Modificatory Circular 10/16 to the Single Insurance and Surety Circular

DOF: 31/05/2016

CIRCULAR Modificatory 10/16 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 Commission of Insurance and Sureties.

MODIFICATORY CIRCULAR 10/16 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Provisions 5.4.1., 5.4.4. and 5.11.6.; Provision Seventy-Third and Seventy-Fourth Transitory;

Annexes 6.1.2. and 6.10.6.)

The National Commission of Insurance and Sureties, based on the provisions of articles 366, fractions II and V, 369, fraction I, 372, fraction V 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 (CUSF) was published in the Official Gazette of the Federation, through which the general provisions emanating from the Law of Insurance and Surety Institutions (LISF) are made known, systematizing its integration and homologating 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 Commission of Insurance and Sureties must adhere in the development of their operations.

In view of the above and with the objective of providing greater legal certainty regarding the regulatory framework to which the aforementioned entities must adhere, it is considered indispensable to make some modifications and additions to the Single Insurance and Surety Circular regarding technical reserves, minimum paid-in capital and the solvency capital requirement, which correspond, generically, to aspects of the procedure for calculating the risk margin; constitution, increase, valuation and registration of the reserve for investment fluctuation of pension insurance derived from social security laws; constitution and increase of the current risk reserve of private insurance consisting of the payment of annuities based on the survival of persons; to make known the value of the Investment Unit that insurance and surety institutions must consider to calculate the equivalence in national currency of their minimum paid-in capital as established in article 49 of the Law of Insurance and Surety Institutions, and clarifications to the procedure for the delivery of the "System for calculating the Solvency Capital Requirement", as well as specification of the version that must be used for the calculation of the Solvency Capital Requirement that said institutions carry out through the use of the general formula provided in article 236 of the Law of Insurance and Surety Institutions, and finally, the deferral of the application of the parameter k=30, used in the calculation of the capital requirement for mismatch between assets and liabilities of Pension Insurance.

That the modification to Provision 5.4.1. of the Single Insurance and Surety Circular is necessary with the objective of providing greater legal certainty to regulated subjects regarding the determination of the risk margin of the current risk reserve, clarifying that, for the purposes of the valuation of technical reserves, the Solvency Capital Requirement of the close of the month immediately preceding the valuation date must be used, in addition to eliminating the exception established in Provision 5.4.4. for the calculation of the risk margin of the current risk reserve of long-term insurance, in order for the calculation procedure to be applicable to all lines and types of insurance.

That the modification to Provision 5.11.6. is presented, with the purpose of facilitating the calculation process of the reserve for investment fluctuation for pension insurance derived from social security laws.

That as a result of the change in the assumptions and methods of valuation of the current risk reserve of private insurance consisting of the payment of annuities based on the survival of persons, it was observed that there are significant increases in the balances of said reserve that may impact the results of institutions authorized to practice pension insurance derived from the Social Security Laws, so it is specified, with prior authorization, to grant a period to cover the possible deficit that they might present.

That through the determination of minimum paid-in capitals, it is sought that insurance and surety institutions have a solid financial position that allows them to respond to the obligations and responsibilities they assume in the exercise of their activity, so it is necessary to modify Annex 6.1.2. of the Single Insurance and Surety Circular in order to make known the value of the Investment Unit that said Institutions must consider to calculate the equivalence in national currency of their minimum paid-in capital.

That in terms of what is provided in fractions I and III of article 369 of the Law of Insurance and Surety Institutions, it corresponds to the Board of Directors of the National Commission of Insurance and Sureties to approve the issuance of general provisions that according to said Law require its agreement, as well as to determine the minimum paid-in capital that insurance institutions and surety institutions must cover in accordance with what is provided in said Law.

That in order to facilitate the management of the investment portfolio in charge of insurance institutions authorized to practice pension insurance derived from the Social Security Laws, in order for them to maintain an adequate position of matching between assets and liabilities, it is necessary to incorporate a transitional regime regarding the update of the value of the measurement segment k for indexed currency, used in the calculation of the capital requirement for mismatch between assets and liabilities referred to in Annex 6.5.7.

Therefore, this Commission has resolved to issue a Modificatory Circular to the Single Insurance and Surety Circular in the terms indicated below:

MODIFICATORY CIRCULAR 10/16 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Provisions 5.4.1., 5.4.4. and 5.11.6.; Provision Seventy-Third and Seventy-Fourth Transitory;

Annexes 6.1.2. and 6.10.6.)

FIRST.- Provisions 5.4.1., 5.4.4. and 5.11.6. of the Single Insurance and Surety Circular are modified to read as follows:

5.4.1.

The risk margin will be the amount that, added to the best estimate, guarantees that the amount of technical reserves is equivalent to what Insurance Institutions will require to assume and meet their obligations.

The risk margin will be calculated by determining the net cost of capital corresponding to the Admissible Own Funds required to back the SCR necessary to meet the insurance and Reinsurance obligations of the Insurance Institution, during its period of validity. For the purposes of the valuation of technical reserves, the SCR of the close of the month immediately preceding the valuation date must be used. This is without prejudice to the fact that the institution may make adjustments to said risk margin, which allow it to recognize the increase or decrease that the same may have, due to relevant increases or decreases in the amount of its obligations that have occurred during the month, after the close of the previous month. In these cases, the person responsible for the valuation of technical reserves must inform the adjustment made and the procedures used to make said adjustment, as part of the content of the certification files, which are part of the RR-3 report.

5.4.4.

The risk margin associated with each line and type of insurance must be calculated according to the following procedure:

I. to IV. ...

5.11.6.

The balance of the reserve for investment fluctuation may not at any time be greater than 50% of the value of the parameter corresponding to the close of the previous month, as follows:

where:

is the balance of the current risk reserve of Basic Pension Benefits for retention, corresponding to the active plans of Pension Insurance excluding the portion corresponding to the special mathematical reserve for Policies Prior to the New Operational Scheme;

is the balance of the current risk reserve of Additional Benefits for retention, corresponding to Policies Prior to the New Operational Scheme;

and are the balance of the current risk reserve of Basic Pension Benefits and the balance of the current risk reserve of Additional Benefits for retention for each Policy of the New Operational Scheme, both obtained with the technical interest rate indicated in Provision 5.8.4 or in fraction II of Provision 5.8.13, as applicable, and the biometric bases indicated in Provision 14.2.6;

and are the balance of the current risk reserve of Basic Pension Benefits and the balance of the current risk reserve of Additional Benefits for retention for each Policy of the New Operational Scheme, both obtained with the technical interest rate indicated in Provision 5.8.4 or in fraction II of Provision 5.8.13, as applicable, and the biometric bases with which the Insurance Institution determined its Constitutive Amount offer;

is the capital requirement for mismatch between assets and liabilities referred to in Provision 6.5.2, and

is the capital requirement relative to losses caused by the change in the value of assets referred to in Provision 6.5.2.

SECOND.- Provisions Seventy-Third and Seventy-Fourth Transitory are added to the Single Insurance and Surety Circular to read as follows:

SEVENTY-THIRD.- Those Insurance Institutions that have life insurance policies that consist of the payment of annuities based on the survival of persons, and that, as a result of the change in the demographic bases provided in these Provisions, the current risk reserve, valued at January 1, 2016, implies an increase in said reserve that translates into a deficit, may request authorization from the Commission for the amortization of said deficit provided that the following is met:

I.

That the annuity plans were contracted prior to the entry into force of these Provisions,

II.

That there are no future premium payments, and

III.

That the insured population is a closed population, in the sense that the insured members are those who meet the characteristics provided in the contract celebrated and belong to the insured population defined therein.

The request must be submitted no later than June 30, 2016 and must be accompanied by a contribution program through which the deficit in question will be remedied.

The amortization period that the Institution requests, for the amortization of the deficit, may not exceed 5 years counted from December 31, 2015.

The authorization granted, if any, will not have effects to be applied to plans that have been subscribed on dates subsequent to the entry into force of these Provisions, or to plans that are subscribed in the future.

SEVENTY-FOURTH.- The value of the measurement segment k =30 for indexed currency referred to in Annex 6.5.7. of these Provisions, considered in the calculation of the capital requirement for mismatch between assets and liabilities of Pension Insurance, will take effect from July 1, 2016. Meanwhile, this parameter will take the value k=26.

THIRD.- Annexes 6.1.2. and 6.10.6. of the Single Insurance and Surety Circular are modified.

TRANSITORY

SINGLE.-

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

This is made known to you, based on articles 366, fractions II and V, 369, fraction I, 372, fraction V of the Law of Insurance and Surety Institutions.

Respectfully,

Effective Suffrage. No Re-election.

Mexico City, May 13, 2016.- The President of the National Commission of Insurance and Sureties, Norma Alicia Rosas Rodríguez.- Rubric.

ANNEX 6.1.2.

MINIMUM PAID-IN CAPITAL THAT INSTITUTIONS MUST HAVE

The minimum paid-in capital that Insurance Institutions must have is fixed according to the following:

I.

Life.- The equivalent to 6 ' 816,974 (six million eight hundred sixteen thousand nine hundred seventy-four) UDI.

II.

Pension Insurance.- The equivalent to 28 ' 000,000 (twenty-eight million) UDI.

III.

Accidents and illnesses:

a)

Lines of personal accidents and/or medical expenses.- The equivalent to 1 ' 704,243 (one million seven hundred four thousand two hundred forty-three) UDI.

b)

Health line, including personal accidents and/or medical expenses.- The equivalent to 1 ' 704,243 (one million seven hundred four thousand two hundred forty-three) UDI.

IV.

Damages:

a)

One line.- The equivalent to 5 ' 112,730 (five million one hundred twelve thousand seven hundred thirty) UDI.

b)

Two lines.- The equivalent to 6 ' 816,974 (six million eight hundred sixteen thousand nine hundred seventy-four) UDI.

c)

Three lines.- The equivalent to 8 ' 521,217 (eight million five hundred twenty-one thousand two hundred seventeen) UDI.

d)

Regardless of what is provided in the previous subsections for the operation of damages, specifically regarding the lines of housing credit and financial guarantee, the following is required:

Housing credit.- The equivalent to 12 ' 200,000 (twelve million two hundred thousand) UDI.

Financial guarantee.- The equivalent to 33 ' 200,000 (thirty-three million two hundred thousand) UDI.

The minimum paid-in capital that Institutions operating sureties must have, for each line they are authorized to operate, including the sub-line or sub-lines of each one, is fixed according to the following:

I.

Sureties:

a)

One line.- The equivalent to 7 ' 310,308 (seven million three hundred ten thousand three hundred eight) UDI.

b)

Two lines.- The equivalent to 9 ' 747,077 (nine million seven hundred forty-seven thousand seventy-seven) UDI.

c)

Three lines.- The equivalent to 12 ' 183,846 (twelve million one hundred eighty-three thousand eight hundred forty-six) UDI.

Insurance Institutions authorized exclusively to practice Reinsurance are fixed for each operation or line that they have been authorized to practice at 50% of the minimum paid-in capital expressed in UDI indicated above, with the exception of the Re-surety operation.

Insurance Institutions that do not have authorization to operate sureties and that carry out Re-surety operations are fixed for each surety line as follows:

I.

Re-surety

a)

One line.- The equivalent to 3 ' 655,154 (three million six hundred fifty-five thousand one hundred fifty-four) UDI.

b)

Two lines.- The equivalent to 4 ' 873,538 (four million eight hundred seventy-three thousand five hundred thirty-eight) UDI.

c)

Three lines.- The equivalent to 6 ' 091,923 (six million ninety-one thousand nine hundred twenty-three) UDI.

To cover the minimum paid-in capital as established in this Annex, Institutions must multiply the number of UDIS determined for each operation or line or well line or sub-line, as the case may be, that they have authorized, as well as for pension insurance, derived from Social Security Laws, by the value of the UDI corresponding to December 31, 2015 given by the Bank of Mexico in the Official Gazette of the Federation of the 24th of the same month and year.

ANNEX 6.10.6.

PROCEDURE FOR THE DELIVERY OF THE COMPUTING SYSTEM FOR THE CALCULATION

OF THE SCR OF

INSTITUTIONS THROUGH THE USE OF THE GENERAL FORMULA

PROVIDED IN THE

ARTICLE 236 OF THE LISF

The delivery of the computing system, which will be identified as "System for calculating the Solvency Capital Requirement", with which the calculation of the SCR carried out by Institutions through the use of the general formula provided in article 236 of the LISF must be made, will be provided as follows:

I.

The delivery of the "System for calculating the Solvency Capital Requirement" will be made to all Institutions that are authorized to operate insurance and/or sureties.

II.

The delivery of the "System for calculating the Solvency Capital Requirement" will be carried out by the General Directorate of Information Technologies of the National Commission of Insurance and Sureties, located at Av. Insurgentes Sur 1971, North Tower, 1st floor, Guadalupe Inn Colony, C.P. 01020, Mexico City, during business hours from 9:00 to 14:00 and from 15:00 to 18:00.

III.

For the purposes of the delivery of the "System for calculating the Solvency Capital Requirement", any person may attend, who must exhibit (in original and copy) a letterhead letter from the technical director, actuary or their equivalent, or from the general director of the Institution, in which they are authorized to receive said system, as well as original and copy of their official identification.

IV.

Along with the "System for calculating the Solvency Capital Requirement", the installation and operation manual for the same will be delivered, which will be found on the installation disk that will be provided to Institutions.

V.

The version of the "System for calculating the Solvency Capital Requirement" that must be used for the calculation of the SCR carried out by Institutions through the use of the general formula provided in article 236 of the LISF, is the most recent that can be obtained from the Commission's Website.

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