Amending Circular 4/17 of the Single Insurance and Surety Circular

DOF: 27/06/2017

Amending Circular 4/17 of the Single Insurance and Surety Circular

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

AMENDING CIRCULAR 4/17 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annex 7.2.5.)

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

CONSIDERING

That on April 4, 2013, the "Decree by which the Law of Insurance and Surety Institutions is issued and various provisions of the Law on the Insurance Contract are reformed and added" was published in the Official Gazette of the Federation, through which, in terms of its First Article, the Law of Insurance and Surety Institutions is issued.

That on December 19, 2014, the Single Insurance and Surety Circular was published in the Official Gazette of the Federation, through which the general provisions emanating from the Law of Insurance and Surety Institutions are made known, systematizing its integration and homogenizing the terminology used, in order to thereby provide legal certainty regarding the regulatory framework to which insurance institutions and mutual insurance societies, surety institutions, and other persons and entities subject to the inspection and supervision of the National Insurance and Sureties Commission must adhere in the development of their operations.

That with the objective of providing greater legal certainty regarding the regulatory framework to which the aforementioned entities must adhere, the National Insurance and Sureties Commission has deemed it necessary to make some modifications related to technical aspects of the Single Insurance and Surety Circular.

That in accordance with what is established in Provision 7.2.1. of the Single Insurance and Surety Circular, insurance institutions, as well as surety 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 accordance with Provision 7.2.5. of the Single Insurance and Surety Circular, insurance and surety institutions must consider for the realization of the Dynamic Solvency Test, the statutory scenarios provided for in Annex 7.2.5. of the aforementioned Circular.

That the National Insurance and Sureties Commission has determined, for the set of insurance and surety institutions, the statutory scenarios that could affect their financial condition, taking into account the general evolution of the insurance and surety markets and the macroeconomic context of the country.

That in view of the foregoing, it is necessary to update what relates to the statutory scenarios for the Dynamic Solvency Test, which the aforementioned institutions must use to carry out the mentioned Test, corresponding to the 2016 fiscal year, applying the assumptions indicated in said statutory scenarios, to each of the lines or types of insurance and suretyship that the Institutions are authorized to operate.

For the aforementioned reasons, the National Insurance and Sureties Commission has resolved to issue the following modification to the Single Insurance and Surety Circular in the following terms:

AMENDING CIRCULAR 4/17 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annex 7.2.5)

SINGLE.- Annex 7.2.5. of the Single Insurance and Surety Circular is modified.

TRANSITIONAL

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

The foregoing is made known to you, based on Articles 366, fraction II, 372, fractions VI and XLII, 373, and 381 of the Law of Insurance and Surety Institutions.

Respectfully,

Effective Suffrage. No Re-election.

Mexico City, June 20, 2017. - National Insurance and Sureties Commission.- In the absence of the

President of the National Insurance and Sureties Commission, based on Article 46

of the Internal Regulations of this Commission, the Vice President of Institutional Operation, Gerardo Lozano de León.- Signature.

Line or Type of Insurance

Life Insurance

Individual

45%

Group

45%

Accident and Health Insurance

Medical Expenses

30%

Personal Accident

137%

Health

45%

Property Insurance

Automobiles

50%

Credit

190%

Civil Liability and Professional Risks

280%

Earthquake and Other Catastrophic Risks

400%

Fire

360%

Agricultural and Livestock

400%

Various

160%

Maritime and Transport

100%

Financial Guarantee

50%

Housing Credit

50%

Bail

320%

Suretyship Lines or Types

First Risk Fidelity Suretyships.

15%

Other Fidelity Suretyships

340%

Judicial Suretyships covering drivers

of motor vehicles

325%

Other Judicial Suretyships

490%

Administrative Suretyships

320%

Credit Suretyships

280%

In congruence with the foregoing, the amount of claims or losses ceded, and losses or claims retained in accordance with the existing reinsurance or reinsuretyship contracts that cover the risk of the line or type of insurance or suretyship 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, must be increased.

2.

HYPOTHESES RELATED TO FINANCIAL RISK

2.1.

Hypothesis for scenario of Decrease in Yield Rates

The amount of the Institution's financial products must 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, must be calculated in accordance with the estimates of the Institution itself, based on its experience and knowledge regarding the performance of said assets.

3.

HYPOTHESES RELATED TO COUNTERPARTY RISK

3.1.

Hypothesis for scenario of losses by Insolvency of the Reinsurer or Reinsuretyship

This hypothesis must consist of assuming the insolvency of the reinsurer or reinsuretyship that has the largest participation in ceded risk of the Institution, whether in proportional or non-proportional contracts.

For these purposes, it must be assumed that the loss, given the insolvency of a reinsurer or reinsuretyship, is at least 50% of the amount of gross claims or losses, projected in accordance with what is indicated in fraction 1.2.1., that the reinsurer or reinsuretyship would have had to cover in a solvent situation.

4.

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 will be those defined below:

4.1. Statutory Scenario 1 - Increase in Loss Ratio in Life Operation:

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

The increase in loss ratio must 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.

Pension insurance derived from social security laws will also be located in this scenario, in accordance with what is indicated in fraction 1.2.2.

4.2. Statutory Scenario 2 - Increase in Loss Ratio in Accident and

Health Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds, by projecting the financial statements of the Institution, under the hypotheses indicated in fraction 1.1., incorporating the hypothesis of an increase in loss ratio 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 must be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss will be understood as that determined by the amount resulting from subtracting from the amount of the 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 ratio must 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 will be located in this scenario.

4.3. Statutory Scenario 3 - Increase in Loss Ratio in Property Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds, by projecting the financial statements of the Institution under the hypotheses indicated in fraction 1.1., and the hypotheses of an increase in loss ratio 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 must be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss will be understood as that determined by the amount resulting from subtracting from the amount of the 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 ratio must 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 the Suretyship Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds, by projecting the financial statements of the Institution 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 suretyship operation must be reflected in all other variables that have a relationship with said losses.

For these purposes, technical loss will be understood as that determined by the amount resulting from subtracting from the amount of the 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 must 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 Accumulation of Liabilities:

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

This scenario will consist of analyzing the sufficiency of admissible own funds, by projecting under the hypotheses indicated in fraction 1.1. and under the assumption that an accumulation of claims occurs derived from assuming claims coming from the three main accumulations that the Institution operates, constituted by all coverages of insurance and suretyship given to the same surety or insured.

The amount of claims must correspond to at least 50% of the insured sums or suretyship amounts retained of each accumulation. This effect of increase in loss ratio must be reflected in all other variables that have a relationship with said loss ratio.

The increase in loss ratio must 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 will 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 must 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 will consist of analyzing the sufficiency of admissible own funds, by projecting under the hypotheses indicated in fraction 1.1. and assuming losses originating from the insolvency of the reinsurer or reinsuretyship, in accordance with the hypotheses indicated in fraction 3.

The losses originating from the insolvency of the reinsurer or reinsuretyship must 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.

4.8. Statutory Scenario 8 - Combined Scenario:

This scenario will consist of analyzing the sufficiency of admissible 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 appropriate for insurance or suretyship operations, that represents the greatest 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 by 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., presents its lowest amount.

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