Forward-looking risk profile

At the same time, the authorities point out
that the choice of business model remains the responsibility of the institution; the supervisory
response in the first instance is to ensure that the institution’s Board and senior management
have considered the inherent risks stemming from their business models and that there exist
appropriate controls and buffers to mitigate them.

Regarding insurance supervision, BaFin
has already introduced useful new instruments, such as scenario analysis of financial
statements and the use of multiyear prognosis of business results. These instruments contain
key elements for a more structured assessment methodology of insurers’ business models
(both of solo and group-level entities) enabling BaFin to have a better understanding of the
embedded risks. Building on existing experience and instruments as well as forthcoming
EBA and ECB guidance, BaFin and the Bundesbank should adopt a comprehensive approach
for assessing banks’ and insurance companies’ business models.

This will allow supervisors
to identify the inherent risks associated with different business models independently from
the institutions and help them challenge assumptions made by those institutions on the level
of risk and the required controls and buffers.