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

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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 operation of disability 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 branch 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 constituted 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 disability, survivorship, and old-age insurance that insurance companies must register are: a) Unearned premium reserves. b) Temporary disability pension reserves. 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.

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Art. 5.- The asset reserves to be held by reinsurers that insurance companies must register are: a) Reserves for unearned ceded premiums; b) Temporary disability pension reserves; 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 temporary disability pensions shall be established each month, taking as a basis the opinion issued by the Disability Assessment Commission. The reserve shall be equivalent to the amount of pensions granted to the affiliate during the transitional period between the first and second disability assessment.

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

Art. 8.- The reserve for claims in process of liquidation shall be established each month with the claims presented by AFP affiliates and notified by them 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 causes for which the amount of supplementary capitals and the special contribution payable by the insurance company will remain pending 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 has the object of guaranteeing the payment of benefits to affiliates or beneficiaries of potential disability or death pensions that, being covered by the disability and survivorship insurance policy, have not been timely informed 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.

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Art. 11.- The reserves to be held by reinsurers for unearned premiums, claims in process of liquidation, and temporary disability pensions shall be established each month with the amount of unearned ceded premiums, and with the amounts payable by reinsurers for their participation in claims derived from those presented by AFP affiliates and notified by them to the insurance companies.

CHAPTER III CALCULATION OF RESERVES

Art. 12.- Insurers shall accrue direct contributions, for co-insurance and accepted reinsurance received from the AFPs of each of their affiliates, and from the total accrued, they shall calculate the reserve considering the days pending to elapse from the date of issuance of the policy, 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 Days Pending to Elapse) / Policy Validity.

Where: Days Pending 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 temporary disability pensions shall be calculated with the obligations arising from direct contributions, accepted co-insurance, and accepted reinsurance, using the following formula:

Temporary Disability Pension Reserve = n x P

Where: n = Equivalent to 36 months that the affiliate may possibly receive a disability pension via the first disability assessment, in accordance with the first opinion issued by the Disability Assessment Commission. P = Will be the estimated reference pension of the insured event.

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

If the affiliate declared disabled in the first assessment is less than three years away from acquiring the legal age to retire for old age, the insurance company may calculate the reserve for the temporary disability pension, considering only the months remaining until reaching retirement age.

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Art. 14.- The reserve for claims in process of liquidation shall be calculated with 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 the Special Contribution generated from disability and survivorship insurance, and which are approved by the insurer.

Supplementary capitals and the special contribution are generated from claims reported to the AFPs, and notified by them to the insurance companies for payment purposes; consequently, if at the end of the month in which the financial statements are prepared, the insurer has one or more supplementary capitals pending payment, or the payment of the 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 instructions applicable to it.

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 to be held by reinsurers for unearned ceded premiums shall be an asset account and shall be calculated with the same formula described for the unearned premium reserve of the liability.

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

CHAPTER IV GENERAL PROVISIONS AND VALIDITY

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

Art. 20.- Repealed. (2)

Art. 21.- Repealed. (2)

Resolutions

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

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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 disability of the affiliate, which must be communicated immediately to the AFP.

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

Art. 25.- If during the period the insurance company accepts the claim, it must issue a document approving the payment 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 antecedent is missing, in which case it must request it immediately from the AFP. b) When there is a judicial resolution ordering it.

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 shall 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 conformity or there is a final judgment in its favor.

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

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

Art. 30.- These rules shall enter into force from the first day of July 2000, applying to all operations carried out 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 of March 15, 2000. (2) Reform approved by the Board of Directors of the Financial System Superintendence, in Session CD – 46/10 of December 15, 2010, with validity from January 1, 2011.

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Annex No. 1 Calculation of Incurred But Not Reported (IBNR) Pension Claim Reserves using the triangle method known as Chain Ladder

1. The IBNR Pension Claim Reserve shall be determined with statistical information from the last 5 years, using the following formula: IBNR = Σ St (t=1 to m); Where: m = 5; t = 1,2,3,4,5

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 shall be followed for the rest of estimated years.

The Sij represent 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 claim reserve, in order to establish more realistic data of movements of creation and elimination of the most recent records.

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

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Annex No. 1

3. With the above information, the first triangle of claims shall be 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 next, 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,….,

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Annex No. 1

Formulas: a) R1 = [S(1,1) + S(2,1) + S(3,1) + S(4,1) + S(5,1)] / [S(1,1) + S(1,2) + S(2,1) + S(2,2) + S(3,1) + S(3,2) + S(4,1) + S(4,2)]; Then, E1 = R1 * S5,1 Where: R1 = Projection Ratio No. 1; E1 = corresponds to the first step of the first column.

b) R2 = [S(1,1) + S(1,2) + S(2,1) + S(2,2) + S(3,1) + S(3,2)] / [S(1,1) + S(1,2) + S(1,3) + S(2,1) + S(2,2) + S(2,3) + S(3,1) + S(3,2) + S(3,3)]; Then, E2 = R2 * S4,1 E3 = R2 * E2 Where: R2 = Projection Ratio No. 2; E2; E3 = second and third step, column 2.

c) R3 = [S(1,1) + S(1,2) + S(1,3) + S(2,1) + S(2,2) + S(2,3)] / [S(1,1) + S(1,2) + S(1,3) + S(1,4) + S(2,1) + S(2,2) + S(2,3) + S(2,4)]; E4 = R3 * S3,3 E5 = R3 * E3 E6 = R3 * E4 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) R4 = [S(1,1) + S(1,2) + S(1,3) + S(1,4)] / [S(1,1) + S(1,2) + S(1,3) + S(1,4) + S(1,5)]; E7 = R4 * S2,4 E8 = R4 * E7 E9 = R4 * E8 E10 = R4 * E9 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 (IBNR) Claim Reserve, subtracting from the total sum of estimated claims those paid during the five years, i.e.: IBNR = Si - Sp Where: Si = Summation of IBNR claims Sp = Summation of paid claims

7. The amount of IBNR claim reserve resulting from calculating it using 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 claim experience of pension insurance;

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Annex No. 1

8. Insurers may calculate the IBNR reserve by discounting from the estimated amount of claims 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 amount of claims that had already been reported by the end of the validity period but were in reserve has evolved. The information on the accounting establishment of the IBNR reserve shall be available to the Superintendence for the corresponding verification;

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

IBNR Reserve

1. Claims 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

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3. Form the triangle perpendicularly, example: n+0= 25450;26300;25200;27360;28200 Annex No. 1

Year	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:

R = (26250 + 26650 + 25500) / (27350 + 27150 + 25870) = 1.01496

R = (27350 + 27150) / (28550 + 27800) = 1.02513

R = (25450 + 26300 + 25200 + 27360) / (26250 + 26650 + 25500 + 27470) = 1.03394

5. Determine the steps

Year	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) = 1.02513

R1 = (25450 + 26300 + 25200 + 27360) / (26250 + 26650 + 25500 + 27470) = 1.03394

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Annex No. 1

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

10 = 27,800 * 1.04736 = 29,066 9 = 26,748 * 1.03464 = 27,966 8 = 29,116 * 1.04553 = 30,442 7 = 30,337 * 1.04553 = 31,718 6 = 25,870 * 1.03394 = 26,748 5 = 28,160 * 1.03394 = 29,116 4 = 29,341 * 1.03394 = 30,337 3 = 27,470 * 1.02513 = 28,160 2 = 28,622 * 1.02513 = 29,341 1 = 28,200 * 1.01496 = 28,622

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Annex No. 2 ACRONYMS, ABBREVIATIONS AND DEFINITIONS. AFP: Pension Fund Administrators. SAP: Pension Savings System. SBR: Regulator Basic Salary. ctn: Technical Capital Necessary per Pension Unit. Superintendencia: Superintendence of the Financial System.

Definitions. For the purposes of these rules, 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 aforementioned difference is negative, the complementary capital will be equal to zero.

Technical Capital Necessary (ctn): The expected present value of all reference pensions generated by the insured member for themselves or their beneficiaries.

Special Contribution: Amount representative of the contributions that the member declared invalid by first ruling, upon being declared not invalid in the second ruling, had accumulated in their individual pension savings account, if during that period they had contributed 10% on the amount of disability pensions paid in accordance with the first ruling.

Legal Age: Age completed that enables a member to opt for an old-age pension, which is 60 years for men and 55 years for women.

Partially Invalid: Member who, as a result of an illness, common accident, or weakening of their 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.

Totally Invalid: Member who, as a result of an illness, common accident, or weakening of their 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: The monetary economic benefit granted monthly to a member or their beneficiaries upon meeting the requirements established in the SAP Law.

Member's Reference Pension: The one determined as a percentage of the basic regulator salary applicable for any time of service the member has provided, in accordance with what Article 120 of the SAP Law establishes.

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Annex No. 2

Beneficiaries' Reference Pension: The one obtained by multiplying the reference pension of the insured member by the percentage corresponding to each beneficiary, in accordance with what Article 121 of the SAP Law establishes.

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 contracted by the AFPs, and to the policies of the Life Annuities that natural persons, members 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 established for classic insurance.

Claim: The death or declaration of common disability of a SAP member that generates the obligation of payment to the Insurance Company.

Survival and Disability Insurance: The one contracted by the AFPs with insurance companies, in accordance with what Article 124 of the SAP Law establishes, and correspond 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: Corresponds to the insurance contracted by members or their direct dependents directly with the insurance company, in accordance with what Article 134 of the SAP Law establishes.

Co-insurance: 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 AFP members for whom the cedent has signed the insurance contract.

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 AFP members who subscribe the disability and survival insurance contract with the cedent.