Amending Circular 3/24 of the Single Circular on Insurance and Surety Bonds

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DOF: 06/09/2024

AMENDING CIRCULAR 3/24 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

At the margin, a seal with the National Coat of Arms, which reads: United Mexican States.- TREASURY.- Ministry of Finance and Public Credit.- National Insurance and Surety Bond Commission.

AMENDING CIRCULAR 3/24 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.15.3. and 7.2.5.)

The National Insurance and Surety Bond Commission, based on the provisions of articles 366, fraction II, 372, fractions VI and XLII, 373 and 381 of the Law on Insurance and Surety Bond Institutions, and:

CONSIDERING

That in accordance with what is provided in Chapter 5.15 of the Single Circular on Insurance and Surety Bonds, Institutions shall value the reserve for surety bonds in force using the paid claim indices that will be calculated by this Commission and assigned to each Institution during the first quarter of each year.

That Institutions that do not have timely, homogeneous, reliable and sufficient information to carry out the valuation of the reserve for surety bonds in force must use the paid claim indices and the annual index of administrative expenses of the surety market, made known in Annex 5.15.3. of the Single Circular on Insurance and Surety Bonds.

That in accordance with what is provided in Provision 5.15.2, fraction IV, of the Single Circular on Insurance and Surety Bonds, said claim indices will be reviewed during the first quarter of each year and will be updated when a significant change in the value of these is observed.

That with the objective that Institutions comply with the foregoing, this Decentralized Body considers it convenient to update in the same way the market parameters referred to in Annex 5.15.3. of the aforementioned Circular.

That Chapter 7.2. of the Single Circular on Insurance and Surety Bonds refers that Institutions are obliged to report to this Commission the results of the Dynamic Solvency Test carried out with the statutory scenarios referred to in Annex 7.2.5. of the same Circular.

That Provision 7.2.1. of the Circular in question provides that Institutions must carry out, at least annually, a Dynamic Solvency Test whose purpose will be to evaluate the sufficiency of the Admissible Own Funds of such entities to cover the Solvency Capital Requirement under various prospective scenarios in their operation.

That, in view of the foregoing, the Commission has determined the statutory scenarios that could affect the financial condition of Institutions taking into account the general evolution of the insurance and surety markets and the macroeconomic context of the country, so it is necessary to update the statutory scenarios for the Dynamic Solvency Test, which Institutions must use to carry out the corresponding test for the 2023 fiscal year.

For the aforementioned reasons, this Commission issues the following modification to the Single Circular on Insurance and Surety Bonds in the following terms:

AMENDING CIRCULAR 3/24 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.15.3 and 7.2.5)

FIRST.- Annex 5.15.3. of the Single Circular on Insurance and Surety Bonds is modified.

SECOND.- Annex 7.2.5. of the Single Circular on Insurance and Surety Bonds is modified.

TRANSITORY PROVISIONS

FIRST. - Publish in the Official Gazette of the Federation.

SECOND.- This Amending Circular will enter into force the day after its publication in the Official Gazette of the Federation.

Respectfully,

Mexico City, August 22, 2024. - The President of the National Insurance and Surety Bond Commission, Ricardo Ernesto Ochoa Rodríguez. - Signature.

ANNEX 5.15.3.

SURETY MARKET INFORMATION, FOR THE PURPOSES OF VALUATION OF THE RESERVE FOR SURETY BONDS IN FORCE IN THE CASE PROVIDED FOR IN PROVISION 5.15.3

Institutions that do not have timely, homogeneous, reliable and sufficient information to carry out the calculation for the constitution, increase and valuation of the reserve for surety bonds in force, while they generate such information, must use the method described in Provision 5.15.3, using the paid claim indices and the annual administrative expense indices of the surety market, which are indicated below.

I.

Paid Claim Indices

Line or type of surety bond

Index

First risk fidelity

86.22%

Other fidelity

1.47%

Judicial covering drivers of motor vehicles

0.63%

Other judicial

0.79%

Administrative

0.23%

Credit

0.81%

II.

Annual Administrative Expense Indices

Surety bond line

Index

Fidelity

1.03%

Judicial

0.30%

Administrative

0.09%

Credit

0.18%

ANNEX 7.2.5.

STATUTORY SCENARIOS FOR THE CONDUCT OF THE DYNAMIC SOLVENCY TEST

For the purposes of carrying out the dynamic solvency test, the following hypotheses and statutory scenarios with which the dynamic solvency test must be carried out are defined below:

HYPOTHESES RELATED TO UNDERWRITING RISK

1.1.

Hypotheses for scenarios based on the Business Plan

1.1.1.

Hypothesis of Gross Premium Written Projection

The amount of gross premium written in each of the projection years ( ), shall be determined as the estimated amount of gross premium written by the Institution in its base scenario ( ), in each line of insurance or surety bond, which respond to expectations of growth or decrease based on their business development plans.

1.1.2.

Hypothesis of Ceded Premium Projection

The amount of ceded premium in each of the projection years ( ), shall correspond to the projected amounts of ceded premium corresponding to its risk cession strategy and reinsurance or re-surety plans, as well as its business development plans.

1.1.3.

Hypothesis of Retained Premium Projection

The amount of retained premium in each of the projection years ( ) shall be determined as the difference between the projected amount of gross premium written and the projected amount of ceded premium determined in accordance with fractions 1.1.1. and 1.1.2. above.

1.1.4.

Hypothesis of Net Acquisition Cost Projection

The amount of net acquisition costs, in each of the projection years, shall be determined by applying to the amounts of gross premium written defined in fraction 1.1.1, the respective percentage indices of net acquisition costs of each line or type of insurance and surety bond, corresponding to the acquisition costs that the Institution expects to have according to the design of the insurance and surety products it projects to sell as part of its business development plans.

1.1.5.

Hypothesis of Operating Cost Projection

The amount of operating costs in each of the future years considered in the projection ( ) shall be determined starting from the Institution's operating costs ( ), based on its business plan and its cost experience. The amount of future operating costs shall be estimated based on fixed costs and variable costs, determined from the Institution's own structure of fixed and variable costs. For these purposes, the portion of variable costs ( ) shall be projected in congruence with the projected amounts of gross premium written, while the portion corresponding to fixed cost ( ) shall be estimated based on the fixed cost observed in the last three years of the Institution's operation, updated with the estimated cumulative inflation for each future year of operation ( ) .

In the case of surety and surety bond insurance operations, the amount of expenses associated with the recovery of payments shall be incorporated as part of operating costs.

1.1.6.

Hypothesis of Future Claims and Losses Projection

The amount of gross claims and losses in each of the projection years ( ), shall be determined in congruence with the projected amounts of gross premium written in accordance with fraction 1.1.1. ( ) and with the levels and patterns of claims or loss experience observed by the Institution, for each line or type of insurance and surety bond ( ) taking into account its experience, or the market experience when the Institution lacks its own experience.

For these purposes, market experience shall be that made known in Annexes 5.3.1 and 5.15.3 of the CUSF or that used by the Institution for the design of its registered products.

Ceded and retained losses shall be calculated based on gross claims and losses, applying the levels of ceded reinsurance or re-surety, based on the reinsurance or re-surety contracts in force held by the Institution or those it projects to have in the future, in accordance with its business plan.

Recovery of Claim Payments

In the case of surety and surety bond insurance operations, as part of the projections of the gross amount of claims, the amount of a part of the claim or loss payments, recovered through counter-guarantees or other recovery rights that the institution has, within the framework of regulation ( ), may be taken into account as income. The value of said recovered amount shall be calculated in accordance with the respective percentage indices of recovery of paid claims ( ), determined by the Institution based on its own observed payment recovery patterns in previous years, or in case of not having experience, it shall be calculated with the market guarantee recovery patterns.

The market experience in terms of recovery of paid claims, expressed in terms of the percentage that has been observed that institutions recover, of each peso of paid amount, is as follows:

Market experience for surety and surety bond insurance:

Line or type of surety bond

First risk fidelity

2%

Other fidelity

5%

Judicial covering drivers of motor vehicles

20%

Other judicial

33%

Administrative

19%

Credit

43%

Surety Bond Insurance

19%

The income from recovery of paid claims, if taken into account, shall be reflected in a congruent manner in the items of ceded loss experience, retained loss experience, recoverable amounts and any other variable that is related.

1.1.7.

Hypothesis of Financial Products Projection

The amount of the Institution's financial products, in each of the projection years based on its business plan, shall be that which the Institution itself calculates in accordance with the yield rates associated with the assets that the Institution has at the time of projection and those it expects to obtain in the future from new asset flows derived from its business plan.

1.1.8.

Hypothesis of Liability Projection

The projected value of the liability shall be estimated, with respect to technical reserves, in congruence with the parameters and methodologies that the Institution has registered as part of its technical reserve methods, or with the methods that are applicable within the framework of current regulation.

Likewise, the projection of other liabilities shall be carried out based on their current value and their possible future value, as well as in accordance with its business plan.

1.1.9.

Hypothesis of Asset Projection

The projected value of the asset shall be estimated, based on the value that assets have had in the last operating year of the Institution and based on the probable value that said assets will have in the future in accordance with the Institution's investment plans.

1.2.

Hypotheses for Scenarios of Increase in Future Claims or Losses

1.2.1.

Hypothesis for Scenarios of Increase in Claims or Losses

The amount of gross claims or losses, in this scenario ( ), shall consist of incorporating into the amounts of claims or loss experience projected by the Institution in accordance with fraction 1.1 ( ), an increase in the percentages ( ), in accordance with the values indicated below:

Line or Type of Insurance

Life Insurance

Individual

60%

Group

60%

Accident and Health Insurance

Medical expenses

35%

Personal accidents

160%

Health

75%

Property Insurance

Automobiles

65%

Credit

200%

Civil liability and professional risks

270%

Catastrophic risks

500%

Fire

500%

Agricultural and animal

500%

Various

230%

Maritime and transports

105%

Financial guarantee

50%

Housing credit

50%

Surety

300%

Lines or types of surety bonds

First risk fidelity surety bonds

10%

Other fidelity surety bonds

350%

Judicial surety bonds covering drivers of motor vehicles

300%

Other judicial surety bonds

500%

Administrative surety bonds

500%

Credit surety bonds

300%

In congruence with the above, the amount of ceded claims or losses and retained claims or losses shall be increased in accordance with the reinsurance or re-surety contracts in force that cover the risk of the line or type of insurance or surety bond in question, or those contracts that the Institution projects to have in the future to cover the flows of losses or claims that will derive from future business.

NOTE: In the case of insurance consisting of the payment of periodic annuities, other than pension insurance contracts derived from social security laws, the projected amount of claims under this scenario, in the year in which the shock is to be introduced, shall correspond to that obtained by assuming that all beneficiaries of the annuity payments of the previous year remain alive.

1.2.2.

Hypothesis of Projection of Increase in Gross Losses of Pension Insurance

In the case of pension insurance derived from social security laws, the amount of gross claims or loss experience of the direct insurance under this scenario for each projection year t ( ), shall be that obtained from the loss experience estimated by the Institution under its base scenario ( ), multiplied by the factor of the projection year in question, such that this amount does not exceed the amount of claims obtained if all insured persons and policy beneficiaries in force remain alive during the projection period ( ), in which case the latter shall be used, i.e.:

t

1

2

3

4

5

1.0257

1.0520

1.0790

1.0956

1.0956

In the projection of the parameter, a probability of death and school dropout equal to zero shall be assumed for all genders and age groups, as the case may be, considering the corresponding annuity payments, settlements and other economic benefits contemplated in the contracts.

HYPOTHESES RELATED TO FINANCIAL RISK

2.1.

Hypothesis for scenario of Decrease in Yield Rates

The amount of the Institution's financial products shall be determined in each of the projection years by applying the asset yield rates considered by the Institution in its base scenario, decreased by 50%.

The financial product corresponding to assets that are not investments generating yields shall be calculated in accordance with the estimates of the Institution itself, based on its experience and knowledge about the performance of said assets.

HYPOTHESES RELATED TO COUNTERPARTY RISK

3.1.

Hypothesis for scenario of losses by Insolvency of Reinsurer or Re-surety

This hypothesis shall consist of assuming the insolvency of the reinsurer or re-surety that has the largest share of ceded risk of the Institution, whether in proportional or non-proportional contracts.

For these purposes, it shall be assumed that the loss, given the insolvency of a reinsurer or re-surety, is at least 50% of the amount of gross claims or losses, projected in accordance with fraction 1.1.6., that the reinsurer or re-surety would have had to cover in a solvent situation.

DEFINITION OF STATUTORY SCENARIOS

For the purposes of what is established in Provisions 7.2.3., fraction IX and 7.2.5 of this Circular, the statutory scenarios shall be those defined below:

4.1.

Statutory Scenario 1 - Increase in Loss Experience in Life Operation:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting the Institution's financial statements, under the hypotheses indicated in fraction 1.1. and the hypothesis of increase in loss experience, indicated in fraction 1.2.1 with respect only to the life operation. This effect of increase in gross losses of the life operation shall be reflected in all other variables that have a relationship with said losses.

The increase in loss experience shall be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its lowest amount, with the exception of pension insurance derived from social security laws, which shall be subject to what is indicated in fraction 1.2.2.

4.2.

Statutory Scenario 2 - Increase in Loss Experience in Accident and

Health Operation:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting the Institution's financial statements, under the hypotheses indicated in fraction 1.1., incorporating the hypothesis of an increase in loss experience in the line of the accident and health operation that represents the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in gross losses shall be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss shall be understood as that determined with the amount resulting from subtracting from the amount of accounting profit or technical loss of the income statement, the estimated amount of operating expenses and the increase to other reserves. The increase in loss experience shall be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its lowest amount.

Institutions that carry out health insurance operations shall be located in this scenario.

4.3.

Statutory Scenario 3 - Increase in Loss Experience in Property Operation:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting the Institution's financial statements under the hypotheses indicated in fraction 1.1., and the hypotheses of an increase in loss experience in the line that represents the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in gross losses of the property operation shall be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss shall be understood as that determined with the amount resulting from subtracting from the amount of accounting profit or technical loss of the income statement, the estimated amount of operating expenses and the increase to other reserves.

The increase in loss experience shall be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its lowest amount.

4.4.

Statutory Scenario 4 - Increase in the Amount of Claims in Surety Operation:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting the Institution's financial statements under the hypotheses indicated in fraction 1.1., and the hypothesis of an increase in the gross amount of claims in the line that represents the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in the gross amount of claims of the surety operation shall be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss shall be understood as that determined with the amount resulting from subtracting from the amount of accounting profit or technical loss of the income statement, the estimated amount of operating expenses and the increase to other reserves.

The increase in the gross amount of claims shall be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its lowest amount.

4.5.

Statutory Scenario 5 - Risk of Loss by Cluster of Liabilities:

This scenario shall only be applicable to surety or surety bond insurance operations and shall consist of analyzing the sufficiency of admissible own funds, under the adverse effect of assuming losses from the occurrence of clusters of claims, coming from at least, the three main risk clusters, generated by the coverages given to the same surety or insured, given in surety or surety bond insurance contracts.

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting under the hypotheses indicated in fraction 1.1. and under the assumption that a cluster of claims occurs derived from assuming claims coming from the three main clusters operated by the Institution, constituted by all insurance and surety coverages given to the same surety or insured. The amount of claims shall correspond to at least 50% of the insured sums or surety amounts retained of each cluster. This effect of increase in loss experience shall be reflected in all other variables that have a relationship with said loss experience.

The increase in loss experience shall be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its lowest amount.

4.6.

Statutory Scenario 6- Decrease in Financial Products:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting under the hypotheses indicated in fraction 1.1. and assuming a decrease in financial products in accordance with the hypotheses indicated in fraction 2.1.

The decrease in financial products shall be assumed to occur in each of the years that make up the projection period.

4.7.

Statutory Scenario 7- Loss by Counterparty Risk:

This scenario shall consist of analyzing the sufficiency of admissible own funds, by projecting under the hypotheses indicated in fraction 1.1. and assuming losses originating from insolvency of the reinsurer or re-surety, in accordance with the hypotheses indicated in fraction 3.

The losses originating from insolvency of the reinsurer or re-surety shall be assumed in the

year in which the solvency margin, projected in accordance with the hypotheses given in fraction

1.1., shows its lowest amount.

4.8.

Statutory Scenario 8 - Combined Scenario:

This scenario will consist of analyzing the sufficiency of eligible own funds, against the combined effect of underwriting risks and financial or counterparty risks.

This scenario must consist of assuming one of the statutory scenarios related to underwriting risk, defined in fractions 4.1, 4.2, 4.3, 4.4 or 4.5, as applicable to insurance or surety operations, which represents the highest amount of losses for the Institution, and on that scenario, incorporate the additional effect of losses produced by any of the scenarios defined in fractions 4.6 or 4.7.

The assumption of losses due to technical or counterparty risk, in this combined scenario, must be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., shows its lowest amount.

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