Rules for the Establishment of Reserves for Pension Insurance Derived from the Pension Savings System

NCS-012
PENSION INSURANCE DERIVED FROM THE PENSION SAVINGS SYSTEM Approval: 01/12/1999 Validity: 01/07/2000

The Board of Directors of the Financial System Superintendence, using the legal powers conferred by Art. 10, letter g) of its Organic Law and in compliance with what is established in Art. 33, letter b) of the Insurance Companies Law, issues the:

RULES FOR THE ESTABLISHMENT OF RESERVES FOR PENSION INSURANCE DERIVED FROM THE PENSION SAVINGS SYSTEM

CHAPTER I
OBJECT AND SUBJECTS

Art. 1.- The object of these rules is to establish the bases and periodicity for the calculation of the reserves that insurance companies must establish, which are dedicated directly or through co-insurance or accepted reinsurance operations, to the exploitation of invalidity and survivorship insurance and life annuity insurance.

Art. 2.- The subjects obliged to comply with these rules are insurance companies specialized in the personal lines sector and those legally authorized to contract the pension insurance referred to in the previous article.

In the text of these rules, the term insurance companies or insurer includes insurance companies established in El Salvador and branches of foreign insurance companies established in the country; the term Superintendence refers to the Financial System Superintendence; and the acronym AFP refers to Pension Fund Administrators.

CHAPTER II
CLASSIFICATION AND DETERMINATION OF RESERVES

Art. 3.- The liability reserves for invalidity, survivorship, and old-age insurance that insurance companies must register are:
a) Unearned premium reserves. b) Reserves for transitional invalidity pensions. c) Reserve for claims in process of liquidation. d) Reserve for incurred but not reported claims.

Art. 4.- The liability reserves for life annuity insurance that insurance companies must establish are:
a) Reserves for life annuity insurance in colones; b) Reserves for life annuity insurance in dollars; and c) Reserves for deferred life annuity insurance.

Art. 5.- The asset reserves held by reinsurance companies that insurance companies must register are:
a) Reserves for unearned ceded premiums; b) Reserves for transitional invalidity pensions; and c) Reserves for claims in process of liquidation.

Determination of Reserves

Art. 6.- The reserve for unearned premiums shall be established monthly and shall be equivalent to the amount of unearned contributions by the insurance company at the date of establishment of the reserve.

Art. 7.- The reserve for transitional invalidity pensions shall be established monthly, taking as a basis the opinion issued by the Invalidity Qualifying Commission. The reserve shall be equivalent to the amount of pensions granted to the affiliate during the transitional period between the first and second invalidity opinion.

Monthly, the insurer will adjust the total value of said reserve, decreasing it by the pension amounts paid during the month, and increasing it by the opinions issued by the Invalidity Qualifying Commission during the month in which the reserve is being established.

Art. 8.- The reserve for claims in process of liquidation shall be established monthly with claims submitted by affiliates to the AFP and notified by the latter to the insurance company; it shall be equivalent to the amount of supplementary capitals and special contributions pending payment at the date of preparation of the respective balance sheet.

The reasons why the amount of supplementary capitals and special contributions due by the insurance company will remain pending payment are the following:
a) Lack of information in the affiliate's file, except if it concerns special contributions. b) Issuance of the payment document. c) Other similar causes.

Art. 9.- The reserve for incurred but not reported claims aims to guarantee the payment of benefits to affiliates or beneficiaries of potential invalidity or death pensions that, while covered by the invalidity and survivorship insurance policy, have not been timely reported to the insurance companies. (2)

Art. 10.- The reserve for life annuities shall be established quarterly, in accordance with the technical bases deposited with the Superintendence.

Art. 11.- The reserves held by reinsurers for unearned premiums, claims in process of liquidation, and transitional invalidity pensions shall be established monthly with the amount of unearned ceded premiums, and with the amounts due by reinsurers for their participation in claims arising from requests submitted by affiliates to the AFP and notified by the latter to the insurance companies.

CHAPTER III
CALCULATION OF RESERVES

Art. 12.- Insurers will accrue direct contributions, co-insurance, and accepted reinsurance contributions received from the AFP for each of their affiliates, and from the total accrued, they will calculate the reserve considering the pending days to elapse from the date of policy issuance until the month in which the financial statements are prepared.

The reserve for unearned premiums shall be calculated using the following formula:

Unearned Premium Reserve = (Accrued Premiums x Pending Days to Elapse) / Policy Validity.

Where:
Pending Days to Elapse: No. of calendar days minus days elapsed.
Policy Validity: Time for which the insurance has been contracted, expressed in days.

Art. 13.- The reserves for transitional invalidity pensions shall be calculated with obligations arising from direct contributions, accepted co-insurance, and accepted reinsurance, using the following formula:

Reserve for Transitional Pensions = n x P

Where:
n = Equivalent to 36 months that the affiliate may possibly receive invalidity pension via the first invalidity opinion, in accordance with the first opinion issued by the Invalidity Qualifying Commission. P = Will be the estimated reference pension of the insured.

In the case that the affiliate recovers their health status and leaves the state of invalidity before the 36-month term to the satisfaction of the Qualifying Commission, insurance companies will annul the established reserve.

If the affiliate declared invalid in the first opinion is less than three years from acquiring the legal age to retire for old age, the insurance company may calculate the reserve for transitional invalidity pension, considering only the months remaining to reach retirement age.

Art. 14.- The reserve for claims in process of liquidation shall be calculated using the formulas and mortality tables presented in the Instruction for the Determination of Necessary Technical Capitals and Generation of Mortality Tables, issued by the Pension Superintendence.

This reserve shall be registered with the amount of Supplementary Capitals and Special Contribution generated from invalidity and survivorship insurance, and which are approved by the insurer.

Supplementary capitals and special contribution are generated from claims reported to the AFP, and notified by them to insurance companies for payment purposes; consequently, if at the end of the month in which financial statements are prepared, the insurer has one or more supplementary capitals pending payment, or the payment of special contribution, it must reserve them at their estimated value in accordance with what is provided in the Pension Savings System Law, its regulations, and applicable instructions.

Art. 15.- The reserve for incurred but not reported claims shall be calculated using the triangle method known as Chain Ladder. The formulas and method of calculation are described in Annex No. 1. (2)

Art. 16.- The reserve for life annuities for the affiliate or their dependents shall be calculated in accordance with the technical bases, mortality tables, and technical interest rate presented in the technical note deposited with the Superintendence.

Art. 17.- The reserve held by reinsurers for unearned ceded premiums shall be an asset account and shall be calculated using the same formula described for the unearned premium reserve of the liability.

Art. 18.- The reserve for transitional invalidity pensions, the reserve for claims in process of liquidation, and the reserve for incurred but not reported claims held by reinsurers shall be asset accounts and shall be calculated based on the participation of each reinsurer in claims in accordance with respective contracts.

CHAPTER IV
GENERAL PROVISIONS AND VALIDITY

Art. 19.- For those variables in whose estimation statistical series from the AFP are considered, the last 12 months will be used. When a new AFP enters the market, the historical average of the remaining AFPs will be considered until it generates its own 12-month statistical series.

Art. 20.- Repealed. (2)

Art. 21.- Repealed. (2)

Resolutions

Art. 22.- Insurance companies will request the AFP to send a copy of the respective file, the next business day after the issuance of the favorable resolution by the AFP regarding the affiliate's or their dependents' right to a pension.

Art. 23.- Insurers, within eight business days of receiving the file, must issue a resolution postponing, approving, or rejecting the obligation generated by the death or declaration of invalidity of the affiliate, which must be communicated immediately to the AFP.

Art. 24.- After the term has elapsed without the issuance of the respective resolution, claims will be included in the reserve for claims pending in process of liquidation, understanding that the insurance company has accepted the payment of claims pending resolution.

Art. 25.- If during the term the insurance company accepts the claim, it must issue a payment approval document that will serve to recognize the obligation or to establish the reserve for claims in process of liquidation.

Art. 26.- The insurance company may postpone the approval of payment in the following cases:
a) When some background information is missing, in which case it must request it immediately from the AFP. b) When there is a judicial order to that effect.

For those cases where the payment resolution has been postponed, the insurance company must maintain the claims in the reserve for claims in process of liquidation, until the problems that gave rise to the postponement are resolved. Upon resolving the matter, the company will have five business days to issue a resolution approving or rejecting the payment of the obligation.

Art. 27.- In resolutions rejecting payment, the insurer must clearly explain the causes that motivated them and maintain the reserve for claims in process of liquidation, until the AFP expresses its written consent or there is a final judgment in its favor.

Art. 28.- Insurance companies dedicated to the exploitation of invalidity and survivorship insurance and life annuity insurance will send the Superintendence information on the annual valuation of the following reserves:
a) Annual Summary of Pension Reserves; b) List of pending claims separated into invalidity and survivorship included in the reserve for claims in process of liquidation; and c) Summary of records considered for the determination of the reserve for incurred but not reported claims. (2)

Art. 29.- What is not contemplated in these rules will be resolved by the Board of Directors of the Superintendence.

Art. 30.- These rules will enter into force from the first day of July 2000, applying to all operations performed from the first day of January of the same year. (1)

MODIFICATIONS:
(1) Reform approved by the Board of Directors of the Financial System Superintendence, in Session CD – 14/2000 on March 15, 2000.
(2) Reform approved by the Board of Directors of the Financial System Superintendence, in Session CD – 46/10 on December 15, 2010, with validity from January 1, 2011.

NCS-012
PENSION INSURANCE DERIVED FROM THE PENSION SAVINGS SYSTEM Approval: 01/12/1999 Validity: 01/07/2000

Annex No. 1
Calculation of Reserves for Incurred But Not Reported Pension Claims using the triangle method known as Chain Ladder

1. The IBNR Pension Reserve shall be determined with statistical information from the last 5 years, using the following formula:

IBNR = Σ St ; Where: t = 1,2,3,4,5; m = 5

2. Collect information on net claims after reinsurance from the last five years, according to the following table:

Statistical Information of the last 5 years
Years 1 2 3 4 5 General Total
1 S1,1 S1,2 S1,3 S1,4 S1,5 S1,n
2 S2,1 S2,2 S2,3 S2,4 S2,n
3 S3,1 S3,2 S3,3 S3,n
4 S4,1 S4,2 S4,n
5 S5,1 S5,n
General Total

Where:
S1,1 Claims reported in year 1;
S1,2 Claims reported in year two, which corresponds to year 1; S1,3 Claims reported in year three, which correspond to year 1; S1,4 Claims reported in year four, which correspond to year 1; Similar procedure will be followed for the rest of estimated years.

Sij represents the amount of claims incurred in year i, which were notified in year j.

Insurers, according to their experience, may apply an adjustment factor on the amounts of claims reported in the last three months prior to the month of calculation of the IBNR reserve, in order to establish more realistic data of creation and elimination movements of the most recent records.

When an event occurs that alters the natural behavior of claim presentation by AFP affiliates, extraordinarily increasing the base to estimate IBNR, the insurer must include this effect in the period it occurs in the construction of the triangle, and in subsequent exercises, it may adjust this effect by applying averages calculated on data from other periods involved in the analysis. The data used to support this adjustment must be available to the Superintendence for review.

3. With the above information, the first claim triangle is formed:

Years 1 2 3 4 5 Total
1 S1,1 S1,1+ S1,2 S1,1+ S1,2+ S1,3 S1,1+ S1,2+ S1,3+ S1,4 S1,1+ S1,2+ S1,3+ S1,4+ S1,5 Σ Si 1,5 / 1,1 2 S2,1 S2,1+ S2,2 S2,1+ S2,2+ S2,3 S2,1+ S2,2+ S2,3+ S2,4 Σ Si 2,4 / 2,1 3 S3,1 S3,1+ S3,2 S3,1+ S3,2+ S3,3 Σ Si 3,3 / 3,1 4 S4,1 S4,1+ S4,2 Σ Si 4,2 / 4,1 5 S5,1 Σ S 5,5 / 5,1 Total

4. Determine the following triangle:

Policy N+0 N+1 N+2 N+3 N+4 TOTAL
Years 1 2 3 4 5
1 S1,1 S1,1+S1,2 S1,1+ S1,2+ S1,3 S1,1+ S1,2+ S1,3+ S1,4 S1,1+S1,2+S1,3+S1,4+S1,5 2 S2,1 S2,1+S2,2 S2,1+S2,2+S2,3 S2,1+S2,2+S2,3+S2,4 3 S3,1 S3,1+S3,2 S3,1+S3,2+S3,3 4 S4,1 S4,1+S4,2 5 S5,1 Total

5. Determine the steps and projection ratios of each column with the following, to complete triangle 1 until it becomes a rectangle:

Policy N+0 N+1 N+2 N+3 N+4 TOTAL
Years 1 2 3 4 5
1
2 E7
3 E4 E8
4 E3 E5 E9
5 E1 E2 E6 E10
Total

1 E1, E2,...,

Formulas:
a) [S1,1 + S2,1 + S3,1 + S4,1 + S5,1] / [S1,1 + S1,2 + S2,1 + S2,2 + S3,1 + S3,2 + S4,1 + S4,2] = R1; Then, E1 = R1 * S5,1 Where: R1 = Projection Ratio No. 1; E1 = corresponds to the first step of the first column. b) [S1,1 + S1,2 + S2,1 + S2,2 + S3,1 + S3,2] / [S1,1 + S1,2 + S1,3 + S2,1 + S2,2 + S2,3 + S3,1 + S3,2 + S3,3] = R2; Therefore, E3 = R2 * S4,1; E2 = R2 * E1; Where: R2 = Projection Ratio No. 2; E2, E3 = second and third step, column 2. c) [S1,1 + S1,2 + S1,3 + S2,1 + S2,2 + S2,3] / [S1,1 + S1,2 + S1,3 + S1,4 + S2,1 + S2,2 + S2,3 + S2,4] = R3; E6 = R3 * E2; E4 = R3 * E1; E5 = R3 * S3,1 + S3,2 + S3,3; Where: R3 = Projection Ratio No. 3; E4, E5, E6 = fourth, fifth, and sixth step, column 3, corresponding to the third, fourth, and fifth year. d) [S1,1 + S1,2 + S1,3 + S1,4] / [S1,1 + S1,2 + S1,3 + S1,4 + S1,5] = R4; E10 = R4 * E6; E8 = R4 * E5; E9 = R4 * E3; E7 = R4 * S2,1 + S2,2 + S2,3 + S2,4; Where R4 = Projection Ratio No. 4, E7, E8, E9, E10 = Seventh, eighth, ninth, and tenth step, of column 4. Corresponding to the second, third, fourth, and fifth year.

6. Determine the Incurred But Not Reported Claims Reserve (IBNR), subtracting from the total sum of estimated claims the paid claims during the five years, i.e.:

IBNR = Si - Sp

Where:
Si = Sum of IBNR claims
Sp = Sum of paid claims

7. The IBNR reserve amount resulting from calculating it via the Chain Ladder methodology is minimal; however, as a prudent measure, insurers may establish additional reserves, when they deem it necessary to strengthen their solvency for deviations in pension insurance claim experience;

8. Insurers may calculate the IBNR reserve by discounting from the estimated claim amount the IBNR premiums of the last 5 years, information that they will keep available to the Superintendence for the respective review;

9. The IBNR reserve shall be established gradually over two years; however, entities may anticipate 100% of its application before the end of said period;

10. The IBNR reserve shall be established annually in the month of expiration of the respective policy and in any case on December 31 of each year, charging the expense account and debiting the corresponding liability. Notwithstanding the foregoing, insurers may make adjustments to it in intermediate periods, taking into account how the paid claim amount has evolved for claims reported by the end of validity but were in reserve. Information on the accounting establishment of the IBNR reserve shall be available to the Superintendence for the corresponding verification;

11. To facilitate understanding of the method in reference, an example is presented for the determination of the IBNR reserve:

IBNR Reserve

1. Claim triangle:

n+0 n+1 n+2 n+3 n+4
2005 25450 800 1100 1200 1300
2006 26300 350 500 650
2007 25200 300 370
2008 27360 110
2009 28200

2. Sum horizontally, example: n+1=25450+800=26250

n+0 n+1 n+2 n+3 n+4
2005 25450 26250 27350 28550 29850
2006 26300 26650 27150 27800
2007 25200 25500 25870
2008 27360 27470
2009 28200
Total 25450 52550 79200 108560 139190

3. Form the triangle perpendicularly, example: n+0= 25450;26300;25200;27360;28200

n+0 n+1 n+2 n+3 n+4 Total
2005 25450 26250 27350 28550 29850
2006 26300 26650 27150 27800
2007 25200 25500 25870
2008 27360 27470
2009 28200
Total

4. Determine the projection ratios:

R2 = (26250 + 26650 + 25500) / (27350 + 27150 + 25870) = 1.01496 R3 = (27350 + 27150) / (28550 + 27800) = 1.02513 R4 = (25450 + 26300 + 25200 + 27360) / (26250 + 26650 + 25500 + 27470) = 1.03394

5. Determine the steps

n+0 n+1 n+2 n+3 n+4 Total
2005 25,450 26,250 27,350 28,550 29,850 137,450 2006 26,300 26,650 27,150 27,800 29,066 136,966 2007 25,200 25,500 25,870 26,748 27,966 131,284 2008 27,360 27,470 28,160 29,116 30,442 142,548 2009 28,200 28,622 29,341 30,337 31,718 148,218 Total 132,510 134,492 137,871 142,551 149,042 696,466

R4 = 29850 / (27350 + 27150) = 1.04553
R3 = (28550 + 27800) / (27350 + 27150) = 1.03394 R1 = (25450 + 26300 + 25200 + 27360) / (26250 + 26650 + 25500 + 27470) = 1.01496

6. Determine the IBNR Reserve

Years Paid Claims n+4 IBNR Reserve (IBNR - Paid Claims) 2005 29,850 29,850 - 2006 27,800 29,066 1,266 2007 25,870 27,966 2,096 2008 27,470 30,442 2,972 2009 28,200 31,718 3,518 Total IBNR Reserve 9,852

E1 = 28,200 * 1.01496 = 28,622
E2 = 28,622 * 1.02513 = 29,341
E3 = 28,160 * 1.02513 = 29,116
E4 = 27,470 * 1.02513 = 28,160
E5 = 29,341 * 1.03394 = 30,337
E6 = 28,160 * 1.03394 = 29,116
E7 = 27,470 * 1.02513 = 28,160
E8 = 29,116 * 1.04553 = 30,442
E9 = 26,748 * 1.03464 = 27,966
E10 = 27,800 * 1.04736 = 29,066

NCS-012
PREVISIONAL BENEFITS DERIVED FROM THE PENSION SAVINGS SYSTEM Approval: 12/01/1999 Validity: 07/01/2000
Annex No. 2
ACRONYMS, ABBREVIATIONS AND DEFINITIONS.
AFP: Pension Fund Administrators.
SAP: Pension Savings System.
SBR: Regulator Basic Salary. ctn: Necessary Technical Capital per Pension Unit.
Superintendencia: Superintendence of the Financial System.
Definitions.
For the purposes of these regulations, the following terms established in the SAP Law, and those used in insurance operations, are defined:
Complementary Capital: The difference between the necessary technical capital and the sum of the balance accumulated in the individual pension savings account, minus voluntary contributions and their profitability, plus the transfer certificate if it exists. In case the mentioned difference is negative, the complementary capital will be equal to zero. Necessary Technical Capital (ctn): The expected present value of all reference pensions generated by the deceased affiliate for himself or his beneficiaries. Special Contribution: Amount representative of the contributions that the affiliate declared invalid by the first ruling, upon being declared not invalid in the second ruling, had accumulated in his individual pension savings account, if during that period he had contributed 10% on the amount of disability pensions paid in accordance with the first ruling. Legal Age: Completed age that enables an affiliate to opt for a old-age pension, which is 60 years for men and 55 years for women. Partial Disability: Affiliate who, as a result of an illness, common accident, or weakening of his physical or intellectual forces, suffers a permanent impairment of the capacity to exercise any work greater than or equal to 50% and less than 2/3, declared in this condition by the Disability Assessment Commission. Total Disability: Affiliate who, as a result of an illness, common accident, or weakening of his physical or intellectual forces, suffers a permanent impairment of the capacity to exercise any work greater than or equal to 2/3, and who has been declared as such by the Disability Assessment Commission. Pension: It is the monetary economic benefit granted monthly to an affiliate or his beneficiaries upon meeting the requirements established in the SAP Law. Affiliate's Reference Pension: It is the one that will be determined as a percentage of the regulator basic salary applicable for any length of service the affiliate has provided, in accordance with what is established in Art. 120 of the SAP Law.

NCS-012
PREVISIONAL BENEFITS DERIVED FROM THE PENSION SAVINGS SYSTEM Approval: 12/01/1999 Validity: 07/01/2000
Annex No. 2
Beneficiaries' Reference Pension: It is the one obtained by multiplying the reference pension of the deceased by the percentage corresponding to each beneficiary, in accordance with what is established in Art. 121 of the SAP Law. Disability Pensions in First Ruling: Disability pensions paid during the validity period of the first disability ruling. Reserves derived from the Pension Savings System: The definition is limited to the accounting reserves associated with the collective disability and survival insurance policies contracted by the AFPs, and to the policies of the Life Annuities that affiliated individuals or beneficiaries contract with an Insurance Company, to guarantee the payment of the benefits established in the SAP Law. The Reserves derived from the Pension Savings System must be presented separately from those constituted for classic insurance. Claim: It is the death or the declaration of common disability of an SAP affiliate that generates the obligation of payment to the Insurance Company. Survival and Disability Insurance: It is the one contracted by the AFPs with insurance companies, in accordance with what is established in Art. 124 of the SAP Law and corresponds to the payment of the following concepts:
i) Pensions for the First Ruling of Disability; ii) The Complementary Capital; and iii) The Special Contribution.
Life Annuity Insurance: It corresponds to the insurance contracted by the affiliates or their direct dependents directly with the insurance company, in accordance with what is established in Art. 134 of the SAP Law. Coinsurance: Direct insurance operation through which an insurer transfers to another party a portion of the risks derived from the disability and survival insurance contracts concluded with the AFPs. In these cases, the co-insurer responds directly to the affiliates of the AFP that has signed the insurance contract with the cedent. Reinsurance: Insurance operation through which an insurer transfers to another party a portion of the disability and survival insurance portfolio through reinsurance contracts. The reinsurer in these cases will respond indirectly to the affiliates of the AFPs that sign the disability and survival insurance contract with the cedent.