Modifying Circular 7/21 of the Single Circular on Insurance and Surety Bonds

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DOF: 10/06/2021

MODIFYING CIRCULAR 7/21 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 7/21 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, the

Institutions will value the reserve for sureties 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 in accordance with what is provided in Provision 5.15.2., paragraph IV, of the Single Circular on

Insurance and Surety Bonds, these claims indices will be reviewed during the first quarter of each year and

updated when a significant change in their value is observed.

That Institutions that do not have timely, homogeneous, reliable and sufficient information to

carry out the valuation of the reserve for sureties in force, must use the paid claims indices

and the annual administrative expense index of the surety market.

That with the objective that Institutions comply with the above, it is necessary to update 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 carried out

with the statutory scenarios referred to in Annex 7.2.5. of said Circular.

That Provision 7.2.1. of the Circular in question provides that 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 view of the above, the Commission has determined the statutory scenarios that could affect

the financial condition of 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 carry out said test, corresponding to the 2020 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 7/21 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 Gazette of the Federation.

The above 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, June 4, 2021. - The President of the National Commission of Insurance and Surety Bonds,

Ricardo Ernesto Ochoa Rodríguez. - Signature.

ANNEX 5.15.3.

SURETY MARKET INFORMATION, FOR THE PURPOSES OF VALUATION OF THE RESERVE

FOR 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 establishment, increase and valuation of the reserve for sureties 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 Claims Indices

Line of Surety or Type of Surety

Index

First risk fidelity

92.65%

Other fidelity

1.64%

Judicial covering drivers of

motor vehicles

0.57%

Other judicial

0.79%

Administrative

0.22%

Credit

0.81%

II.

Annual Administrative Expense Indices

Surety Line

Index

Fidelity

0.86%

Judicial

0.24%

Administrative

0.10%

Credit

0.23%

ANNEX 7.2.5.

STATUTORY SCENARIOS FOR THE CONDUCT OF THE DYNAMIC SOLVENCY TEST

For the purposes of conducting the dynamic solvency test, the hypotheses

and statutory scenarios with which the dynamic solvency test must be carried out are defined below:

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, which 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 corresponding to its risk cession strategy

and reinsurance or re-surety plans, as well as its 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

amount of ceded premium 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 line 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

business development plans.

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 experience in costs. The amount of future operating costs

must be estimated as a function of fixed costs and variable costs, determined

from the Institution's own structure of fixed and variable costs. For these

effects, the portion of variable costs ( ) must be projected in congruence with the

projected gross premium written amounts, while the portion corresponding to the fixed cost

( ) must be estimated based on the fixed cost observed in the last three years of

operation of the Institution, updated with the estimated accumulated inflation 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 line 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 the

made known in Annexes 5.3.1 and 5.15.3 of the CUSF or used by the Institution for the

design of its registered products.

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

brutos, 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 amount of claims, 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 ( ), may 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 observed payment recovery patterns in previous years, or in case of not

counting with experience, it 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 sureties and surety bond insurance:

Line 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, retained loss, 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, 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 that are applicable within the framework of the

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 the

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.

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:

Line or Type of Insurance

Life Insurance

Individual

60%

Group

60%

Accident and Health Insurance

Medical expenses

40%

Personal accidents

160%

Health

65%

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

300%

Lines 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

300%

Credit sureties

260%

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

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

re-surety contracts in force that cover the risk of the line or type of insurance or surety in question, or of 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 amount

of claims 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 from 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 the

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

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

in question, such that this amount does not exceed the amount of claims obtained if

all insured persons and beneficiaries of policies 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

provided for 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 Re-surety

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

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 carrying out

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. 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 that have

relation 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

subject to what is indicated in paragraph 1.2.2.

4.2.

Statutory Scenario 2 - Increase in Loss Experience in Accident

and Health Operation:

This scenario will consist of analyzing the sufficiency of admissible own funds, by carrying out

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 line of

the

accident and health operation 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 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 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 carrying out

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 line 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 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 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 carrying out

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 line 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 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 paragraph 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 surety or

insured, given in surety or surety bond insurance contracts.

This scenario will consist of analyzing the sufficiency of admissible own funds, by carrying out

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

cluster of claims occurs derived from assuming the claims coming from

the three main 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 experience must be reflected in all other

variables that have relation 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 carrying out

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 carrying out

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.

The losses originated by insolvency of the reinsurer or re-surety 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.

fraction 1.1., present 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 applicable to insurance or surety operations, which is the one that represents the highest amount of losses for the Institution, and on that scenario, incorporate the additional effect of losses produced by one 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, 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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