Modifying Circular 5/22 of the Single Circular on Insurance and Surety Bonds

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DOF: 28/07/2022

CIRCULAR Modificatoria 5/22 of the Single Circular on Insurance and Surety Bonds

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

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

MODIFYING CIRCULAR 5/22 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,

fraction

II, 367, fraction II, 372, fractions VI and XLII, 373 and 381 of the Law of Insurance and Surety Institutions, and

CONSIDERING

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

Institutions will value the reserve for surety bonds in force using the paid claims 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 reserve for surety bonds in force, must use the paid claims indices

and the annual index of administrative expenses of the surety market, made known in 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, fraction IV, of the Single Circular on

Insurance and Surety Bonds, said claims 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 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 view of the foregoing, the Commission has determined the statutory scenarios that could affect

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

insurer 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

perform said test, corresponding to the 2021 fiscal year.

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

Insurance and Surety Bonds in the following terms:

MODIFYING CIRCULAR 5/22 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 after its publication in the

Official Journal of the Federation.

The foregoing is made known to you, based on articles 366, fraction II, 367, fraction II,

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

Respectfully,

Mexico City, July 20, 2022. - 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

RESERVE FOR SURETY BONDS 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 for surety bonds 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 indices of administrative expenses of the surety market, which are

indicated below.

I.

Paid Claims Indices

Line of business or type of surety bond

Index

First risk fidelity

89.56%

Other fidelity

1.58%

Judicial covering drivers

of motor vehicles

0.65%

Other judicial

0.81%

Administrative

0.23%

Credit

0.82%

II.

Annual Administrative Expense Indices

Line of surety bonds

Index

Fidelity

0.94%

Judicial

0.26%

Administrative

0.09

Credit

0.22%

ANNEX 7.2.5.

STATUTORY SCENARIOS FOR THE PERFORMANCE OF THE DYNAMIC SOLVENCY TEST

For the purposes of performing the Dynamic Solvency Test, the following are defined below

hypotheses and statutory scenarios with which it must be performed:

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 line of insurance or surety bonds, that 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 ceded premium amounts that correspond to its

risk cession strategy and reinsurance or reinsure plans, as well as its plans for

business development.

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 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 gross premium written amounts defined in fraction 1.1.1, the

own percentage indices of net acquisition costs of each line or type of insurance

and surety bonds, corresponding to the acquisition costs that the Institution foresees having

in accordance with the

design of the insurance and surety products that it projects to sell as part

of its business development plans.

1.1.5.

Hypothesis of Operating Cost Projection.

In the case of surety and surety bond insurance operations, the amount of expenses associated

with the recovery of payments must be included as part of

operating costs.

1.1.6.

Hypothesis of Future Claims and Losses Projection.

Ceded and retained losses must be calculated based on gross claims and

losses, applying the levels of ceded reinsurance or reinsure, in function

of the reinsurance or reinsure contracts 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 amount of claims, it may be taken into account, as income, 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 ( ). 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 observed payment recovery patterns

in previous years or, in case of not having experience, 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 as follows:

Market experience for surety and surety bond insurance:

Line of business or type of surety bond

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 consistently in the lines of ceded loss, retained loss, recoverable amounts and any other variable that is related.

1.1.7.

Hypothesis of Financial Product Projection.

The amount of the Institution's financial products, in each of the years of

projection based on its business plan, must be the one that 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, 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 current regulation.

Likewise, the projection of other liabilities must be carried out based on its current value

and its 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 fiscal year of the Institution and based on the probable value

that said assets will have in the future in accordance with 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.

Line of business or Type of Insurance

Life Insurance

Individual

65%

Group

65%

Accident and Health Insurance

Medical expenses

40%

Personal accidents

160%

Health

70%

Property Insurance

Automobiles

65%

Credit

200%

Civil liability and professional

risks

270%

Catastrophic risks

400%

Fire

430%

Agricultural and animal

400%

Miscellaneous

230%

Maritime and transports

105%

Financial guarantee

50%

Housing credit

50%

Surety

300%

Lines or types of surety bonds

First risk fidelity surety bonds

10%

Other fidelity surety bonds

350%

Judicial surety bonds covering

drivers of motor vehicles

300%

Other judicial surety bonds

500%

Administrative surety bonds

500%

Credit surety bonds

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 contracts of

reinsurance or reinsure in force that cover the risk of the line or type of insurance

or of

surety bond in question, or of those contracts that the Institution projects to have

in the future to cover the loss or claim flows that will 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 amount of

projected claims under this scenario, in the year in which the

shock must be introduced, must correspond to that obtained by assuming that all beneficiaries of the

payment of annuities from the previous year remain alive.

1.2.2.

Hypothesis of Projection of Increase in Gross Losses of Pension

Insurance.

In the projection of the parameter

it must be assumed a probability of death

and school dropout equal to zero for all genders and age groups, as

the case may be, considering the corresponding payments of annuities, 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

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

returns, must be calculated in accordance with the estimates of the Institution itself, 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 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 contracts

proportional or non-proportional.

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 losses,

projected in accordance with what is indicated in fraction 1.1.6., that the reinsurer or reinsurer

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., fraction 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 Ratio in Life Operation:

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

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

fraction 1.1. and the hypothesis of increase in loss ratio, indicated in fraction 1.2.1 in

what

corresponds only to the life operation. This effect of increase in gross losses of the life operation must be reflected in all other variables that have

relation with 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,

with the exception of pension insurance derived from social security laws, which will

adhere to what is indicated in fraction 1.2.2.

4.2.

Statutory Scenario 2 - Increase in Loss Ratio in Accident

and Health Operation:

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

the projection of 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

accident and health 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 that have relation with said losses.

For these purposes, technical loss will be understood as that determined by the amount that

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

the projection of 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 that have relation with said losses.

For these purposes, technical loss will be understood as that determined by the amount that

results from subtracting from the amount of accounting profit or technical loss of 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 the Surety

Operation:

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

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

the

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 that have relation with said

losses.

For these purposes, technical loss will be understood as that determined by the amount that

results from subtracting from the amount of accounting profit or technical loss of 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 or surety 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 given to the same principal or

insured, given in surety or surety bond insurance contracts.

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

the projection 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 coverages of

insurance and surety bonds given to the same principal 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 that have relation with 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, performing

the projection 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 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, performing

the projection under the hypotheses indicated in fraction 1.1. and assuming losses originated

by insolvency of the reinsurer or reinsurer, in accordance with the hypotheses indicated in

fraction 3.

The losses originated by insolvency of the reinsurer or reinsurer 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

to 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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INDICATORS

Exchange Rate and Rates as of 27/08/2026

DOLLAR

16.9660 UDIS

8.808255 TIIE 28 DAYS

6.7559% TIIE 91 DAYS

6.7931% TIIE 182 DAYS

6.8474% TIIE DE FONDEO

6.50%

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