Stricter supervision for subordinated debt issuances by life insurers and pension schemes

As of 15 July 2019 the German regulator BaFin announced stricter supervision for subordinated debt issuances by life insurers and pension schemes. BaFin’s point is that the holders of life insurers’ subordinated debt will, depending on the drafting of the respective terms, only suffer a loss in the insurer’s insolvency whilst BaFin has the means to cut the claims of insured persons already before insolvency as a crisis prevention measure. Thus, BaFin has decided that holders of life insurance and pension scheme issuers have to suffer a loss prior to the insured customers and has published a wording to be included in future terms and conditions of subordinated loans and subordinated bonds.  

Background

Numerous insurers in Germany strengthen their capital base with subordinated bonds or loans. This is nothing which has attracted special attention of the German regulator. However, BaFin now has formed the view that in order to protect the insured customers under their insurance contracts stricter supervision would be needed1.

BaFin’s point is that the holders of life insurers’ subordinated debt will, depending on the drafting of the respective terms, only suffer a loss in the insurer’s insolvency whilst BaFin has the means to cut the claims of insured persons as a crisis prevention measure. As a consequence, it cannot be excluded that the insured persons suffer a reduction of their claim under their insurance contract while the holders of subordinated debt do not suffer a loss.

In BaFin’s judgement this outcome is not acceptable. Their reasoning is that holders of subordinated claims profit of higher interest rates because they bear a higher risk of loss. However, this would not be true in the case of life insurer and pension scheme issuers in situations when BaFin would reduce insurance claims in accordance with section 314(2) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz).

Thus, BaFin has decided that holders of life insurance and pension scheme issuers have to suffer a loss prior to the insured customers and, thus, has published a wording to be included in future terms and conditions of subordinated loans and subordinated bonds. The wording required to be included states that holders of subordinated claims shall be liable even prior to the occurrence of an insolvency of the issuer, if BaFin would otherwise reduce insurance claims in accordance with section 314(2) of the German Insurance Supervision Act (Versicherungsaufsichtsgesetz). BaFin shall inform the holders about the occurrence of the event that triggers its liability. The holders will be liable to the same extent they would be liable upon the opening of insolvency proceedings over the assets of the issuer. The wording to be included shall also state that the holders will suffer a total loss at the latest with the implementation of a reduction of insurance claims.

The legal and practical changes

BaFin announced in its article that for all outstanding issues of subordinated debt BaFin will review the terms and, in case it comes to the conclusion that the terms are disadvantageous for the insured customers it will contact the relevant issuers and ask them to agree respective amendments to the terms of the issues.

For future issues BaFin requires that the new wording is included and the terms and conditions of subordinated debt of life insurance companies and pension schemes have to be notified to BaFin well in advance of the envisaged issue in draft form together with a reasoning why the interest rate is at market and how it has been calculated.


1 Please see article “Künftig striktere Aufsicht über Nachrangdarlehen” dated 15 July 2019 published in the BaFin Journal 07/2019, p. 16 ff (only German language).

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