Amending Circular 5/20 of the Single Circular on Insurance and Surety Bonds — SHCP — MX

DOF: 05/06/2020

CIRCULAR Modificatoria 5/20 of the Single Circular on Insurance and Surety Bonds

At the margin a seal with the National Coat of Arms, which says: United Mexican States.- TREASURY.- Ministry of

Treasury and Public Credit.- National Commission of Insurance and Surety Bonds.

AMENDING CIRCULAR 5/20 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.3.1., 5.15.3. and 7.2.5.)

The National Commission of Insurance and Surety Bonds, 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 in accordance with what is established in Provision 5.3.1. of the Single Circular on Insurance and Surety Bonds,

Insurance Institutions and Mutual Societies that, for the valuation of risk reserves in

course and for obligations pending fulfillment for accidents occurred and not reported, use the statutory

method, must apply the financial and technical parameters determined with the market information

referred to in the aforementioned Circular, resulting necessary for such effect, update the parameters contained

in Annex 5.3.1. of the same Circular.

That in terms of what is provided in Chapter 5.15. of the Single Circular on Insurance and Surety Bonds, the

Institutions will value the surety reserve 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 surety reserve in force, must use the paid claim indices

and the annual index of administrative expenses of the surety market.

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 their value 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 indicated Circular.

That Chapter 7.2. of said Circular indicates that Institutions are obliged to report to this

Commission the report of the results of the Dynamic Solvency Test carried out with the

statutory scenarios referred to in Annex 7.2.5. of the Single Circular on Insurance and Surety Bonds.

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 the Institutions taking into account the general evolution of the markets

insurer and surety 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 said test, corresponding to the 2019 fiscal year

For the above reasons, this Commission issues the following modification to the Single Circular on

Insurance and Surety Bonds in the following terms:

AMENDING CIRCULAR 5/20 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.3.1, 5.15.3 and 7.2.5)

FIRST.-

Annex 5.3.1. of the Single Circular on Insurance and Surety Bonds is modified.

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

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

TRANSITORY

SINGLE.- This Amending Circular will enter into force the day after its publication in the Official Journal 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.

Sincerely

Mexico City, May 27, 2020. - The President of the National Commission of Insurance and Surety Bonds, Ricardo Ernesto Ochoa Rodríguez. - Signature.

ANNEX 5.3.1

MARKET PARAMETERS FOR THE PURPOSES OF VALUATION OF RISK RESERVES IN

COURSE AND FOR OBLIGATIONS PENDING FULFILLMENT FOR ACCIDENTS OCCURRED NOT

REPORTED AND ADJUSTMENT EXPENSES ASSIGNED TO THE ACCIDENT, EMPLOYING THE STATUTORY

METHOD

Market information for the calculation of the risk reserve in course

Branch/type

Last loss ratio

Percentile 99.5% of the

statistics of last loss ratios

Percentage of

administrative expense

Duration

Short-term Life

57.38%

85.51%

6.75%

1.62

Medical Expenses

75.99%

100.62%

6.16%

1.71

Personal Accidents

26.85%

69.90%

9.81%

1.90

Health

62.65%

102.97%

26.40%

1.52

Civil Liability

37.54%

139.45%

8.47%

2.46

Maritime and transports

67.12%

136.91%

8.79%

2.00

Fire

67.32%

358.64%

5.07%

1.91

Agricultural and animal

81.12%

329.22%

13.55%

1.67

Automobiles

68.71%

112.91%

4.84%

1.59

Credit

68.76%

206.58%

18.60%

2.45

Various

61.47%

204.38%

8.14%

2.85

Market percentage of administrative expense

for the calculation of the risk reserve in course of

long-term life insurance

Insurance

Percentage of administrative expense

Massive

6.00%

Non-massive

12.00%

II.

Market information for the calculation of the reserve for obligations pending fulfillment

for accidents occurred not reported and adjustment expenses assigned to the accident

Branch/type

Last loss ratio

Percentile

99.5% of the

statistics of

last loss ratios

Duration of the

future payment obligations

associated with the

reserve for

OPC by SONR

Accrual factors

Long-term endowment Life

2.99%

21.48%

2.06

100%

31.34%

22.11%

15.08%

9.30%

Long-term non-endowment Life

8.80%

29.45%

2.04

100%

18.75%

11.35%

8.23%

6.24%

Short-term Life

16.95%

35.29%

1.74

100%

15.93%

7.72%

5.27%

3.75%

Medical Expenses

11.36%

38.42%

1.95

100%

15.86%

10.97%

8.32%

6.04%

Personal Accidents

7.40%

50.12%

1.69

100%

23.69%

10.47%

5.44%

3.24%

Health

10.63%

22.38%

1.03

100%

2.82%

0.18%

0.02%

Civil Liability

15.09%

79.13%

2.21

100%

53.82%

32.38%

22.38%

13.92%

Maritime and transports

10.80%

58.70%

1.88

100%

37.06%

23.85%

17.78%

11.57%

Fire

10.92%

82.87%

1.94

100%

25.35%

13.96%

9.89%

7.29%

Agricultural and animal

10.19%

40.71%

1.75

100%

10.16%

8.69%

7.18%

5.11%

Automobiles

5.27%

44.13%

1.69

100%

31.93%

15.42%

8.79%

5.80%

Credit

1.63%

21.45%

1.54

100%

63.52%

30.62%

13.70%

6.57%

Catastrophic risks

14.45%

182.73%

2.37

100%

24.98%

9.84%

6.72%

5.05%

Various

10.26%

64.70%

1.95

100%

39.29%

24.02%

17.07%

13.21%

ANNEX 5.15.3.

SURETY MARKET INFORMATION, FOR THE PURPOSES OF VALUATION OF THE RESERVE OF

SURETIES 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 surety reserve in force, while

generating such information, must use the method described in Provision 5.15.3, using the indices

of paid claims and the annual indices of administrative expenses of the surety market, which are

indicated below.

Paid claim indices

Branch or type of surety

Index

First risk fidelity

92.96%

Other fidelity

1.69%

Judicial that cover drivers of

motor vehicles

0.58%

Other judicial

0.83%

Administrative

0.22%

Credit

0.86%

II.

Annual administrative expense indices

Surety branch

Index

Fidelity

0.86%

Judicial

0.22%

Administrative

0.10%

Credit

0.25%

ANNEX 7.2.5.

STATUTORY SCENARIOS FOR THE CONDUCT OF THE DYNAMIC SOLVENCY TEST

For the purposes of conducting the dynamic solvency test, the following are defined below the hypotheses

and statutory scenarios with which the dynamic solvency test must be carried out:

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 , must be determined

as the estimated gross premium written amount by the Institution in its base scenario , in each

branch of insurance or surety, which respond to expectations of growth or decrement 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 , must correspond to

the projected ceded premium amounts that correspond to their risk cession strategy and

reinsurance or reinsure plans, as well as their business development plans.

1.1.3.

Hypothesis of Retained Premium Projection

The amount of retained premium in each of the projection years

must be determined

as the difference between the projected gross premium written amount and the projected ceded premium amount

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, must be determined by applying to the gross premium written amounts defined in fraction 1.1.1, the own

percentage indices of net acquisition costs of each branch or type of insurance and surety, corresponding to the acquisition costs that the Institution foresees having according to the design

of the insurance and surety products that it projects to sell as part of its plans of

business development.

1.1.5.

Hypothesis of Operating Cost Projection

The amount of operating costs in each of the future years considered in the

projection

must be determined starting from the operating costs of the Institution

based on its business plan and its experience in costs. The amount of future operating costs, must be estimated as a function of 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

must be projected in congruence with the projected amounts of

gross premium written, while the portion corresponding to fixed cost

must be estimated based on the fixed cost observed in the last three years of operation of the

Institution, updated with the estimated cumulative inflation for each future year of

operation .

In the case of surety and surety insurance operations, the amount of expenses associated with the

recovery of payments must be incorporated as part of the

operating costs.

1.1.6.

Hypothesis of Future Claims and Accidents Projection

The amount of gross claims and accidents in each of the projection years ,

must 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 ratios observed by

the Institution, for each branch or type of insurance and surety

taking into account its

experience or the market experience when the Institution lacks its own experience. For

these purposes, market experience will 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 accidents must be calculated based on gross claims and accidents

brut, applying the levels of reinsurance or reinsure ceded, based on the reinsurance or reinsure contracts

ceded that the Institution has in force or that it projects to have in the

future, according to its business plan.

Recovery of Claim Payments

In the case of surety and surety insurance operations, as part of the projections of the amount

of gross claims, it may be taken into account, as income, the amount of a part of the payments of

claims or accidents, recovered through counter-guarantees or other recovery rights that the

institution has, within the framework of regulation ( ). The value of said recovered amount, must be calculated

in accordance with the own percentage indices of recovery of paid claims ,

determined by the Institution based on its own patterns of payment recovery observed in

previous years, or in case of not having experience, it must be calculated with the market recovery patterns

of guarantees.

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 the

following:

Market experience for sureties and surety insurance:

Branch or type of surety

First risk fidelity

Other fidelity

Judicial that cover drivers

of motor vehicles

20%

Other judicial

33%

Administrative

19%

Credit

43%

Surety Insurance

19%

The income from recovery of paid claims, if taken into account, must be

reflected in a congruent manner in the items of ceded loss ratio, retained loss ratio, amounts

recoverable 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, must be that which the Institution itself calculates according to the

yield rates associated with the assets that the Institution has at the time of projection

and those it foresees obtaining 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 must be estimated, insofar as technical reserves are concerned, 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 the

current regulation.

Likewise, the projection of other liabilities must be carried out based on its current value and its

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 must 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 they will have

in the future according to the Institution's investment plans.

1.2.

Hypotheses of Scenarios of Increase in Future Claims or Accidents

1.2.1.

Hypothesis of Scenarios of Increase in Claims or Accidents

The amount of gross claims or accidents, in this scenario , must consist of

incorporating to the amounts of claims or loss ratios projected by the Institution in accordance

with fraction 1.1, an increase in the percentages, in accordance with the values indicated below:

Branch or Type of Insurance

Life Insurance

Individual

50%

Group

50%

Accident and Health Insurance

Medical expenses

30%

Personal accidents

160%

Health

65%

Property Insurance

Automobiles

65%

Credit

200%

Civil liability and professional risks

270%

Catastrophic risks

400%

Fire

430%

Agricultural and animal

400%

Various

230%

Maritime and transports

105%

Financial guarantee

50%

Housing credit

50%

Surety

300%

Branches or types of sureties

First risk fidelity sureties

10%

Other fidelity sureties

350%

Judicial sureties that cover drivers of

motor vehicles

250%

Other judicial sureties

450%

Administrative sureties

300%

Credit sureties

260%

In congruence with the above, the amount of ceded claims or accidents

must be increased, and ceded or retained claims or accidents in accordance with the reinsurance or

reinsure contracts in force that cover the risk of the branch or type of insurance or surety in question, or of those contracts that the Institution projects to have in the future to cover the flows of

accidents or claims that derive from future business.

NOTE: In the case of insurance that consist of the payment of periodic annuities, other than pension insurance contracts derived from social security laws, the amount of projected claims under

this scenario, in the year in which the shock is to be introduced, must correspond to that obtained by

assuming that all beneficiaries of the annuity payment of the previous year, remain alive.

1.2.2.

Hypothesis of Projection of Increase in Gross Accidents of Pension Insurance

In the case of pension insurance derived from social security laws, the amount of the

gross claims or loss ratio of the direct insurance under this scenario for each year of

projection t , will be that obtained from the loss ratio estimated by the Institution

under its base scenario , multiplied by the factor

of the projection year in question, without such amount resulting in excess of the amount of claims that is obtained if all

insured and policy beneficiaries in force remain alive during the projection period , in which case this latter must be used, that is:

1.0257

1.0520

1.0790

1.0956

In the projection of the parameter

it must be assumed a probability of death and of

school dropout equal to zero 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, must be determined in each of the years

of projection 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 that generate yields,

must be calculated in accordance with the Institution's own estimates, 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 Reinsurer

This hypothesis must consist of assuming the insolvency of the reinsurer or reinsurer that has the

largest share of 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

reinsurer, is at least 50% of the amount of gross claims or accidents, projected

in accordance with what is indicated in fraction 1.1.6., that the reinsurer or reinsurer 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 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, carrying out

the projection of the Institution's financial statements, under the hypotheses indicated in

fraction 1.1. and the hypothesis of increase in loss ratio, indicated in fraction 1.2.1 in what

corresponds only to the life operation. This effect of increase in gross accidents of the life operation must be reflected in all other variables that have

relation with said accidents.

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, with

the exception of pension insurance derived from social security laws, which will be

attended to what is indicated in fraction 1.2.2.

4.2.

Statutory Scenario 2 - Increase in Loss Ratio in Accident and

Disease Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds, carrying out

the projection of the Institution's financial statements, under the hypotheses indicated in

fraction 1.1., incorporating the hypothesis of an increase in loss ratio in the branch of the

accident and disease operation that represents the greatest technical loss, applying the

parameters indicated in fraction 1.2.1. This effect of increase in gross accidents

must be reflected in all other variables that have relation with said accidents.

For these purposes, technical loss will be understood as that which is determined with the amount that

results 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, carrying out

the projection of the Institution's financial statements under the hypotheses indicated in

fraction 1.1., and the hypotheses of an increase in loss ratio in the branch that represents the

greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of

increase in gross accidents of the property operation must be reflected in all

other variables that have relation with said accidents.

For these purposes, technical loss will be understood as that which is determined with the amount that

results 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 Operation of

Sureties:

This scenario will consist of analyzing the sufficiency of admissible own funds, projecting the Institution's financial statements under the assumptions set forth in fraction 1.1, and the assumption of an increase in the gross claim amount in the line of business representing the greatest technical loss, applying the parameters indicated in fraction 1.2.1.

This effect of an increase in the gross claim amount of the suretyship operation must be reflected in all other variables related to such claims.

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

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

4.5.
Statutory Scenario 5 Risk of Loss from Claim Clusters:

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

This scenario will consist of analyzing the sufficiency of admissible own funds, projecting under the assumptions set forth in fraction 1.1 and under the assumption that a cluster of claims occurs derived from assuming claims arising from the three main clusters operated by the Institution, constituted by all insurance and suretyship coverages provided to the same surety or insured. The amount of the claims must correspond to at least 50% of the insured sums or retained guaranteed amounts of each cluster. This effect of an increase in claim frequency must be reflected in all other variables related to such claim frequency.

The increase in claim frequency shall be assumed in the year in which the solvency margin, projected in accordance with the assumptions 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, projecting under the assumptions set forth 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 comprising the projection period.

4.7.
Statutory Scenario 7 - Loss from Counterparty Risk:

This scenario will consist of analyzing the sufficiency of admissible own funds, projecting under the assumptions set forth in fraction 1.1 and assuming losses arising from the insolvency of the reinsurer or re-surety, in accordance with the assumptions set forth in fraction 3.

The losses arising from the insolvency of the reinsurer or re-surety shall be assumed in the year in which the solvency margin, projected in accordance with the assumptions 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 applicable to insurance or suretyship operations, which represents the greatest amount of losses for the Institution, and on that scenario, incorporate the additional effect of losses produced by one of the scenarios defined in fractions 4.6 or 4.7.

The assumption of losses from technical or counterparty risk, in this combined scenario, shall be assumed in the year in which the solvency margin, projected in accordance with the assumptions given in fraction 1.1, presents its lowest amount.

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