Amending Circular 7/19 of the Single Insurance and Surety Circular — SHCP — MX

DOF: 31/05/2019

Amending Circular 7/19 of the Single Insurance and Surety Circular

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

AMENDING CIRCULAR 7/19 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annexes 5.3.1, 5.15.3 and 7.2.5)

The National Commission of Insurance and Sureties, 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 issuing the Law of Insurance and Surety Institutions and reforming and adding various provisions of the Law on the Insurance Contract" 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 surveillance of the National Commission of Insurance and Sureties 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 Commission of Insurance and Sureties has deemed it necessary to make some modifications and additions related to technical aspects of the Single Insurance and Surety Circular.

That, according to Provision 5.3.1 of the Single Insurance and Surety Circular, Insurance Institutions and Mutual Societies that, for the valuation of risk reserves in progress and for obligations pending to be fulfilled for accidents occurred and not reported, use the statutory method, must apply the financial and technical parameters determined with market information, which are established in the aforementioned Single Circular, resulting necessary, for this purpose, to update the market parameters provided for in Annex 5.3.1.

That in terms of what is provided in Chapter 5.15 of the Single Insurance and Surety Circular, Institutions will value the reserve of sureties in force using the paid claim indices that will be calculated by the National Commission of Insurance and Sureties 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 of sureties 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 Insurance and Surety Circular, the paid 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 in this context, and with the objective that Institutions have the necessary indices to carry out the correct valuation of the reserve of sureties in force with reliable, homogeneous and sufficient values, the National Commission of Insurance and Sureties has determined it convenient to update the market parameters referred to in Annex 5.15.3 of the Single Insurance and Surety Circular.

That according to what is established in Provision 7.2.1 of the Single Insurance and Surety Circular, insurance institutions and 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 according to what is provided in Chapter 7.2 of the Single Insurance and Surety Circular, insurance institutions and surety institutions are obliged to report to the National Commission of Insurance and Sureties, 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 aforementioned Circular.

That the National Commission of Insurance and Sureties has determined, for the set of 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 above, it is necessary to update what relates to the statutory scenarios for the Dynamic Solvency Test, which Institutions must use to carry out the corresponding test for the 2018 exercise, applying the assumptions indicated in said statutory scenarios, to each of the lines or types of insurance and sureties that Institutions are authorized to operate.

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

AMENDING CIRCULAR 7/19 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annexes 5.3.1, 5.15.3 and 7.2.5)

FIRST. - Annex 5.3.1 of the Single Insurance and Surety Circular is modified.

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

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

TRANSITORY

SINGLE. - This Amending Circular will enter into force on the same day of 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,

Mexico City, April 29, 2019.- The President of the National Commission of Insurance and Sureties, Ricardo Ernesto Ochoa Rodríguez.- Rubric.

ANNEX 5.3.1

MARKET PARAMETERS FOR THE PURPOSES OF VALUATION OF RISK RESERVES IN PROGRESS AND FOR OBLIGATIONS PENDING TO BE FULFILLED FOR ACCIDENTS OCCURRED NOT REPORTED AND EXPENSES OF ADJUSTMENT ASSIGNED TO THE ACCIDENT, EMPLOYING THE STATUTARY METHOD

I.
Market information for the calculation of the risk reserve in progress

Line/Type | Last Loss Ratio Index | 99.5th Percentile of the Statistics of Last Loss Ratio Indices | Percentage of Administrative Expenses | 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 Transport | 67.12% | 136.91% | 8.79% | 2.00 Fire | 67.32% | 358.64% | 5.07% | 1.91 Agricultural and Animals | 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

Percentage of market administrative expense for the calculation of the risk reserve in progress of long-term life insurance

Insurance | Percentage of Administrative Expenses --- | --- Mass | 6.00% Non-mass | 12.00%

II.
Market information for the calculation of the reserve for obligations pending to be fulfilled for accidents occurred not reported and adjustment expenses assigned to the accident

Line/Type | Last Loss Ratio Index | 99.5th Percentile of the Statistics of Last Loss Ratio Indices | Duration of Future Payment Obligations Associated with the Reserve for OPC due to SONR | Accrual Factors 1 | Accrual Factors 2 | Accrual Factors 3 | Accrual Factors 4 | Accrual Factors 5 --- | --- | --- | --- | --- | --- | --- | --- | --- Long-term Endowment Life | 2.99% | 21.48% | 2.06 | 100% | 12.53% | 4.82% | 3.18% | 1.78% Long-term Non-endowment Life | 8.80% | 29.45% | 2.04 | 100% | 25.13% | 4.81% | 2.88% | 2.16% Short-term Life | 16.95% | 35.29% | 1.74 | 100% | 26.89% | 4.12% | 2.03% | 1.40% Medical Expenses | 11.36% | 38.42% | 1.95 | 100% | 13.51% | 2.18% | 1.55% | 1.11% Personal Accidents | 7.40% | 50.12% | 1.69 | 100% | 26.29% | 6.26% | 2.03% | 1.14% Health | 10.63% | 22.38% | 1.03 | 100% | 2.82% | 0.18% | 0.02% | 0.02% Civil Liability | 15.09% | 79.13% | 2.21 | 100% | 37.98% | 19.17% | 11.56% | 6.75% Maritime and Transport | 10.80% | 58.70% | 1.88 | 100% | 14.21% | 5.60% | 3.83% | 2.46% Fire | 10.92% | 82.87% | 1.94 | 100% | 12.64% | 2.70% | 1.63% | 1.13% Agricultural and Animals | 10.19% | 40.71% | 1.75 | 100% | 12.37% | 2.04% | 1.64% | 1.16% Automobiles | 5.27% | 44.13% | 1.69 | 100% | 5.29% | 1.45% | 0.72% | 0.45% Credit | 1.63% | 21.45% | 1.54 | 100% | 1.75% | 0.95% | 0.64% | 0.25% 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% | 18.90% | 8.26% | 5.08% | 4.00%

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 reserve of sureties 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 indices of administrative expenses of the surety market, which are indicated below.

I.
Paid Claim Indices

Line or Type of Surety	Index
First Risk Fidelity	91.78%
Other Fidelity	1.62%
Judicial covering drivers of motor vehicles	0.52% Other Judicial

II.
Annual Administrative Expense Indices

Line of Sureties	Index
Fidelity	0.83%
Judicial	0.21%
Administrative	0.10%
Credit	0.27%

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 hypotheses and statutory scenarios with which the dynamic solvency test must be carried out are defined below:

1.
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 amount of gross premium written by the Institution in its base scenario, in each line of insurance or sureties, 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 amounts of ceded premium corresponding to its risk cession strategy and reinsurance or reinsure 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 must 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, must be determined by applying to the amounts of gross premium written defined in fraction 1.1.1, the own percentage indices of net acquisition costs of each line or type of insurance and sureties, corresponding to the acquisition costs that the Institution foresees having 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 must be determined starting from the operating costs of the Institution, based on its business plan and its cost experience. The amount of future operating costs must be estimated in terms 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 accumulated inflation for each future year of operation.

In the case of surety and caution insurance operations, the amount of expenses associated with the recovery of payments must be incorporated as part of 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 experience observed by the Institution, for each line or type of insurance and sureties, 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, applying the levels of ceded reinsurance or reinsure, in function of the ceded reinsurance or reinsure contracts 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 caution insurance operations, as part of the projections of the gross amount of claims, the amount of a part of the claim payments or accidents, 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 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 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 the following:

Market Experience for Sureties and Caution Insurance:

Line or Type of Surety	Percentage
First Risk Fidelity	2%
Other Fidelity	5%
Judicial covering drivers of motor vehicles	20% Other Judicial

The income from recovery of paid claims, if taken into account, must be reflected in a congruent manner in the items of ceded loss, retained loss, 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, must 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 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, 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 must 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 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 said assets 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 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 | Percentage Increase --- | --- 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 Animals | 400% Various | 230% Maritime and Transport | 105% Financial Guarantee | 50% Housing Credit | 50% Caution | 300%

In congruence with the above, the amount of ceded claims or accidents, and retained accidents or claims must be increased in accordance with the current reinsurance or reinsure contracts that cover the risk of the line or type of insurance or surety in question, or 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 consisting of the payment of periodic rents, 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, must correspond to that obtained by assuming that all beneficiaries of the payment of rents 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 gross loss of direct insurance for each projection year will be considered as the 2% increase to the result obtained from the quotient of the loss of direct insurance estimated by the Institution, between the maximum expected loss in each of the projection years. The maximum expected loss will be determined in accordance with what is established in Provision 5.10.5, fractions I, II and III of this Circular, considering all policies in force and all types of pension, that is:

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 that generate yields, must be calculated in accordance with the estimates of the Institution itself, based on its experience and knowledge about the performance of said assets.

3.
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 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 reinsurer, is at least 50% of the amount of gross claims or accidents, projected in accordance with what is indicated in fraction 1.2.1., that the reinsurer or reinsurer 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 Experience 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 increase in loss experience, indicated in fraction 1.2.1 with respect 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 experience must be assumed in the year in which the solvency margin, projected in accordance with the hypotheses given in fraction 1.1., presents its smallest 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 Experience in Accident and

Illness 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 experience in the line of the accident and illness 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 resulting from subtracting from the amount of the accounting profit or technical loss of the income statement, the estimated amount of the

operating expenses and the increase to other reserves. The increase in loss ratio 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 placed in this scenario.

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

This scenario will 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 ratio in the line representing the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in gross losses in the property operation shall be reflected in all other variables related to such losses.

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

The increase in loss ratio 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 Claim Amount in Surety Operations:

This scenario will 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 representing the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in the gross amount of claims in the surety operation shall be reflected in all other variables related to such losses.

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 from Cumulative Liabilities:

This scenario shall only be applicable to surety 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 clusters of claims, coming from at least, the three main risk clusters, generated by the coverages provided to the same surety or insured, given in surety contracts or bail bond 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 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 provided to the same surety or insured.

The amount of claims shall correspond to at least 50% of the insured sums or retained guaranteed amounts of each cluster. This effect of increase in loss ratio shall be reflected in all other variables related to such loss ratio.

The increase in loss ratio 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 Income:

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 income in accordance with the hypotheses indicated in fraction 2.1.

The decrease in financial income 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, by projecting under the hypotheses indicated in fraction 1.1 and assuming losses originating from the insolvency of the reinsurer or reinsurer, in accordance with the hypotheses indicated in fraction 3.

Losses originating from the insolvency of the reinsurer or reinsurer 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.

4.8. 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 shall 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 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 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 hypotheses given in fraction 1.1, presents its lowest amount.

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