval, so the choice should be made after modelling the capital effect for both seller and buyer.

For distressed insurers, the new recovery and resolution framework will add pre-emptive recovery planning, early intervention and resolution tools. Until it applies, BaFin relies on its existing powers under the VAG, including measures in the event of capital shortfalls, restrictions on business and the appointment of a special representative.

BaFin supervisory practice and enforcement

BaFin's insurance supervision combines ongoing analysis of reports, supervisory meetings, on-site inspections and thematic reviews. Its toolkit includes requests for information, orders to remedy deficiencies, capital add-ons, restrictions on business, removal of managers, administrative fines and, ultimately, withdrawal of the licence. Conduct supervision covers product oversight and governance, distribution under the Insurance Distribution Directive, complaints handling and the fair treatment of policyholders. For international groups, BaFin participates in supervisory colleges and coordinates with EIOPA and other national supervisors. Our page on the insurance and reinsurance sector gives an overview of the wider regulatory landscape, and our insight on reinsurance contracts under German law covers contractual questions.

How TRW & Co helps

We advise insurers, reinsurers, insurance groups, intermediaries and investors on insurance supervision in Germany. We support licence applications and portfolio transfers, owner control procedures, governance and key function design, outsourcing and DORA compliance, and the implementation of the Solvency II review and the recovery and resolution framework. In supervisory proceedings we advise on BaFin requests, inspections and enforcement measures. We work with our financial regulation and corporate teams on transactions involving insurers. This page is general information, not legal advice. To discuss your situation, please contact us.