Norm for the Preparation of Technical Notes and Actuarial Studies

Resolution No. CD-SIBOIF-934-2-MAR18-2016
Dated March 18, 2016

NORM FOR THE PREPARATION OF TECHNICAL NOTES AND ACTUARIAL STUDIES

The Board of Directors of the Superintendent of Banks and Other Financial Institutions,

CONSIDERING

I
That Article 73 of Law No. 733, General Law of Insurance, Reinsurance, and Suretyship, published in La Gaceta, Official Diary No. 162, 163 and 164, on August 25, 26 and 27, 2010, establishes that the Superintendent will review and approve the general conditions, particular conditions, insurance application, questionnaires, addenda, and other documents that form an integral part of the policies, as well as the respective technical notes, for new plans and/or modifications to existing ones.

II
That Article 76 of the aforementioned law establishes that insurance companies must support each of their coverages, plans, and risk premiums with a technical note, prepared by an actuary registered with the Superintendent.

III
That the same Article 76, in its final part, empowers the Board of Directors of the Superintendent of Banks and Other Financial Institutions to issue, through a general norm, the criteria, bases, and general guidelines that serve as support for the formulation of tariffs or premiums and other technical support documents in their operations;

IV
That in accordance with the foregoing and based on the powers provided in Articles 4, 5, items 1) and 3); 6, items 9) and 11); and 7 of the aforementioned Law 733; and Article 3, item 13) of Law 316; Law of the Superintendent of Banks and Other Financial Institutions, and its reforms.

In exercise of its powers,

HAS ISSUED

The following,

CD-SIBOIF-934-2-MAR18-2016
NORM FOR THE PREPARATION OF TECHNICAL NOTES AND ACTUARIAL STUDIES

CHAPTER I
CONCEPTS, OBJECT, AND SCOPE

Article 1. Concepts.-
1 For the purposes of applying the provisions contained in this norm, the terms indicated in this article, both in uppercase and lowercase, singular or plural, shall have the following meanings:

a) Actuary: Person registered in the Registry of Insurance Auxiliaries of the Superintendent, graduated in the actuarial career, professionally trained to solve aspects of a financial, technical, mathematical, and statistical nature, related to insurance operations, through the application of actuarial sciences. For the purposes of this norm, they shall be in charge of preparing, evaluating, certifying, and signing actuarial technical studies, actuarial balances, technical notes, product design, and the reserves of insurance companies, in accordance with what is established in Article 37 of the General Insurance Law.

b) Actuarial Calculation: Method by which the value of sufficient tariff premiums for an insurance is determined, considering that this method incorporates the contingent characteristics of the occurrence of the insured risk.

c) Board of Directors: Board of Directors of the Superintendent of Banks and Other Financial Institutions.

d) Administrative Expenses: Those incurred for the underwriting, issuance, collection, administration, control, and any other function necessary for the operational management of the product.

e) Acquisition Expenses: Those generated by the commercial activity of the insurer, such as: commissions, over-commissions, advertising, campaigns and promotions, training, and policy rehabilitations, among others.

f) Reinsurance Cost: Expenses for the acquisition of reinsurance.

g) General Insurance Law: Law No. 733, General Law of Insurance, Reinsurance, and Suretyship, published in Gaceta No. 162, 163 and 164, on August 25, 26 and 27, 2010.

h) Law No. 316: Law of the Superintendent of Banks and Other Financial Institutions, published in La Gaceta Official Diary No. 196, on October 14, 1999, and its reforms.

i) Safety Margin: It is intended to cover unfavorable random deviations from the expected loss ratio and must be calculated on the pure premium, if applicable.

j) Profit Margin: It is the marginal contribution to the general gross profit defined for the line or type of insurance in question, in accordance with the policies established by the company.

k) Technical Note: It is the document that describes the actuarial calculations that, for each plan or modality of insurance, give rise to the determination of the premiums and surcharges that an insurance entity will apply, as well as the justification of its management and administrative expenses and systems for calculating technical provisions.

l) Tariff Premiums: The value of the quota or payment that the policyholder or insured must satisfy to an insurance company, as consideration for the coverage of the risk specified in the insurance, reinsurance, and suretyship contract, which is composed of the pure or risk premium and the surcharges for administrative and acquisition expenses, reinsurance cost, safety margin, and profit margin.

m) Pure or Risk Premium: It is the amount necessary and sufficient to cover exclusively the risk.

n) Ratio, reason, or Combined Indicator: Indicator that measures the technical profitability of life insurance. It is the sum of the loss ratio and the operational expense ratio calculated on net premiums.

o) Registry: Registry of Insurance Auxiliaries of the Superintendent.

p) Insurance company or company: Entity that operates in insurance, reinsurance, and suretyship, national or foreign, private, state, or mixed ownership, in accordance with what is established in the General Insurance Law.

q) Superintendent: Superintendent of Banks and Other Financial Institutions.

r) Superintendent: Superintendent of Banks and Other Financial Institutions.

Article 2. Object.- The purpose of this norm is to establish the requirements that insurance companies must fulfill for the preparation of technical notes and actuarial studies, so that these companies support the formulation of their tariff premiums and other technical support documents in their operations.

Article 3. Scope.- The provisions of this norm are applicable to insurance companies and to actuaries, as applicable.

CHAPTER II
AUTHORIZATION OF TARIFF PREMIUMS AND TECHNICAL NOTES

Article 4. Application.-
2 In accordance with what is established in Articles 73 and 75 of the General Insurance Law, both tariff premiums, as well as technical notes and their modifications, will require prior authorization from the Superintendent for their use, and must be presented at the time an insurance company requests authorization for new products or modifications to existing ones.

Tariff premiums and technical notes must be prepared and certified by an actuary registered in the Superintendent's Registry, for which the guidelines established in this Norm must be met, at a minimum.

Article 5. Authorization.-
3 For the authorization of technical notes and their future modifications, the procedure shall follow what is established in the regulations governing the matter for the authorization of insurance policies.

CHAPTER III
REQUIREMENTS FOR THE PREPARATION OF TECHNICAL NOTES SUPPORTING TARIFF PREMIUMS

Article 6. Support and substantiation of tariff premiums.- In the event that the tariff premium is the result of applying the principle of using statistical loss information, which meets requirements of homogeneity and representativeness, it must be supported by the technical note; and in the event that it is the result of support from reinsurers with recognized technical and financial solvency, it must be substantiated by the certification signed by the reinsurer accrediting that the pure or risk premium is the result of their support.

Article 7. Structure of tariff premiums.- Tariff premiums must observe that the premium and the associated risk present a positive correlation according to the objective conditions of the coverage, that is, in accordance with the product offered in each type of insurance; and must include the cost of risk and operating costs, such as, acquisition expenses, administrative expenses, safety margin, and profit margin.

Article 8. Structure of technical notes.- Technical notes must be drafted in Spanish and with characters legible to the naked eye and must contain, at a minimum, the methodologies, models, formulas, and actuarial calculations that give rise to the determination of the premiums, surcharges, and discounts that the insurance company will apply to a specific product, as well as, the justification of its acquisition expenses, administrative expenses, safety margin, and profit margin and systems for calculating reserves.

The actuaries who prepare and certify the technical notes will be responsible in all cases for any irregularities observed during the authorization and registration process of the product. Technical notes must contain the following information:

2 Article 4, reformed on September 6, 2016 – Resolution CD-SIBOIF-958-3-SEP6-2016 3 Article 5, reformed on September 6, 2016 – Resolution CD-SIBOIF-958-3-SEP6-2016

a) General Information: It will provide the name of the insurance product or plan, detailed description of basic and additional coverages, exclusions, explanation of the insurable risk according to the respective insurance policy, the risk factors considered in the tariff, the tariff systems and nomenclature used. The estimated risk rates and their technical support. In the case of life insurance, demographic assumptions applied (mortality tables) and interest rates must also be supported;

b) Statistical Information: In the event that the tariff premium is the result of applying the principle of using own loss statistical information, information will be provided on the database of at least five (5) years and the statistical analysis process that has been used, indicating the sample size, sources and method of obtaining it, and the period to which it refers;

c) Safety Margin: It must be calculated on the pure premium, detailing its amount and justifying its sufficiency;

d) Surcharges for operating costs: The amount, sufficiency, and adequacy of the surcharges for administrative and acquisition expenses will be detailed;

e) Profit Margin: The amount will be detailed, which will be destined to remunerate financial resources and increase the dynamic solvency of the insurance company;

f) Premium Calculation: Based on statistical and financial bases if applicable, actuarial equivalence will be established to fix the pure premium corresponding to the risk to be covered and the surcharges for operating costs. Taking the pure premium and surcharges as a base, the tariff premium will be obtained. When the payment of the premium in installments is anticipated, the base and the surcharge to calculate them must be justified;

g) Recommendation on the management of reinsurance adequate to the product;

h) Pure or Risk Premium: They must be supported on actuarial and statistical bases, so as to guarantee the technical and financial balance of the benefits system, and the fulfillment of obligations with insured persons derived from the coverages contained in the insurance policies issued;

i) Tariff Premium: Risk premium plus surcharges for operating costs;

j) Guaranteed Values: Detail the calculation and manner in which they will be granted in the specific insurance plan, as applicable;

k) Methodology for calculating other relevant variables: Detail the procedure with which the values of surrender, extended insurance, paid-up insurance, dividends, bonuses, or profits in favor of

the insured, among others, will be calculated. These procedures must satisfy technical and actuarial principles, as well as current legal standards in the specific insurance plan, as applicable;

l) Calculation of reserves: Technical notes will reflect the method and the reserves that must be constituted. In the case of life insurance lines, all actuarial hypotheses and formulas of the different basic values (surrender values, average reserve, paid-up insurance, extended insurance, and any other that is part of the product) must be included.

m) The full name, registration number, and signature of the actuary responsible for the content of the technical note; and

n) Any other information that, in the opinion of the actuary, or as determined by the Superintendent, is necessary to adequately support the insurance.

In addition to the above, the insurance company must deliver electronically to the Superintendent the calculation memory of the plan submitted for approval.

Article 9. Life and Annuities Line.- In the case of insurance that make up the life and annuities line, premiums will be supported on actuarial calculations based on applicable mortality, survival, accident, or disability tables and on the technical interest rates that determine mathematical reserves. The technical bases of life insurance must contain the risk selection criteria that each company has decided to apply, determining their temporality, groups, among others, admission ages, waiting period, assumptions regarding the requirement of prior medical valuation, minimum number of people for the application of tariff premiums and extra premiums for collective or group insurance, and the module for setting insured capitals in these insurances; and, the formulas to determine guaranteed, paid-up, or extended values for cases of surrender, reduction of insured capital, and advances, the resulting values must be consistent with those of the policy.

Article 10. Use of alternative mortality tables.- In the event that insurance companies use alternative mortality tables, different from those generally accepted, in their technical bases for the calculation of mathematical reserves and of premiums and extra premiums for life insurance, they must request prior authorization from the Superintendent for the use of said tables, for which they will justify their application in the technical note, which must contain at a minimum the following:

a) A detailed explanation of the actuarial techniques used for the construction of alternative mortality tables, the resulting death probabilities, segmented, at least, by annual age and sex;

b) A comparison for each age and sex, between the life expectancies derived from the alternative tables and those derived from the regulatory tables; and

c) A comparison of the impact of the calculation of reserves based on alternative tables with respect to generally accepted tables and a historical database containing the information used to construct the alternative tables.

This information must reflect the mortality experience of the insurance company's portfolio of insured persons.

Article 11. Other insurance related to the life line.- For other insurance related to the life line, which also require the constitution of mathematical reserves, insurance companies may present their own probability tables or parameters necessary for the calculation of reserves, for example, morbidity tables, disability tables, accident tables, among others. These tables must be technically supported based on the own experience of the insurance company, national or foreign, and be adjusted to generally accepted statistical and actuarial treatments.

Article 12. Market Experience.- When there is no market experience regarding the administration of certain risks, the reinsurer's rate and/or statistical bases from other countries may be considered as a reference. However, once the insurance company has five (5) years of experience with the product, it must support in a technical note, based on its own statistical bases, the rates applicable to the insurance products it markets, provided that the experience is statistically sufficient for said product.

Article 13. Periodic review of tariff premiums and technical notes.- Insurance companies must periodically review their tariff premiums and technical notes, using their loss experience as a base. In the event that modifications result from them, insurance companies must proceed to request their authorization from the Superintendent in accordance with what is established in Article 4 of this norm. To this effect, insurance companies must establish in their internal policies the periodicity with which they will review premium tariffs and technical notes.

When the combined ratio of a line or product presents a value greater than one hundred percent (100%) for three (3) consecutive years, it will be understood that the tariff of the line or product is not sufficient and the insurance company must present a new tariff supported by the respective technical note.

Article 14. References.- In the development and content of a technical note, references to procedures or parameters established in texts, publications, or previously registered technical notes cannot be made, so all procedures and parameters that are necessary must appear expressly in the technical note submitted for registration.

CHAPTER IV
REQUIREMENTS FOR THE PREPARATION OF ACTUARIAL STUDIES

Article 15. Concept of actuarial study.- For the purposes of this norm, an actuarial study will be considered, and therefore will be the competence of an actuary registered with the Superintendent, any type of quantification or economic valuation of contingent events (subject to probabilistic and financial laws), which require specialized actuarial calculation to propose reserve schemes that allow the solvent fulfillment of the corresponding economic obligations and the knowledge of the current economic and financial situation, and its projection into the future.

Article 16. Object of the actuarial study.- The object of the actuarial study must be aimed at the following:

a) To know the process and resulting values of the quantification of the present value of contingent events, including premiums or contributions, as well as associated reserves and the respective sufficiency analysis;

b) To know the current financial situation and future financial evolution, using a reasonable period in relation to each actuarial study through the projection of the most probable net cash flows, without prejudice to presenting different sensitivity scenarios on the variables with the greatest impact on the study;

c) To value future sustainability considering contribution rates, benefits and/or other obligations, the risks involved, and the adopted risk management and financing regime, including, if necessary, corrective measures or changes in the adopted risk management and financing regime, to achieve or maintain actuarial balance; and

d) To identify the causes of possible financial and/or actuarial imbalances, using models that allow sensitivity analysis and the change in the adoption of assumptions.

Article 17. Subjects of actuarial studies.- The following will be included, but not limited to, in the list of subjects of actuarial studies that require specialized technical notes:

a) The determination and application of mathematical factors, related to probability, statistics, and finance, for the evaluation of reserve sufficiency, solvency margins, and other contingent funds tending to perpetuate the solvency of obligations;

b) The determination and application of mathematical factors, related to the establishment of premiums, quotas, indemnities, and other contingent present or future values, as well as the analysis of their technical equivalence between the required reserves, necessary contributions, and feasible benefits; and,

c) The design of plans, models, and other specific mechanisms for adequate comprehensive risk management, including derivative instruments that are required by supervised institutions by virtue of the policies they offer to the public, in order to cover their possible future obligations.

Article 18. Principles.- Actuarial studies must be prepared observing the following principles:

a) Methods and Assumed Hypothesis: The actuary responsible for the study must guarantee that the methodology used in their calculations is based on generally accepted actuarial principles. Additionally, they must guarantee that the calculations faithfully reflect the methods and hypotheses adopted. In this context, the responsible actuary must attach in the respective technical note the assumptions and hypotheses adopted, also establishing the mechanism to be followed so that final divergences between future facts with respect to the hypotheses and results obtained in the report are analyzed and taken into account in subsequent reports. The technical rates used in actuarial calculations will be real; that is, net of the applicable inflationary effect, otherwise they must verify it in the report and substantiate the technical reasons for having used said exception.

b) Objectivity: If it corresponds to the responsible actuary to determine the assumptions and hypotheses used for projections, they must guarantee that they are determined without inadequate external influences, presenting the demographic and economic bases, among others, that they have used for said determination. If the responsible actuary is not in charge of determining the hypotheses but they are calculated by another entity, and whenever the determination of hypotheses is entrusted to external sources, the responsible actuary must indicate their origin, present an opinion on the program, and include a sensitivity analysis of the incidence of different starting assumptions and hypotheses; and,

c) Transparency: The report must be drafted in Spanish, with clarity, simplicity, and consistency with the elements provided in it, describing objectives and results, using generally accepted technical terminology, including a glossary of the most important technical terms that have been included. The actuary must express themselves with utmost clarity in their reports and/or presentations, taking into account the different users who use their results.

Article 19. Minimum content of actuarial studies.- Every actuarial study must contain, at a minimum, in its initial part, identification of the client or employer; the purpose, scope, and temporal scope; and the registration number and name of the actuary or actuaries issuing it. Additionally, it must contain in the main body of the study or in its annexes, at least, the following references:

a) A clear description of the assumptions, hypotheses, and forms used, as well as the data collection method used and an indication of the extent to which the actuary has relied on the information and opinions provided by others.