Rules on Constitution and Calculation of Reserves

RULES ON CONSTITUTION AND CALCULATION OF RESERVES Approved in Resolution CD-SUPERINTENDENCIA-XLIX-I-97 of January 8, 1997 Modified in Resolution CD-SIB-188-1-NOV23-2001, of November 23, 2001

I - TOTAL CURRENT RISK RESERVES.
Art. 1 The minimum current risk reserves that Insurance Institutions must establish, both for direct insurance and for taken reinsurance, will be:
1) For individual life and capitalization insurance, the reserves corresponding to each policy will be calculated according to the technical bases or procedures approved by the Superintendence upon prior request by each Institution. Reserves for deferred dividends, funds for lotteries, reserves for deviations in lotteries, reserves for life annuities, and any other funds destined for contingent payments will be included under this item.
2) The reserve for Current Risks for Additional Benefits and occupational and subnormal risks corresponding to the Individual Life line will be equal to 50% of the net premiums retained in the year.
3) For the lines of group life, accidents and illnesses, damages and sureties (which are not those mentioned in the following numeral 4), nor cargo transport insurance) where the coverage period is not greater than one year, the reserve will be 40% of the total premiums retained during the year prior to the valuation date.
4) For multi-year policies for the risks referred to in the preceding numeral 3), the valuation must be carried out according to special procedures approved by the Superintendence, upon prior request by each Institution, unless the premiums to be paid each year are equal, in which case the valuation will be made according to the indications contained in numeral 3) of this article. However, no calculation procedure may result in a reserve lower than the sum of the premiums or fractions thereof, received in advance for risks of future years, plus the reserves for the current year calculated based on the premiums of the tariffs corresponding to the policy year, according to the procedures indicated in the referenced numerals.

II - CURRENT RISK RESERVES FOR CEDDED REINSURANCE.
Art. 2 The current risk reserves corresponding to ceded reinsurance operations will be calculated as follows:
1) For the individual life line, in the case of reinsurance under the annual temporary system, its additional benefits and occupational and subnormal risks, by the percentage stipulated in the current reinsurance contracts.

For cases other than those mentioned in the previous paragraph, procedures approved by the Superintendence upon prior request by each Institution will be used.
2) For the lines of group life, damages, accidents and illnesses, and sureties, the reserve will be equal to the percentage stipulated in the reinsurance contract applied to the total premiums ceded during the year immediately preceding its calculation. In the transport line, only the premiums ceded for what corresponds to hull insurance will be taken into account for calculation purposes.
In the case of multi-year policies, unless the premiums paid by the insured during each year of the insurance validity are equal, the reserve will be calculated according to procedures approved by the Superintendence, upon prior request by each Institution.
Notwithstanding what is provided in paragraphs 1 and 2 of this article, the reserve for ceded reinsurance for each contract may not be less than 50% of the percentage established for the retention reserve. This condition is not applicable to individual life insurance, in which the reserve for ceded reinsurance will be equal to the percentage established in each reinsured contract.

III - RESERVES FOR PENDING OBLIGATIONS.
Art. 3 The minimum reserves for pending payment obligations for benefits due according to insurance and taken reinsurance contracts will be the following:
1) For insurance on the lives of persons in which certain sums of money were offered as compensation for the occurrence of a foreseen risk, the amount of cash due according to the respective contracts will be reserved.
2) For damage, personal accident, and surety insurance, with the exception of automobile insurance, the reserve will be established according to the following rules:
a) When it concerns claims in which both parties have reached an agreement, the reserve will be equal to the agreed value. b) If the claim is pending payment due to disagreement between the parties, the average of the sums estimated by the insurance company and claimed by the insured will be reserved, with the latter having as a maximum the greater indemnity to which the insured is entitled according to the contract, plus the respective expenses. c) In any other case, the estimation of the reserve will be made by the insurance institutions, according to sound criteria.
3) For automobile insurance:
a) When it concerns adjusted claims in which both parties have reached an agreement, the reserve will be equal to the agreed value. b) When it concerns claims pending adjustment or having been adjusted but not yet approved by the parties, the reserve will be made based on prudently made estimates by the insurance company, but its amount may not be lower than the result of multiplying the number of claims whose adjustment is pending, or has not been approved by the parties, by the average cost of claims. The average cost of claims will be understood as the result of dividing the amount of paid claims plus that of the reserved ones according to subsection a) corresponding to the exercise, by the number of claims.
4) The other due benefits, which are dividends payable on policies, coupons on deposit, persistence bonds on deposit, reserves for certain annuities, obligations for lotteries, deposits of premiums or for rehabilitations, and pending requests, surrenders payable, and any other sums with similar characteristics, will be calculated according to procedures approved by the Superintendence for each Institution upon prior request.
5) For all insurance, a reserve for occurred and unreported claims will be established, which will be determined according to the experience of each company, and may not be less than five percent (5%) of the reserves for benefits and pending claims of the respective exercise.
Art. 4 The reserves for pending obligations owed to reinsurers will be those corresponding according to reinsurance contracts.

IV - CONTINGENCY RESERVES.
Art. 5 Contingency reserves for statistical deviations must be established for retained risks, and will be operated as follows:
1) Minimum annual increases:
a) For life insurance, individual and group, take 1.5% of the premiums retained in the year, or 10% of the profits obtained in this period in the life line, whichever is greater. b) For additional life benefits, for accidents and disability, and premiums from subnormal insurance and occupational extra-premiums, take 40% of the premiums retained in the year. c) For the lines of accidents and illnesses, damages and sureties, which are not Allied Fire Lines, nor any of the lines specified in Art. 7, take 3% of the premiums retained in the year, or 90% of the favorable loss deviation, whichever is greater. If for all the lines referred to in this subsection the joint loss deviation is favorable for retention operations and unfavorable for the total risk operations assumed, the increases referred to in subsection c) must be increased by 10% of the favorable loss deviation. d) The Contingency Reserve for occupational and subnormal risks will be used jointly with that corresponding to Life Insurance, for unfavorable deviations in mortality for retained risks, so that in no case the amount accumulated for said occupational and subnormal risks is reduced to less than 40% of the retention premiums of the year corresponding to the valuation.

2) Annual decreases for the deviations of each year will be made separately with respect to each group of lines or benefits, as follows:
a) For life insurance, individual and group, which are not those mentioned in subsection b) below, the reserve will be decreased by the amount of unfavorable deviations in mortality for retained risks, according to computations presented for this purpose. b) For additional life benefits for accidents and disability, the reserve will be decreased by the total amount of retention claims. c) For the lines of accidents and illnesses, sureties and damages which are not Allied Fire Lines, nor any of the lines specified in the last paragraph of Art. 7, the reserve will be decreased by the value of the unfavorable loss deviation of each particular line, provided that the general technical results for the set of lines of this subsection are a loss. Thus, if there is a global technical profit for the set of these lines, the reserves will not be decreased by unfavorable deviation in any particular line among them. d) Releases other than the above may be considered by subsequent regulations when circumstances change or experience is gained, or exceptionally in specific cases sufficiently justified, with prior approval of the Superintendence.
3) For the purposes of this article, favorable loss deviation will be considered as the excess of expected loss experience over incurred loss experience (including adjustments and salvage), and unfavorable loss deviation as the excess of incurred loss experience (including adjustments and salvage) over expected loss experience.
Expected loss experience will be estimated by applying the percentages indicated below to the result of performing the following operations: sum the corresponding current risk reserves for retention at the end of the previous year, with 80% of the corresponding retention premiums received in the year, and subtract from this total the reserves corresponding to current risks for retention, at the end of the year. The percentages to be applied will be the following:
Fire 45.00 %
Accidents and Illnesses 55.00 %
Other Damages 50.00 %
Sureties 40.00 %

V - RESERVE FOR CATASTROPHIC RISKS
Art. 6 Insurance companies will have the obligation to establish a Reserve for Catastrophic Risks, which aims to cover risks of uncertain frequency and catastrophic effects, protecting the normal performance of said companies.

Art. 7 For transport insurance (cargo and ship), aviation insurance (accidents in air travel and aircraft), fire insurance for cotton, general civil liability, machinery breakdown and boiler explosion, and sureties that are not fidelity sureties, each insurance company will propose to the Superintendence within a period not exceeding 90 days after receiving these Rules, the formula to determine the reserve, which may be approved or modified. Art. 8 Annual Increases.- For Allied Fire Lines, the reserve will be increased by a minimum of 15% of the premiums retained in the year. Art. 9 Decreases.- For the same Allied Fire Lines, the reserve will be decreased by the total amount of retention claims. Transport insurance (cargo and ship), Aviation (accidents in air travel and aircraft), risks allied to fire insurance, fire for cotton, General Civil Liability, machinery breakdown and boiler explosion, and sureties that are not fidelity sureties, when there is a need to decrease the Reserve for Catastrophic Risks for each of these lines in particular, in no case shall it be reduced to less than 40% of the respective retention premiums of the year corresponding to the valuation.

VI - OTHER PROVISIONS.
Art. 10 Insurance institutions must send to the Superintendence, as an annex to the year-end calendar financial statements, a detailed valuation report as of this same date, for all technical reserves detailed here, and for contingency reserves and catastrophic risk reserves, the sums used and the calculations made to establish the increases and decreases of said reserves must be reported. When detailing the calculation of reserves for ceded reinsurance, information relative to the part of these, if any, that corresponds to reinsured risks, via facultative, must be incorporated. The valuation report referred to in this article must be sent to the Superintendence no later than the last day of February of the year following that to which they correspond, without prejudice to the obligation to send the year-end financial statements with real or estimated reserve figures, no later than January 31 of the following year, and with the understanding that any declaration of dividend distribution must be made based on real figures, and not estimated figures. Art. 11 In addition to the reserves established in these Rules, the Superintendence will have the authority to establish portfolio health reserves and additional capitalization reserves when it deems them appropriate within the limits established in the third paragraph of Article No. 32 of the General Law of Insurance Institutions.

Art. 12 All reserves referred to in these Rules will affect the Profit and Loss accounts, in the manner established in the Unique Chart of Accounts for Insurance Institutions.
Art. 13 The contingency reserves that Insurance Institutions had established upon the entry into force of this Regulation remain subject to its provisions, and are allocated to the lines of life, accidents and illnesses, damages and sureties, in proportion to their corresponding current risk reserves and increases to the contingency reserve, calculated in the first valuation in which this Regulation is applied.

VII - VALIDITY
Art. 14 VALIDITY.- The Regulatory Rules approved by this Resolution will enter into force from the date on which they are communicated through personal delivery to an authorized official of each of the Insurance Companies.
Art. 15 TRANSITIONAL PROVISION.- Without prejudice to what is provided in the previous Article, the Superintendent is authorized to agree on special deadlines when the application of any of these Rules to established insurance companies so requires.