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Topic Fintechs Insurtechs

There is no standard legal definition for the term “insurtech company”. In BaFin’s view, insurtech companies are young and tech-savvy enterprises authorised to carry out insurance business.

Between 2017 and 2022, BaFin has granted authorisation to seven insurtech companies, which it supervises according to the principle “same business, same risk, same rules”, i.e. in the same way as traditional insurers that have been in the market for a long time. In doing so, BaFin observes the principle of proportionality.
BaFin’s experience so far in supervising the start-up phase of insurtech companies has shown that supervisory practice needs to be adapted. The adaptations required include, for example, strengthening the “organisation fund” and the technical provisions.

Strengthening the organisation fun

One aspect relates to the organisation fund, which insurers must set up in order to obtain authorisation. As digitalisation has changed the framework conditions that apply for the first authorisation and during the start-up phase of insurance companies, it is necessary to strengthen the organisation fund and adapt it to the actual business models of the companies in question. With regard to newly established companies, BaFin will ensure that the level of the organisation fund reflects the increasingly important role of IT in the distribution of insurance products. This is because, for young digital insurers, setting up a successful and sustainable business model often depends on whether the IT set-up costs are adequately financed in the long term. The organisation fund should be set at a level that covers all losses that can be expected, on the basis of realistic projections, from the time the company is established until its first profits are generated.

Higher technical provisions

Under the foundational European framework Solvency II, insurance companies are required to include IT set-up costs in the calculation of their technical provisions. This includes not only any overhead expenses incurred to develop software solutions and apps for insurance operations, but also the salaries of the relevant IT employees.
When calculating their technical provisions, all companies in the start-up phase should allocate most of their expenses to existing business. This is because projected new business in the start-up phase is subject to too many uncertainties; companies cannot, with a clear conscience, allocate the majority of their expenses to this part. This would also contradict the principles of Solvency II, which require insurance companies to value their technical provisions in a prudent and reliable manner. All in all, predominantly allocating expenses to existing business will result in higher technical provisions.

In addition to insurtech companies, there are a number of start-ups that are not authorised by BaFin, that see themselves as insurance intermediaries or service providers for the insurance industry and offer technical solutions to authorised insurance companies. From the point of view of the insurance companies, this might be deemed outsourcing and therefore trigger a notification requirement. But BaFin can also apply measures to the third-party service providers if this is required to protect policyholders and those entitled to insurance benefits.

Background: Insurance intermediaries

But BaFin can also apply measures to the third-party service providers if this is required to protect policyholders and those entitled to insurance benefits.

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