Modifying Circular 3/18 of the Single Insurance and Surety Circular

DOF: 03/29/2018

Modifying Circular 3/18 of the Single Insurance and Surety Circular

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

MODIFYING CIRCULAR 3/18 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annexes 5.15.3 and 7.2.5)

The National Insurance and Sureties Commission, 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 their integration and homogenizing the terminology used, in order to thereby provide legal certainty regarding the regulatory framework to which Institutions and Mutual Societies and other persons and entities subject to the inspection and surveillance of the National Insurance and Sureties Commission 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 Insurance and Sureties Commission has deemed it necessary to make some modifications and additions related to technical and operational aspects of the Single Insurance and Surety Circular.

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 Insurance and Sureties 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 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 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 Insurance and Sureties Commission has determined it convenient to update the market parameters referred to in Annex 5.15.3 of the Single Insurance and Surety Circular.

That in accordance with 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 in accordance with what is provided in Chapter 7.2 of the Single Insurance and Surety Circular, insurance institutions and surety institutions are obligated to report to the National Insurance and Sureties Commission 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 Insurance and Sureties Commission has determined, for the set of institutions that make up the insurance and surety sectors, 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 foregoing, it is necessary to update the statutory scenarios for the Dynamic Solvency Test, which insurance institutions and surety institutions must use to carry out the corresponding Test for the 2017 exercise, applying the assumptions indicated in said statutory scenarios to each of the lines or types of insurance and sub-lines of sureties that they are authorized to operate.

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

MODIFYING CIRCULAR 3/18 OF THE SINGLE INSURANCE AND SURETY CIRCULAR

(Annexes 5.15.3 and 7.2.5)

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

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

TRANSITORY

SINGLE.- This Modifying Circular will enter into force the day after 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,

Effective Suffrage. No Re-election.

Mexico City, March 21, 2018.- The President of the National Insurance and Sureties Commission, Norma Alicia Rosas Rodríguez.- Rubric.

ANNEX 5.15.3.

SURETY MARKET INFORMATION, FOR THE PURPOSES OF VALUING 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 administrative expense indices of the surety market, which are indicated below.

I.

Paid Claim Indices

Line or type of surety

Index

First-risk fidelity sureties

88.85%

Other fidelity sureties

1.45%

Judicial sureties covering drivers of motor vehicles

0.51%

Other judicial sureties

0.75%

Administrative sureties

0.22%

Credit sureties

0.86%

II.

Annual Administrative Expense Indices

Surety line

Index

Fidelity sureties

0.81%

Judicial sureties

0.22%

Administrative sureties

0.11%

Credit sureties

0.30%

Income from the recovery of paid claims, if taken into account, must be reflected consistently in the items of ceded claims, retained claims, recoverable amounts, and any other variable related.

1.1.7.

Hypotheses for the Projection of Financial Products

The amount of the Institution's financial products, in each of the projection years based on its business plan, must be the amount that 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 expects to obtain in the future from new asset flows derived from its business plan.

1.1.8.

Hypotheses for the Projection of Liabilities

The projected value of liabilities 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 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 their business plan.

1.1.9.

Hypotheses for the Projection of Assets

The projected value of assets must be estimated based on the value that assets 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 for Scenarios of Increase in Future Claims or Losses

1.2.1.

Hypotheses for Scenarios of Increase in Claims or Losses

Lines or types of sureties

First-risk fidelity sureties

10%

Other fidelity sureties

400%

Judicial sureties covering drivers of motor vehicles

300%

Other judicial sureties

550%

Administrative sureties

300%

Credit sureties

260%

In congruence with the above, the amount of ceded claims or losses, and retained claims or losses according to existing reinsurance or reinsuring 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 losses or claims derived from future business, must be increased.

Regarding insurance consisting of the payment of periodic annuities, other than pension insurance contracts derived from social security laws, the projected amount of claims under this scenario, in the year corresponding to introducing the shock, must correspond to that obtained by assuming that all beneficiaries of annuity payments from the previous year remain alive.

1.2.2.

Hypotheses for the Projection of Increase in Gross Losses of Pension Insurance

2.

HYPOTHESES RELATED TO FINANCIAL RISK

2.1.

Hypotheses 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 generating yields must be calculated in accordance with the Institution's own estimates, based on its experience and knowledge regarding the performance of said assets.

3.

HYPOTHESES RELATED TO COUNTERPARTY RISK

3.1.

Hypotheses for Scenario of Losses by Insolvency of Reinsurer or Reassurer

This hypothesis must consist of assuming the insolvency of the reinsurer or reassurer 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 reassurer, is at least 50% of the amount of gross claims or losses, projected in accordance with what is indicated in fraction 1.2.1., that the reinsurer or reassurer 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 Ratio in Life Operation:

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 increased loss ratio, indicated in fraction 1.2.1 with respect only to the life operation. This effect of increase in gross losses of the life operation must be reflected in all other variables related to said losses.

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.

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 Ratio in Accident and Disease Operation:

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., incorporating the hypothesis of an increase in loss ratio in the line 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 losses must be reflected in all other variables related to said losses.

For these purposes, technical loss will 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 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, 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 that represents the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in gross losses of the property operation must be reflected in all other variables related to said losses.

For these purposes, technical loss will 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 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 Surety Operation:

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 that represents the greatest technical loss, applying the parameters indicated in fraction 1.2.1. This effect of increase in the gross amount of claims of the surety operation must be reflected in all other variables related to said losses.

For these purposes, technical loss will 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 the gross amount of claims 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.

4.5.

Statutory Scenario 5 - Risk of Loss by Cluster of Liabilities:

This scenario will only be applicable to surety operations or surety insurance 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 principal risk clusters, generated by the coverages given to the same surety or insured, given in surety contracts or surety 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 principal clusters 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 cluster. This effect of increase in loss ratio must be reflected in all other variables related to said loss ratio.

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.

4.6.

Statutory Scenario 6 - Decrease in Financial Products:

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 products in accordance with the hypotheses indicated in fraction 2.1.

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

The losses originating from the insolvency of the reinsurer or reassurer 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.

4.8.

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 appropriate for insurance or surety operations, that 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 by technical or counterparty risk, in this combined scenario, 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.

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