Technical Standards for the Calculation of Minimum Net Worth of Insurance Companies

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

THE STANDARDS COMMITTEE OF THE CENTRAL RESERVE BANK OF EL SALVADOR,

CONSIDERING:

I. That Article 29 of the Insurance Companies Law establishes that insurance companies must, at all times, have a minimum net worth that allows them to have available resources to cover extraordinary obligations caused by deviations in claim frequency.

II. That Article 30 of the Insurance Companies Law establishes the components for the calculation of Minimum Net Worth, which in turn will allow the determination of net worth deficiencies.

III. That Article 31 of the Insurance Companies Law establishes the provisions regarding the determination of the solvency margin.

IV. That Article 54 of the Insurance Companies Law establishes the regularization processes that insurance companies must follow in the event of a net worth deficiency.

V. That Article 118 of the Insurance Companies Law establishes the percentages for the application of the solvency margin.

VI. That Article 99, subsection c) of the Law on Supervision and Regulation of the Financial System, establishes that it is the responsibility of the Standards Committee of the Central Reserve Bank of El Salvador to approve technical standards for the preparation, approval, presentation, and dissemination of financial statements and supplementary information of the members of the financial system; for the determination of accounting obligations and the principles according to which they must keep their accounts; and for the establishment of criteria for the valuation of assets, liabilities, and the constitution of provisions and reserves for risks, all of the foregoing in accordance with what is established in the Law and other applicable laws, with the aim that the real liquidity and solvency situation of said members is reflected.

THEREFORE,

by virtue of the regulatory powers conferred by Article 99 of the Law on Supervision and Regulation of the Financial System,

AGREES to issue the following:

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES

CHAPTER I
OBJECT, SUBJECTS, AND TERMS

Object
Art. 1.- These Standards aim to facilitate insurance companies' application of the legal provisions regarding the Calculation of Minimum Net Worth and to establish a uniform system for presenting reports on said calculation to the Superintendence of the Financial System.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Standards are:
a) Insurance companies incorporated in El Salvador; b) Branches of foreign insurance companies established and authorized in the country; and c) Cooperative associations providing insurance services incorporated in the country.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Central Bank: Central Reserve Bank of El Salvador; b) Law: Insurance Companies Law; c) Solvency Margin: Additional resources to cover obligations in excess of what is expected; d) Net Worth: Set of financial resources that support the maintenance of the company's solvency, constituted by the sum of paid-in capital, capital reserves, and other financial resources, minus credits to related parties and shareholdings in subsidiaries, joint investment companies, and other insurance companies; e) Insurance companies: Includes companies incorporated in El Salvador, branches of foreign insurers, and cooperative associations providing insurance services; and f) Superintendence: Superintendence of the Financial System.

CHAPTER II
NET WORTH DEFICIENCY

Minimum Net Worth
Art. 4.- In accordance with Article 30 of the Law, the Minimum Net Worth will correspond to the higher value between:
a) The Net Worth necessary to maintain a Total Debt to Net Worth ratio not exceeding five times; in other words, the Total Debt to Net Worth ratio is the quotient of dividing Total Debt by five. This calculation is applicable to the entirety of all insurance and suretyship groups or lines; and b) The amount resulting from the sum of the Solvency Margin calculations established by the Law, calculated separately for each of the groups or lines in which the company may operate. In any case, the Minimum Net Worth cannot be less than the amount of the Minimum Social Capital.

Regularization Process
Art. 5.- When insurance companies incur net worth deficiencies, the regularization process referred to in Articles 53, 54 subsection b), and 55 of the Law will be applied.

Such deficiencies will be determined through the procedure established in Annex No. 4 of these Standards.

Art. 6.- The deadlines to overcome deficiencies arising from Net Worth with respect to Minimum Net Worth or from losses greater than twenty percent of Net Worth will be counted from the date of their determination.

The deadline to rule on the reconsideration request referred to in subsection b) of Article 54 of the Law will be counted from the date of presentation of said request to the Superintendence.

CHAPTER III
CALCULATION OF MINIMUM NET WORTH

Art. 7.- The determination of the Net Worth described in Annex No. 1 of these Standards will be carried out in accordance with what is established by Article 32 of the Law, including fifty percent of net profits after income tax provision during the months of January to December.

In the case of the related credits referred to in Annex No. 1 of these Standards, a list of such credits must be sent to the Superintendence in accordance with Article 28 of the Law.

Art. 8.- The procedure to establish the Total Debt to Net Worth ratio referred to in subsection a) of Article 30 of the Law is developed in Annex No. 2 of these Standards.

Art. 9.- The components for the calculation of Minimum Net Worth, which in turn will allow the determination of net worth deficiencies, are summarized in Annex No. 13 of these Standards.

Art. 10.- In accordance with Article 31 of the Law, the Solvency Margin will be determined based on the following procedure:

A. For Damage, Accident, Illness, and Life-Complementary Insurance The basic elements to determine the Solvency Margin established in subsection a) of Article 31 of the Law are detailed in Annex No. 3 of these Standards, which are:
i. Premiums for direct insurance and taken reinsurance:
Refers to the sum of net product premiums less returns and cancellations of direct insurance, taken reinsurance, and co-insurance from the last twelve months to the calculation date.

ii. Total Claims:
Correspond to the sum of the following elements:
a) Direct insurance, taken reinsurance, and co-insurance claims; b) Direct insurance, taken reinsurance, and co-insurance adjustment expenses; c) Reinsurers' participation in salvage and retrocessionaires' participation in salvage; d) Collective life bonuses; and e) Increase in reserves for pending claims for direct insurance and taken reinsurance.

Less the integration of the following components:
a) Salvage and recoveries; b) Direct insurance refunds; c) Reimbursements for taken reinsurance and co-insurance; and d) Decreases in reserves for pending claims for direct insurance and taken reinsurance.

iii. Claims borne by reinsurers:
Constituted by the sum of claims recovered from reinsurers, plus the net increases or decreases in reserves for claims borne by reinsurers.

The accounts and subaccounts that integrate the aforementioned elements are detailed in Annex No. 5 of these Standards.

The solvency margin for this line will be the result of the sum of the solvency margins from Annexes No. 3 and 4 of these Standards.

B. For the Pension, Annuity, and Pensions Line The basic elements to develop the calculation of the Solvency Margin for the pension, annuity, and pensions line, which includes the total net premiums for direct insurance and taken reinsurance for pension, annuity, and pension insurance, are described in Annex No. 4 of these Standards.

The accounts and subaccounts that integrate the elements mentioned in the previous paragraph, taking into consideration the methodology established in the line for damage, accident, illness, and life-complementary insurance, are specified in Annex No. 6 of these Standards.

The solvency margin for this line will be the higher result between the calculation based on premiums and the calculation based on claims.

C. For Life Insurance
The basic elements for the Calculation of the Solvency Margin established in subsection b) of Article 31 of the Law are detailed in Annex No. 7 of these Standards, as follows:
i. Mathematical Reserve for Direct Insurance and Taken Reinsurance:
This section includes mathematical reserves, reserves for annuities and pensions, life annuities, additional life insurance reserves, and reserves for taken reinsurance.

ii. Retained Mathematical Reserve:
Corresponds to the mathematical reserve for insurance and taken reinsurance, minus the life in-force risk reserves borne by reinsurers.

iii. Direct Insured Sums and Taken Reinsurance:
Refers to the liabilities of in-force insurance policies plus the liabilities for taken reinsurance.

iv. Retained Insured Sums:
The direct insured sums and taken reinsurance minus reinsurance ceded and retrocessions.

The accounts and subaccounts that integrate these components are detailed in Annex No. 8 of these Standards.

D. For the Motor Vehicle Line
The basic elements to determine the Solvency Margin established in subsection c) of Article 31 of the Law are detailed in Annex No. 9 of these Standards.

The accounts and subaccounts that integrate the basic elements mentioned in the previous paragraph are detailed in Annex No. 10 of these Standards.

E. For Earthquake Catastrophic Risk
The basic elements to develop the Calculation of the Solvency Margin for earthquake catastrophic risks established in subsection d) of Article 31 of the Law are detailed in Annex No. 11 of these Standards.

The accounts and subaccounts that integrate the basic elements mentioned in the previous paragraph are specified in Annex No. 12 of these Standards.

For the purposes of said calculation, the retained and in-force liabilities correspond to commitments for in-force insurance policies and taken earthquake reinsurance, deducting from these the liabilities borne by reinsurers.

F. For Suretyship Operations
The basic elements to develop the calculation of the Solvency Margin established in subsection e) of Article 31 of the Law are described in Annex No. 11 of these Standards.

The accounts and subaccounts that integrate the basic elements mentioned in the previous paragraph are specified in Annex No. 12 of these Standards.

For this calculation, the net liability for suretyship and the cleaning reserve are considered as the liabilities for in-force suretyship policies and taken suretyship reinsurance, deducting from these the liabilities for ceded suretyship reinsurance and suretyship retrocessions, as well as the cleaning reserve.

Art. 11.- The basic elements mentioned by the Law to determine the investment base are detailed in Annex No. 14 of these Standards.

CHAPTER IV
OTHER PROVISIONS AND VALIDITY

Information Submission
Art. 12.- Insurance companies will monthly submit to the Superintendence information related to the Minimum Net Worth according to the Annexes of these Standards, via a note signed by the Manager or whoever performs a similar function, within the first six business days following the month being reported, except for the month of December, which will be presented within the first twenty business days of January, and June, within the first ten business days of July.

Art. 13.- According to accepted experience in the insurance sector, the seismic zone of highest exposure is that comprised between the departments of San Salvador and La Libertad, from the following districts:
01 San Salvador
02 Apopa
03 Ayutuxtepeque
04 Cuscatancingo
05 Ciudad Delgado
06 Ilopango
07 Mejicanos
08 Nejapa
09 Panchimalco
10 Rosario de Mora
11 San Marcos
12 Santiago Texacuangos
13 Santo Tomás
14 Soyapango
15 Tonacatepeque
16 Santa Tecla
17 Antiguo Cuscatlán
18 Huizúcar
19 Nuevo Cuscatlán

Sanctions
Art. 14.- Non-compliance with the provisions contained in these Standards will be sanctioned in accordance with what is established in the Law on Supervision and Regulation of the Financial System.

Repeal
Art. 15.- "Technical Standards for the Calculation of Net Worth" (NRP-01), approved by the Board of Directors of the Superintendence of the Financial System in Session CD-19/1997 on April 23, 1997, whose Organic Law was repealed by Legislative Decree No. 592 containing the Law on Supervision and Regulation of the Financial System, published in Official Gazette No. 23, Volume No. 390, on February 2, 2011.

Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

Unforeseen Aspects
Art. 16.- Aspects not foreseen in regulatory matters in these Standards will be resolved by the Central Bank through its Standards Committee.

Validity
Art. 17.- These Standards will enter into force as of February 15, two thousand twenty-four.

Annex No. 1
Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

NAME OF INSURANCE COMPANY:_________________________________ DETERMINATION OF NET WORTH AS OF __ OF __ OF 20__

ACCOUNT DETAIL BALANCE
3101 Paid-in Capital
3501010 Legal Reserve
3501020 Statutory Reserves
3502 Voluntary Reserves
3601 Revaluations (50%) 1/
3602 Undistributable Profits
3802010 Profits from Previous Years
3801010 Current Year Profits (50% from January to December net of ISR provision at year-end) SUB TOTAL

Less:
Related Credits (Articles 27 and 28 of the Law) Shareholdings in Companies 3802020 Loss from Previous Years 3801020 Current Year Loss SUB TOTAL

NET WORTH

Annex No. 2
Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

NAME OF INSURANCE COMPANY: ____________________________________ DETERMINATION OF TOTAL DEBT TO NET WORTH RATIO AS OF __ OF ____ OF 20__

CODE ACCOUNT BALANCE
2 LIABILITY
Less:
LIFE MATHEMATICAL RESERVES
220101 Long-term individual life mathematical reserves 220109 Additional life insurance reserves 2202 Mathematical reserves for pension, annuity, and pension insurance 4301010 Increase in long-term individual life mathematical reserve 4301090 Adjustment of additional life insurance reserve 4302 Increase in pension, annuity, and pension insurance reserves Plus 5201010 Decrease in long-term individual life mathematical reserves 5201090 Adjustment of additional life insurance reserves 5202 Decrease in pension, annuity, and pension insurance mathematical reserves TOTAL LIFE MATHEMATICAL RESERVES

TOTAL MATHEMATICAL RESERVES *0.67

Less:
2208 Provision Reserves
TOTAL DEBT

DEBT RATIO (NOT EXCEEDING FIVE TIMES)
TOTAL DEBT A / MAXIMUM DEBT RATIO

Annex No. 3
Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

NAME OF INSURANCE COMPANY:_________________________________ CALCULATION OF SOLVENCY MARGIN AS OF ____ OF _________ OF 20__. DAMAGE, ACCIDENT, ILLNESS, AND LIFE-COMPLEMENTARY INSURANCE VALUES

BASED ON PREMIUMS
1 Total Net Premiums for Direct Insurance and Taken Reinsurance 1_/ (Article 31, subsection a, No. 1 of the Law) 0 2 PREVIOUS AMOUNT x 31% (Article 118, subsection a) of the Law) 0 3 Total Claims 0 4 Claims Borne by Reinsurers 0 5 Net Reinsurance Claims (3 - 4) 0 6 Net Reinsurance Claims / Total Claims x 100 (5 / 3 * 100) 2_/ 0% 7 Minimum Percentage (Article 31, subsection a, No. 1 of the Law) 50% 8 CALCULATION RESULT [ 2 * (the greater of 6 and 7)] 0

BASED ON CLAIMS
9 Average Claims for Direct Insurance and Taken Reinsurance for the last 36 months to the calculation date (Article 31, subsection a), No. 2 of the Law) 0 10 PREVIOUS AMOUNT x 56% (Article 118, subsection b) of the Law) 0 11 Net Reinsurance Claims / Total Claims x 100 (5 / 3 * 100) 2_/ 0% 12 Minimum Percentage (Article 31, subsection a), No. 2 of the Law) 50% 13 CALCULATION RESULT [ 10 * (the greater of 11 and 12)] 0 14 SOLVENCY MARGIN (The greater of 8 and 13) 0 1_/ From the last twelve months to the calculation date 2_/ In case that Total Claims are equal to or less than Claims Borne by Reinsurers, the Net Reinsurance Claims/Total Claims Ratio will be assigned a value of zero percent

Annex No. 4
Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

NAME OF INSURANCE COMPANY:_____________________________________ CALCULATION OF SOLVENCY MARGIN AS OF ____ OF _____________ OF 20__. PENSION, ANNUITY, AND PENSION INSURANCE VALUES BASED ON PREMIUMS 1 Total Net Premiums for Direct Insurance and Taken Reinsurance 1_/ (Article 31, subsection a), No. 1 of the Law) 0 2 PREVIOUS AMOUNT x 31% (Article 118, subsection a) of the Law) 0 3 Total Claims 0 4 Claims Borne by Reinsurers 0 5 Net Reinsurance Claims (3 - 4) 0 6 Net Reinsurance Claims / Total Claims x 100 (5 / 3 * 100) 2_/ 0.0% 7 Minimum Percentage (Article 31, subsection a), No. 1 of the Law) 50.0% 8 CALCULATION RESULT [ 2 * (the greater of 6 and 7)] 0 BASED ON CLAIMS 9 Average Claims for Direct Insurance and Taken Reinsurance for the last 36 months to the calculation date (Article 31, subsection a), No. 2 of the Law) 0 10 PREVIOUS AMOUNT x 56% (Article 118, subsection b) of the Law) 0 11 Net Reinsurance Claims / Total Claims x 100 (5/3 * 100) 2_/ 0.0% 12 Minimum Percentage (Article 31, subsection a), No. 2 of the Law) 50.0% 13 CALCULATION RESULT [ 10 *(the greater of 11 and 12) 0 14 SOLVENCY MARGIN (The greater of 8 and 13) 0 1_/ From the last twelve months to the calculation date. 2_/ In case that Total Claims are equal to or less than Claims Borne by Reinsurers, the Net Reinsurance Claims/Total Claims Ratio will be assigned a value of zero percent.

Annex No. 5
Alameda Juan Pablo II, between 15 and 17 Av. Norte, San Salvador, El Salvador.
Tel. (503) 2281-8000 www.bcr.gob.sv
CNBCR-01/2024
NRP-52
TECHNICAL STANDARDS FOR THE CALCULATION OF MINIMUM NET WORTH OF INSURANCE COMPANIES Approval: 01/31/2024 Validity: 02/15/2024

NAME OF INSURANCE COMPANY:_________________

DATA FOR SOLVENCY MARGIN CALCULATION - DAMAGE, ACCIDENT, ILLNESS, AND LIFE-COMPLEMENTARY LINE AS OF __ OF ____ OF 20__.

CODE ACCOUNT BALANCE
51 Product Premiums
5101010 (-) Long-term individual life premiums 5101020 (-) Short-term individual life premiums 5101040 (-) Other life plan premiums 5102 (-) Pension, annuity, and pension insurance premiums 5105 (-) Motor vehicle premiums 5107 (-) Suretyship premiums 46 (-) Returns 4601010 + Long-term individual life returns 4601020 + Short-term individual life returns 4601040 + Other life plan returns 4602 + Pension, annuity, and pension insurance returns 4605 + Motor vehicle returns 4607 + Suretyship returns PREMIUMS FOR DIRECT INSURANCE AND TAKEN REINSURANCE - CLAIMS YEAR 1 41 Claims 4101010 (-) Long-term individual life claims 4101020 (-) Short-term individual life claims