Resolution No. JPRF-S-2022-050 Reforming the Standard on Maximum Investment Segments and Percentages

Resolution No. JPRF-S-2022-050 FINANCIAL POLICY AND REGULATION BOARD

CONSIDERING:

That, Article 226 of the Constitution of the Republic of Ecuador prescribes that State institutions, their agencies, dependencies, public servants, and persons acting under a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law;

That, Article 13 of the Organic Monetary and Financial Code, Book I, reformed by the Organic Reformatory Law to the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, created the Financial Policy and Regulation Board, part of the Executive Branch, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for formulating credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation;

That, the article numbered immediately following Article 6, ibidem, refers to international best practices, and mandates that bodies with regulatory, normative, or control capacity shall seek to adopt international technical standards related to their area of competence as a reference framework for the issuance of regulations and the exercise of their functions;

That, Article 9 of the aforementioned Organic Code states that regulatory and control bodies shall have the duty to coordinate actions to fulfill their purposes and make effective the enjoyment and exercise of rights recognized in the Constitution;

That, Article 14 of the Organic Monetary and Financial Code, Book I, which refers to the scope of the Financial Policy and Regulation Board, determines that this collegiate body is responsible for formulating credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policies; issuing regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems; and, additionally, issuing micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their corresponding areas of competence and without prejudice to their independence;

That, numbers 1, 7, 17, and 25 of Article 14.1 of the aforementioned Organic Code establish that the Financial Policy and Regulation Board has the duty and exercises the faculty to regulate the creation, constitution, organization, activities, operation, and liquidation of insurance entities; issue the prudential regulatory framework to which insurance entities must adhere, a framework that must be coherent and not give rise to regulatory arbitrage; dictate the norms that regulate insurance and reinsurance; as well as, apply the provisions of the Organic Monetary and Financial Code.

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That, the Twenty-Ninth General Provision of the Organic Monetary and Financial Code, Book I, added by the Organic Reformatory Law to the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"In the current legislation where mention is made of the 'Board of Monetary and Financial Policy and Regulation', replace it with 'Financial Policy and Regulation Board'.";

That, the Fifty-Fourth Transitional Provision of the aforementioned Organic Code, added by the Organic Reformatory Law to the Organic Monetary and Financial Code for the Defense of Dollarization, provides:

"Transitional Regime of Resolutions of the Codification of the Board of Monetary and Financial Policy and Regulation. The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Board of Monetary and Financial Policy and Regulation and the norms issued by control bodies shall remain in force until the Board of Monetary and Financial Policy and the Board of Financial Policy and Regulation decide what is appropriate, within their areas of competence.";

That, Article 22 of the Organic Monetary and Financial Code, Book III (General Insurance Law) establishes that:

"Art. 22.- Insurance and reinsurance companies must maintain at all times the general or by-line solvency requirements regulated by the Board of Monetary and Financial Policy and Regulation, considering the following: a) Technical reserves regime; b) Risk management system; c) Technical equity; and, d) Mandatory investments. The solvency requirements shall be reviewed by the Board of Monetary and Financial Policy and Regulation. The Board of Monetary and Financial Policy and Regulation shall issue the necessary regulations to apply the solvency regime provided for in this article; it may determine the deadlines, conditions, measures, and actions necessary for its application; with the purpose of avoiding or attenuating the exposure to risk of insurance and reinsurance companies for the benefit of policyholders. Insurance and reinsurance companies must establish technical reserves for risks in progress, mathematical reserves, catastrophic reserves, reserves for pending obligations, and reserves for loss deviation; defined by the regulations issued by the Board, who shall determine their methodology.

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Technical reserves must cover the entirety of the risks assumed by insurance and reinsurance companies. The Board may create other types of technical reserves and/or modify existing ones and their calculation formula based on the dynamics inherent to the development of the insurance business. The technical equity regime comprises the determination of the minimum required technical equity, which is established based on an adequate capital level intended to protect insurance and reinsurance companies against effects generated by deviation in the frequency and severity of underwriting risk, as well as any other risk and especially credit risk derived from reinsurance operations. The technical equity regime requirements established in this chapter must be fulfilled in addition to the provisions regarding minimum capitals established in the law, and other regulations issued by the Board of Monetary and Financial Policy and Regulation regarding this matter. Every insurance and reinsurance company must establish efficient and effective schemes for the administration and control of technical, market, liquidity, credit, and operational risks.";

That, Article 23 ibidem mandates the following:

"Art. 23.- Insurance and reinsurance companies must invest their technical reserves, at least sixty percent (60%) of paid-in capital, and the legal reserve, in securities market titles, investment funds, financial instruments, and real estate, in the segments and percentages defined by the Board of Monetary and Financial Policy and Regulation, through general character norms, seeking an adequate combination of risks, liquidity, security, and profitability. Insurance and reinsurance companies are prohibited from trading shares or convertible obligations with institutions of the Financial System. In no case shall investments in financial instruments issued by institutions of the financial system exceed 10% of the total investment instruments; the Board shall define the maximum percentages for other investments.";

That, in Title III "On Surveillance, Control, and Information of the Private Insurance System", of Book III "Private Insurance System" of the Codification of Monetary, Financial, Resolutions, Chapter VII titled "Standard on Maximum Investment Segments and Percentages" exists;

That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0085-M of December 20, 2022, submits to the President of the Board the following reports:

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(i) Technical Report No. JPRF-CT-2022-0042 of December 19, 2022, through which the Technical Secretariat proposes reforming the Standard on Maximum Investment Segments and Percentages codified in Book III "Private Insurance Systems", Title III "On Surveillance, Control, and Information of the Private Insurance System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in order that the aforementioned norm aligns with the development and functioning of the insurance sector, seeking improvements in its implementation; taking into consideration, international best practices, operational incidence, and the review of comparable international norms; and,

(ii) Legal Report No. JPRF-CJ-2022-0051 of December 19, 2022, issued by the Legal Coordination of the Board, which concludes that: (i) the Financial Policy and Regulation Board, as responsible for the formulation of insurance policy and regulation, has legal competence to regulate the creation, constitution, organization, activities, operation, and liquidation of insurance entities; issue the prudential regulatory framework to which insurance entities must adhere, a framework that must be coherent, not give rise to regulatory arbitrage; dictate the norms that regulate insurance and reinsurance; and, apply the provisions of the Organic Monetary and Financial Code; in accordance with what is provided in numbers 1, 7, 17, and 25 of Article 14.1 of the Organic Monetary and Financial Code, Book I; and (ii) the reform of the norm of the Codification of Monetary, Financial, Securities, and Insurance Resolutions is legally viable in light of the legal considerations exposed by said Coordination in the aforementioned report, under the terms indicated in Report No. JPRF-CT-2022-0042 of December 19, 2022, issued by the Technical Coordination of this Board;

That, the Financial Policy and Regulation Board, in an extraordinary session convened by technological means on December 21, 2022 and carried out via video conference on December 22, 2022, reviewed Memorandum No. JPRF-SETEC-2022-0085-M of December 20, 2022, issued by the Technical Secretariat of the Board; as well as the aforementioned reports from the Technical Coordination and the Legal Coordination, in addition to the corresponding draft resolution;

That, the Financial Policy and Regulation Board, in an extraordinary session convened by technological means on December 21, 2022 and carried out via video conference on December 22, 2022, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

ARTICLE FIRST.- Substitute the text of Article 2 of Chapter VII "Standard on Maximum Investment Segments and Percentages", Title III "On Surveillance, Control, and Information of the Private Insurance System", Book III "Private Insurance System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 2.- Fixed-income investments: Insurance and reinsurance companies may invest in fixed-income securities in the following segments and percentages:

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1. Up to seventy percent (70%) in certificates or other securities issued and guaranteed by institutions or entities of the public sector, including decentralized autonomous governments and public companies; and, in securities resulting from a securitization process whose originator or beneficiary belongs to the public sector, which are registered in the Public Cataster of the Securities Market and in the stock exchange, and have a risk rating of "A" or higher. Securities issued by the Ministry of Finance or the Central Bank of Ecuador do not require a risk rating;

2. Up to ten percent (10%) in time deposits and long-term obligations or other generic securities issued by entities of the national financial system, provided they are registered in the Public Cataster of the Securities Market and in the stock exchange, and have a risk rating of "A" or higher, of the security or the issuer, as applicable;

3. Up to eighty percent (80%) in long-term obligations and commercial paper issued by commercial companies subject to the control of the Superintendence of Companies, Securities, and Insurance, or securities resulting from credit-content securitization processes issued by commercial trusts, subject to the control of the Superintendence of Companies, Securities, and Insurance, which are registered in the Public Cataster of the Securities Market or in the Special Stock Exchange Register (REB), originated by commercial companies, entities of the private financial system, and the popular and solidarity financial system, and have a risk rating of "A" or higher, of the security or the issuer, as applicable. Insurance companies that are part of the national private insurance system, and entities of the popular and solidarity financial sector are exempt; and,

4. Up to twenty percent (20%) in Negotiable Commercial Invoices (FCN) and securities registered in the REB."

ARTICLE SECOND.- Substitute the text of Article 3 of Chapter VII "Standard on Maximum Investment Segments and Percentages", Title III "On Surveillance, Control, and Information of the Private Insurance System", Book III "Private Insurance System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 3.- Variable-income investments: Insurance and reinsurance companies may invest in variable-income investments in the following segments and percentages:

1. Up to thirty percent (30%) in shares of anonymous companies subject to the control of the Superintendence of Companies, Securities, and Insurance, with the exception of those part of the national private insurance system, securities houses, and fund management companies and trusts, and always provided they meet these conditions:

a. Their equity, at the close of the economic exercise preceding the date of investment, must exceed a figure representing twenty thousand (20,000) unified basic remunerations in effect at the time of investment;

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b. They must be registered in the Public Cataster of the Securities Market; and, in the stock exchange; and,

c. They must have a risk rating of "A" or higher, if they chose to opt for a risk rating. The investment per issuer may not exceed 10% of the paid-in capital of said issuer.

2. Up to fifty percent (50%) in quotas of collective investment funds or participation units of administered investment funds registered in the Public Cataster of the Securities Market. The portfolios of these funds may not contain more than twenty-five percent (25%) of their composition in securities issued backed or guaranteed by the national financial system. The investment in each fund may not exceed a participation of fifteen percent (15%) of the total of its quotas or participation units; and,

3. Up to fifteen percent (15%) in participation values of securitization processes registered in the Public Cataster of the Securities Market, and which have a risk rating of "A" or higher, an investment that may not exceed fifteen percent (15%) of the total of each process."

ARTICLE THIRD.- Eliminate the "SINGLE GENERAL PROVISION" of Chapter VII "Standard on Maximum Investment Segments and Percentages", Title III "On Surveillance, Control, and Information of the Private Insurance System", Book III "Private Insurance System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, and incorporate as General Provisions the following:

"GENERAL PROVISIONS:

FIRST: For the calculation of the amount of mandatory investments, sixty percent (60%) of the value of premiums receivable to mature, documented premiums to mature, and the portfolio of non-matured credit card receivables, in the amount related to the financing of insurance premiums, in the retained proportion, shall be deducted from the reserves for risks in progress and group life and additional coverage reserves. The retained proportion will be the factor resulting from relating the total net premium retained and net premium issued in the last twelve (12) months. The deduction of sixty percent (60%) of the non-matured credit card receivable portfolio, referred to in the previous paragraph, shall be applied once the Superintendence of Companies, Securities, and Insurance reforms the Unique Account Catalog of the insurance sector to identify the balance of the portfolio of premiums financed with credit cards, which must be fulfilled by March 31, 2023.

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SECOND: Cases of doubt in the application of this standard shall be resolved by the Superintendence of Companies, Securities, and Insurance."

SINGLE GENERAL PROVISION.- The Superintendence of Companies, Securities, and Insurance shall communicate to the respective controlled entities the content of this Resolution.

REPEALING PROVISION.- The Sixth, Seventh, Eighth, and Ninth Transitional Provisions of Chapter VII "Standard on Maximum Investment Segments and Percentages", Title III "On Surveillance, Control, and Information of the Private Insurance System", Book III "Private Insurance System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions are repealed.

FINAL PROVISION.- This Resolution shall enter into force from the present date, without prejudice to its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board, within a maximum term of two days from its issuance.

COMMUNICATE.- Given in the Metropolitan District of Quito, on December 22, 2022.

THE PRESIDENT, Mgs. María Paulina Vela Zambrano

The Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, processed and signed the preceding Resolution in the Metropolitan District of Quito, on December 22, 2022.- I CERTIFY.

TECHNICAL SECRETARY Dr. Nelly Arias Zavala