Modifying Circular 2/23 of the Single Circular on Insurance and Surety Bonds

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DOF: 16/05/2023

Modifying Circular 2/23 of the Single Circular on Insurance and Surety Bonds

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

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

MODIFYING CIRCULAR 2/23 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.15.3. and 7.2.5.)

The National Commission of Insurance and Surety Bonds, based on the provisions of articles 366,

paragraph

II, 372, paragraphs VI and XLII, 373 and 381 of the Law of Insurance and Surety Institutions, and:

CONSIDERING

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

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 administrative expense index of the surety market, made known in the

Annex

5.15.3. of the Single Circular on Insurance and Surety Bonds.

That in accordance with what is provided in Provision 5.15.2., paragraph 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 the value of these 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 aforementioned Circular.

That Chapter 7.2. of the Single Circular on Insurance and Surety Bonds refers that Institutions are

obligated to report to this Commission the results of the Dynamic Solvency Test effectuated with the statutory scenarios referred to in Annex 7.2.5. of the same Circular.

That Provision 7.2.1. of the Circular in question provides that Institutions must effectuate, 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 light of the foregoing, the Commission has determined the statutory scenarios that could

affect the financial condition of Institutions taking into account the general evolution of the markets

insurance 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 2022 fiscal year.

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

Insurance and Surety Bonds in the following terms:

MODIFYING CIRCULAR 2/23 OF THE SINGLE CIRCULAR ON INSURANCE AND SURETY BONDS

(Annexes 5.15.3 and 7.2.5)

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

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

TRANSITORY

SINGLE. - This Modifying Circular will enter into force the day following its publication in the

Official Journal of the Federation.

The foregoing is made known to you based on articles 366, paragraph II, 372, paragraphs VI

and XLII, 373 and 381 of the Law of Insurance and Surety Institutions.

Respectfully,

Mexico City, May 8, 2023. - The President of the National Commission of Insurance and Surety Bonds,

Ricardo Ernesto Ochoa Rodríguez. - Rubric.

ANNEX 5.15.3.

SURETY MARKET INFORMATION, FOR THE PURPOSES OF VALUATION OF THE

SURETY RESERVE 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 establishment, 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 administrative expense indices of the surety market, which are

indicated below.

I.

Paid Claim Indices

Branch or Type of Surety

Index

First risk fidelity

89.13%

Other fidelity

1.50%

Judicial covering drivers of motor vehicles

0.72%

Other judicial

0.81%

Administrative

0.23%

Credit

0.77%

II.

Annual Administrative Expense Indices

Surety Branch

Index

Fidelity

0.99%

Judicial

0.28%

Administrative

0.09%

Credit

0.20%

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 are defined

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

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 that respond to growth or decrement expectations

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 re-surety 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 paragraphs 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 paragraph 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 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 Institution's operating costs

( ), based on its business plan and its cost experience. The amount of costs of

operation for future projection years must be estimated based on fixed costs and

variable costs, determined from the Institution's own structure of fixed costs and variable costs

of the Institution. For these purposes, the portion of variable costs ( ) must be projected

in congruence with the projected gross premium written amounts, 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 accumulated inflation

estimated for each future year of operation ( ) .

In the case of surety and surety bond 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 Losses Projection

The amount of gross claims and losses in each of the projection years ( ) ,

must be determined in congruence with the projected gross premium written amounts in accordance with

paragraph 1.1.1. ( ) and with the levels and patterns of claims or loss experience 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 losses must be calculated based on gross claims and losses,

applying the levels of ceded reinsurance or re-surety, based on the contracts

of reinsurance or re-surety ceded that the Institution has in force or that it projects to have

in the future, in accordance with its business plan.

Recovery of Claim Payments

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

of the gross claim amount, the amount of a

part of the claim payments or losses recovered through counter-guarantees or other

recovery rights that the institution has, within the framework of regulation ( ) , can 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 observed payment recovery in previous years or, in case of not

having experience, must be calculated with the market guarantee recovery patterns

of

the market.

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 as follows:

Market experience for sureties and surety bond insurance:

Branch or Type of Surety

First risk fidelity

2%

Other fidelity

5%

Judicial covering drivers of

motor vehicles

20%

Other judicial

33%

Administrative

19%

Credit

43%

Surety Bond Insurance

19%

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

must be reflected in a congruent manner in the lines of ceded loss experience, retained loss experience,

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 according to

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

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 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 fiscal year of operation 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 for Scenarios of Increase in Future Claims or Losses

1.2.1.

Hypothesis of Scenarios of Increase in Claims or Losses

The amount of gross claims or losses, in this scenario ( ),

must consist of

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

paragraph 1.1 ( ) , an increase in the percentages ( ) , in accordance with the

values indicated below:

Branch or Type of Insurance

Life Insurance

Individual

65%

Group

65%

Accident and Health Insurance

Medical expenses

40%

Personal accidents

160%

Health

75%

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 bond

300%

Branches or Types of Sureties

First risk fidelity sureties

10%

Other fidelity sureties

350%

Judicial sureties covering drivers of

motor vehicles

300%

Other judicial sureties

500%

Administrative sureties

500%

Credit sureties

260%

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

and retained losses or claims must be increased in accordance with the reinsurance or

re-surety contracts in force that cover the risk of the branch 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

losses or claims that derive from future business.

NOTE: In the case of insurance consisting of the payment of periodic annuities, other than

pension insurance contracts derived from social security laws, the projected claim amount under this scenario, in the year corresponding to introduce the shock,

must correspond to that obtained by assuming that all beneficiaries of the payment of annuities

of the previous year remain alive.

1.2.2.

Hypothesis of Projection of Increase in Gross Losses of Pension Insurance

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

claims or loss experience of direct insurance under this scenario for each projection year t ( ), will be that obtained from the loss experience estimated by the Institution

under its base scenario ( ), multiplied by the factor of the projection year in question,

provided that such amount does not exceed the amount of claims obtained if all

insured and policy beneficiaries in force remain alive during the projection period ( ), in which case the latter must be used, i.e.:

t

1

2

3

4

5

1.0257

1.0520

1.0790

1.0956

1.0956

In the projection of the parameter

, a probability of death and of school dropout equal to zero must be assumed 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 Re-surety

This hypothesis must consist of assuming the insolvency of the reinsurer or re-surety 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

re-surety, is at least 50% of the amount of gross claims or losses, projected

in accordance with paragraph 1.1.6., that the reinsurer or re-surety 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., paragraph IX, and 7.2.5. of the present

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 performing the

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

1.1. and the hypothesis of increase in loss experience, indicated in paragraph 1.2.1. insofar as

only the life operation is concerned. 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 experience must be assumed in the year in which the solvency margin,

projected in accordance with the hypotheses given in paragraph 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 paragraph 1.2.2.

4.2

Statutory Scenario 2 - Increase in Loss Experience in Accident and

Disease Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds by performing the

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

1.1., incorporating the hypothesis of an increase in loss experience in the branch of the operation of

accidents and diseases that represents the greatest technical loss, applying the parameters

indicated in paragraph 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 with the amount that

results from subtracting from the amount of accounting profit or technical loss of the income statement, the amount

estimated for operating expenses and the amount of increase to other reserves. The increase in

loss experience must be assumed in the year in which the solvency margin, projected in accordance with

the hypotheses given in paragraph 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 Experience in Property Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds by performing the

projection of the Institution's financial statements under the hypotheses indicated in paragraph 1.1., and the hypotheses of an increase in loss experience in the branch that represents the greatest technical loss,

applying the parameters indicated in paragraph 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 with the amount that

results from subtracting from the amount of accounting profit or technical loss of the income statement, the amount

estimated for operating expenses and the amount of increase to other reserves.

The increase in loss experience must be assumed in the year in which the solvency margin,

projected in accordance with the hypotheses given in paragraph 1.1., presents its lowest amount.

4.4.

Statutory Scenario 4 - Increase in the Amount of Claims in the Surety Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds by performing the

projection of the Institution's financial statements under the hypotheses indicated in paragraph 1.1., and the hypothesis of an increase in the gross amount of claims in the branch that represents the

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

increase in the gross amount of claims of the surety 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 with the amount that

results from subtracting from the amount of accounting profit or technical loss of the income statement, the amount

estimated for operating expenses and the amount of 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 paragraph 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 surety or surety bond 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

contracts of sureties or surety bond insurance.

This scenario will consist of analyzing the sufficiency of admissible own funds by performing the

projection under the hypotheses indicated in paragraph 1.1. and under the assumption that a

accumulation of claims occurs derived from assuming claims coming from the three main

accumulations operated by the Institution, constituted by all coverages of insurance and sureties given to

the same surety or insured. The amount of claims must correspond to at least 50%

of the insured sums or surety amounts retained of each accumulation. This effect of increase

in loss experience must be reflected in all other variables that have a relationship with said

loss experience.

The increase in loss experience must be assumed in the year in which the solvency margin,

projected in accordance with the hypotheses given in paragraph 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 performing the

projection under the hypotheses indicated in paragraph 1.1., and assuming a decrease in the

financial products in accordance with the hypotheses indicated in paragraph 2.1.

The decrement of 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 performing the

projection under the hypotheses indicated in paragraph 1.1., and assuming losses originated by

insolvency of the reinsurer or re-surety, in accordance with the hypotheses indicated in paragraph 3.

Losses arising from the insolvency of the reinsurer or surety 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 eligible 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 highest 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 due to 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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