Modificatory Circular 15/16 of the Single Circular on Insurance and Sureties — SHCP — MX

DOF: 29/09/2016

CIRCULAR Modificatory 15/16 of the Single on Insurance and Sureties

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

MODIFICATORY CIRCULAR 15/16 OF THE SINGLE ON INSURANCE AND SURETIES

(Provisions 5.6.1., 6.4.4., 6.4.5., 6.4.11., 6.8.2., 6.8.3., 8.19.5., 9.5.6.; Seventy-Sixth Transitory; Annexes 5.6.1-c, 6.3.18., 6.4.11. and 8.20.2.)

The National Commission of Insurance and Sureties, based on the provisions of articles 366, fraction II, 369, fraction I, 372, fractions V, 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 Circular on Insurance and Sureties (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 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 and operational aspects of the Single Circular on Insurance and Sureties.

That regarding the calculation of the maximum probable loss and the deductions related to the agricultural and livestock line, it is indispensable to make modifications and additions, which correspond, generically, to a transitional alternative for the calculation of the maximum probable loss in case the technical bases and the corresponding calculation system cannot be applied, as well as to the deductions applicable to the aforementioned line.

That the modification to Provision 5.6.1. of the Single Circular on Insurance and Sureties is necessary with the objective of providing greater legal certainty to the regulated subjects by giving the alternative that, in case an insurance institution or mutual insurance society, for any circumstance, is unable to apply the technical bases and the calculation system for the calculation of the maximum probable loss in the agricultural and livestock line, it must calculate transitively, while regularizing its situation, the maximum probable retention loss. On the other hand, the calculation of the accumulation limit of the catastrophic risk reserve for these insurances is specified. Regarding this, the modification to Provision 6.4.4. is with the purpose of making congruent the calculation of the maximum probable loss indicated in the proposal for modification to provision 5.6.1.

That the modification to Provision 6.4.5. is with the purpose of specifying that, in case the maximum probable loss for the agricultural and livestock line is determined in accordance with what is established in Annex 5.6.1-c that is added, the deductions must be taken as zero.

That the addition of a Seventy-Sixth Transitory Provision to the Single Circular on Insurance and Sureties is necessary to specify some aspects related to the accumulation limit of the catastrophic risk reserve for agricultural and livestock insurances, while insurance institutions and mutual insurance societies do not have the required information for its determination.

That in Annex 5.6.1-c that is added, the alternative calculation procedure for the maximum probable loss in the agricultural and livestock line is specified.

That for the calculation of the solvency capital requirement, the estimation of recoverable amounts from reinsurance, re-surety or other contracts that include risk or liability transfer mechanisms, as well as in the execution of Financial Reinsurance operations, insurance and surety institutions and mutual insurance societies must consider the use of ratings issued by specialized rating companies in terms of what is established in the Law of Insurance and Surety Institutions.

That through writings of November 23, 2015 and February 11, 2016, the company named HR Ratings de México, S.A. de C.V., requested the National Commission of Insurance and Sureties to be incorporated into the Single Circular on Insurance and Sureties to be considered among the specialized rating companies that may support the evaluation of solvency and stability of foreign reinsurers or re-sureties, for the purposes of article 107 of the Law of Insurance and Surety Institutions.

That once the aforementioned request was analyzed, the National Commission of Insurance and Sureties, through official letter No. 06-C00-41100/01164 of January 27, 2016, informed HR RATINGS DE MÉXICO, S.A. DE C.V. about its incorporation into the Single Circular on Insurance and Sureties to be considered among the specialized rating companies that may support the evaluation of solvency and stability of foreign reinsurers or re-sureties, for the purposes of Provision 34.1.2. of the aforementioned Single Circular.

That in accordance with what is established in Provision 6.4.11., fraction I, of the Single Circular on Insurance and Sureties, the M r requirement factor is a function of the credit rating of the insured issuance, which will be adjusted to what is provided in Table 6.4.11-a that according to fraction II of said Provision, the credit risk adjustment factor FA, which is calculated as the unit plus the quotient of the sum of the value in basis points of the index of emerging market bonds corresponding to Mexico (EMBI MX) plus the credit risk factor of the insured issuance (B r) will be adjusted to what is indicated in Table 6.4.11-b, and that fraction IV of the aforementioned Provision states that the factors FBA and FA that Insurance Institutions must apply for the calculation of the factors G c,i will be those indicated in Annex 6.4.11. of the aforementioned Single Circular, it is considered convenient to include in the aforementioned Tables, as well as in Annex 6.4.11., the specialized rating company HR Ratings de México, S.A. de C.V. in order to be a more option for obtaining the credit rating required for these effects.

That for the estimation of recoverable reinsurance amounts related to the risks considered in the risk in force reserve -with the exception of that related to Pension Insurances-, and the reserve for pending obligations, the default probabilities of Foreign Reinsurers registered in the General Register of Foreign Reinsurers indicated in Provision 8.20.2. of the Single Circular on Insurance and Sureties, as well as in Annex 8.20.2 must be considered, and that in the execution of Financial Reinsurance operations with foreign reinsurers or re-sureties, it is required that they, in addition to being registered in the General Register of Foreign Reinsurers referred to in article 107 of the Law of Insurance and Surety Institutions, have a minimum rating for this effect granted by a specialized rating company, therefore, it has been considered to include in said Annex 8.20.2. and within the minimum ratings the specialized rating company HR Ratings de México, S.A. de C.V. in order to be a more option for the estimation of the recoverable reinsurance amounts referred to. Likewise, Provision 9.5.6 is modified to include the specialized rating company HR Ratings de México, S.A. de C.V., in the list of minimum financial strength ratings, on a global scale for Foreign Reinsurers with which Institutions intend to enter into Financial Reinsurance operations.

That in accordance with what is established in Chapter 6.8 and Annex 6.3.18 of the Single Circular on Insurance and Sureties, insurance and surety institutions must calculate the capital requirement for operational risk and the losses caused by defaults of the reinsurance entities that back the losses of reinsurance contracts, both proportional and excess of loss coverage, which back the maximum probable loss, of which a modification to the calculation procedure is required in order to address the results, analysis, comments and observations obtained from the insurance and surety sector.

That the modification to Provision 8.19.5. is carried out with the purpose of providing legal certainty in the celebration of contracts that insurance and surety institutions and mutual insurance societies formalize with Mexican Financial Entities, their subsidiaries abroad or, in their case, the Depositary Institution and to contribute to the implementation and adaptation of administrative and operational processes.

That in order to contribute and facilitate the implementation and adaptation of the administrative and operational processes that insurance and surety institutions and mutual insurance societies must carry out, it has been determined to eliminate the requirement consisting of agreeing within the aforementioned contracts that the Mexican Financial Entity, its subsidiary abroad or, in their case, the Depositary Institution provides the information related to the risk factors of the titles or securities that are traded outside the national territory, as well as of the Foreign Over-the-Counter Financial Derivative Operations carried out in foreign markets, which are part of the Institution's investment portfolio, and that such information be sent to the National Commission of Insurance and Sureties, when so required, since such information is within that provided to the aforementioned National Commission through price providers.

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

MODIFICATORY CIRCULAR 15/16 OF THE SINGLE ON INSURANCE AND SURETIES

(Provisions 5.6.1., 6.4.4., 6.4.5., 6.4.11., 6.8.2., 6.8.3., 8.19.5., 9.5.6.; Seventy-Sixth Transitory; Annexes 5.6.1-c, 6.3.18., 6.4.11. and 8.20.2.)

FIRST.- Provisions 5.6.1., 6.4.4., 6.4.5., 6.4.11., 6.8.2., 6.8.3., 8.19.5., 9.5.6. are modified, to remain as indicated below:

5.6.1. Authorized Insurance Institutions and Mutual Societies authorized to practice in the operation of damage insurance, the agricultural and livestock line referred to in fraction IX of article 27 of the LISF, must constitute and increase a catastrophic risk reserve called "catastrophic risk reserve for agricultural and livestock insurance", according to the following guidelines:

I. to VI. ...

VII.

The maximum balance that the catastrophic risk reserve for agricultural and livestock insurance must reach will be determined as the average of the last five years of the amount of the maximum probable retention loss at the close of each fiscal year. The maximum probable loss must be calculated in accordance with the technical bases indicated in Annex 5.6.1-a, and through a calculation system that will be provided to Insurance Institutions and Mutual Societies by the Commission, as indicated in Annex 5.6.1-b.

When an Insurance Institution or Mutual Society, for any circumstance, is prevented from applying the technical bases and the calculation system referred to in the previous paragraph, it must calculate transitively, while regularizing its situation, the maximum probable retention loss in accordance with the procedure indicated in Annex 5.6.1-c.

For the purposes of determining the limit of the catastrophic risk reserve, the value of the maximum probable retention loss will be calculated at the close of each annual fiscal year and said value will remain constant, for the purposes of calculating the aforementioned limit, during any of the months prior to the last month of the fiscal year in question.

When the values used for the calculations referred to in this fraction, such as insured sums or retention levels, in any fiscal year, are such that significantly distort the calculation of the maximum accumulation limit of the catastrophic risk reserve for agricultural and livestock insurance referred to in this Provision, the Commission, prior to analysis of the situation, will establish the manner and terms in which the situation must be corrected.

6.4.4.

...

I. For Agricultural and Livestock, in Annex 5.6.1-a or 5.6.1-c, as applicable, as indicated in Provision 5.6.1.;

II to IV. ...

6.4.5.

...

If the maximum probable loss for agricultural and livestock insurance is determined in accordance with what is established in Annex 5.6.1-c, for the purposes of calculating the [symbol for loss ratio or similar metric], of this type of insurance, the deductions must be taken as zero, that is: Dj = 0 and PDj = 0.

6.4.11.

...

Table 6.4.11-a.

Characteristics of the insured issuance

Factor

If it is registered in the Public Credit Unit of the Ministry,

and the

lower of its national scale credit ratings is:

From AAA to AA- (Standard & Poor's);

From Aaa to Aa3 (Moody's);

From AAA to AA- (Fitch);

From HR AAA to HR AA- (HR Ratings)

0.33%

A+ to BBB (Standard & Poor's);

From A1 to Baa2 (Moody's);

From A+ to BBB (Fitch);

From HR A+ to HR BBB (HR Ratings);

0.83%

If it is not registered in the Public Credit

Unit of the Ministry

2.47%

...

II.

...

Table 6.4.11-b.

Characteristics of the insured issuance

Factor

(basis

points)

If the lower of its national scale credit ratings is:

AAA (Standard & Poor's);

Aaa (Moody's);

AAA (Fitch);

HR AAA (HR Ratings)

0.0

AA (Standard & Poor's);

Aa (Moody's);

AA (Fitch);

HR AA (HR Ratings)

22.4

A (Standard & Poor's);

A (Moody's);

A (Fitch);

HR A (HR Ratings)

30.5

BBB (Standard & Poor's);

Baa2 (Moody's);

BBB (Fitch);

HR BBB (HR Ratings)

185.3

III. and IV.

...

9.5.6.

...

II.

...

III.

Aa3, when it comes to ratings granted by Moody's;

IV.

AA-, when it comes to ratings granted by Standard & Poor's, and

HR AA- (G) when it comes to ratings granted by HR Ratings de

México, S.A. de C.V.

SECOND.- Provision Seventy-Sixth Transitory is added to the Single Circular on Insurance and Sureties, to remain as follows:

SEVENTY-SIXTH.-

While an Insurance Institution or Mutual Society operating the agricultural and livestock line does not have information on the maximum probable retention loss of at least one annual close, the maximum balance that the catastrophic risk reserve for agricultural and livestock insurance must reach at the close of each quarter, will be determined as the maximum probable retention loss of this type of insurance at the close of the quarter in question.

Likewise, Insurance Institutions and Mutual Societies operating the aforementioned line that do not have information on the maximum probable loss of five annual closes, the maximum balance that the catastrophic risk reserve for the line in question must reach will be determined as the average of the maximum probable retention losses corresponding to the closes of the fiscal years for which such information is available, until completing the five fiscal years referred to in fraction VII of Provision 5.6.1.

THIRD.- Annex 5.6.1-c is added to the Single Circular on Insurance and Sureties and Annexes 6.3.18., 6.4.11. and 8.20.2. of said Single Circular are modified.

FOURTH.- The "LIST OF ANNEXES" of the Single Circular on Insurance and Sureties is modified to refer to Annex 5.6.1-c titled "Procedure for the calculation of the maximum probable loss of agricultural and livestock insurance for those Institutions that fall under the scenario provided in the second paragraph of fraction VII of Provision 5.6.1."

TRANSITORY

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

This is made known to you, based on articles 366, fraction II, 369, fraction I, 372, fractions V, VI and XLII, 373 and 381 of the Law of Insurance and Surety Institutions.

Respectfully,

Effective Suffrage. No Re-election.

Mexico City, September 26, 2016.- The President of the National Commission of Insurance and Sureties, Norma Alicia Rosas Rodríguez.- Rubric.

ANNEX 6.4.11.

FACTORS FBA AND FA FOR THE CALCULATION OF FACTORS G c,t APPLICABLE

TO THE CALCULATION OF

RC PMLgf

I. ...

II. ...

a) ...

b) ...

Guaranteed values that do not have collateral guarantee or with a maturity term

greater than 7 years:

AAA (Standard & Poor's); Aaa (Moody's); AAA (Fitch); HR AAA (HR Ratings)

2.7710

AA (Standard & Poor's); Aa (Moody's); AA (Fitch); HR AA (HR Ratings)

2.9420

A (Standard & Poor's); A (Moody's); A (Fitch); HR A (HR Ratings)

3.0038

BBB (Standard & Poor's); Baa2 (Moody's); BBB (Fitch); HR BBB (HR Ratings)

4.1855

ANNEX 8.20.2

DEFAULT PROBABILITIES

Institutions, for the purposes of calculating the Recoverable Reinsurance Amounts referred to in

fraction V of Provision 8.20.2, must use default probabilities, according to the

following:

Standard &

Poor's

A.M Best

Fitch

Moody's

HR Ratings

Default Probability

AAA

A++, A+

AAA

Aaa

HR AAA (G)

0.002%

AA+,AA, AA-

A, A-

AA+,AA, AA-

Aa1, Aa2,

Aa3

HR AA+ (G)+, HR

AA (G), HR AA- (G)

0.05%

A+,A, A-

B++, B+

A+,A, A-

A1, A2, A3

HR A+ (G), HR A (G)

, HR A- (G)

0.18%

BBB+, BBB,

BBB-

BBB+, BBB,

BBB-

Baa1,

Baa2,Baa3

HR BBB+ (G), HR

BBB (G), HR BBB-

(G)

0.36%

BB+, BB, BB-

B, B-

BB+, BB, BB-

Ba1,

Ba2,Ba3

HR BB+ (G), HR BB

(G), HR BB- (G)

0.87%

B+, B, B-

C++, C+

B+, B, B-

B1, B2,B3

B+, B, B-

4.29%

CCC

or less

C, C-, D

less

CCC

less

Caa1

less

HR CCC (G)

less

30.65%

Not rated

30.65%

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