Technical Standards for the Technical Provisions Fund of Reciprocal Guarantee Societies and Reinsurers of Reciprocal Guarantee Societies

Approval: 31/10/2024
Validity: 15/11/2024

NCF-08
TECHNICAL STANDARDS FOR THE TECHNICAL PROVISIONS FUND OF RECIPROCAL GUARANTEE COMPANIES AND REINSURERS OF RECIPROCAL GUARANTEE COMPANIES

CENTRAL BANK OF RESERVE OF EL SALVADOR
GOVERNMENT OF EL SALVADOR

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

CONSIDERING:

I. That Article 29 of the Law of the Reciprocal Guarantee System for Micro, Small and Medium Rural and Urban Enterprises establishes that every Guarantee Company must constitute a Technical Provisions Fund, which will form part of its equity and will have the purpose of reinforcing the solvency of the company.

II. That Article 2, second paragraph of the Law of Supervision and Regulation of the Financial System establishes that the proper functioning of the Financial Supervision and Regulation System requires, from the members of the financial system and other supervised entities, compliance with current regulations and the adoption of the highest standards of conduct in the development of their business, acts and operations, in accordance with what is established in the aforementioned Law, in other applicable laws, in regulations and in the technical standards issued for such effect.

III. That Article 3, letter c) of the Law of Supervision and Regulation of the Financial System establishes that it is the responsibility of the Superintendence of the Financial System to proactively monitor the risks of the members of the financial system and the way in which they manage them, ensuring the prudent maintenance of their solvency and liquidity.

IV. That Article 7 of the Law of Supervision and Regulation of the Financial System establishes the entities that are subject to the supervision of the Superintendence of the Financial System.

V. That Article 99, third paragraph, letter a) of the Law of Supervision and Regulation of the Financial System establishes that it is the responsibility of the Committee of Standards of the Central Bank of Reserve of El Salvador to approve the Technical Standards for the preparation, presentation and dissemination of the Financial Statements and supplementary information of the members of the financial system; the determination of accounting obligations and the principles according to which they must keep their accounting and the establishment of criteria for the valuation of assets, liabilities and constitution of provisions and reserves for risks.

VI. That in accordance with Article 101, fourth paragraph of the Law of Supervision and Regulation of the Financial System, the powers to approve, modify and repeal technical standards that must be complied with by the members of the financial system and other supervised entities are transferred to the Central Bank of Reserve of El Salvador.

THEREFORE, by virtue of the regulatory powers conferred upon it by Article 99 of the Law of Supervision and Regulation of the Financial System, AGREES to issue the following:

TECHNICAL STANDARDS FOR THE TECHNICAL PROVISIONS FUND OF RECIPROCAL GUARANTEE COMPANIES AND REINSURERS OF RECIPROCAL GUARANTEE COMPANIES

CHAPTER I
OBJECT, SUBJECTS AND TERMS

Object
Art. 1.- These Standards aim to establish the accounting applications for the constitution, use and recovery of the Technical Provisions Fund of the Reciprocal Guarantee Companies and the Reinsurers of Reciprocal Guarantee Companies for Micro, Small and Medium Rural and Urban Enterprises.

Subjects
Art. 2.- The subjects obliged to comply with the provisions established in these Standards are:
a) Reciprocal Guarantee Companies; and b) Reinsurers of Reciprocal Guarantee Companies.

Terms
Art. 3.- For the purposes of these Standards, the terms indicated below have the following meaning:
a) Provisions Fund: Technical provisions fund; b) Reinsurer(s): Reinsurers of Reciprocal Guarantee Companies; c) Guarantee Company(ies): Reciprocal Guarantee Company or Companies; d) Superintendence: Superintendence of the Financial System.

CHAPTER II
ON THE PROVISIONS FUND

Minimum amount
Art. 4.- The Provisions Fund will have the purpose of reinforcing the solvency of the Guarantee Company and the Reinsurer and the amount constituted will form part of its equity. Its minimum amount will be one percent of the active risk portfolio;

however, this percentage must be reviewed and adjusted every two years from the validity of these Standards, by the Superintendence, taking as a basis the Consumer Price Index or the annual variations of the ratio of failed guarantees to issued guarantees during the year, whichever is higher.

In the second case, and if there is more than one Guarantee Company or Reinsurer, the adjustment will be an average of these results. For this purpose, Guarantee Companies and Reinsurers must maintain records of these variations.

The active risk portfolio will be determined by the balance recorded in account "911 Commitments Acquired by Guarantees and Reinsurance Granted".

Form of constitution
Art. 5.- The Provisions Fund will be constituted by:
a) The amount that the Guarantee Company or the Reinsurer allocates from the net profits of each exercise, without limitations and in concept of insolvency provisions; b) Subsidies, donations or other non-refundable contributions made to the Guarantee Company or the Reinsurer; and c) Any other contributions that regulations or statutes determine.

CHAPTER III
CONSTITUTION AND USE OF THE TECHNICAL PROVISIONS FUND

Constitution of the Provisions Fund
Art. 6.- The Provisions Fund must be constituted with the portion separated from the net profits of each exercise, according to agreement of the Ordinary General Meeting of the Guarantee Company or the Reinsurer. The portion thus determined will cause a charge in account 315002 Results to Apply - Results of the Current Exercise and a credit to account 3130010101 Technical Provisions Fund - Insolvency Provisions.

Art. 7.- For the purposes of maintaining the minimum requirement of one percent referred to in Article 4 of these Standards, the Guarantee Company may request this percentage from its participating partners for the amounts guaranteed in concept of guarantees, bonds and other financial guarantees, in accordance with what their statutes dictate. If this is the case, these contributions must be recorded in account 3130040101 Technical Provisions Fund - Non-refundable Contributions - from participating partners.

Art. 8.- When the Guarantee Company or the Reinsurer receives subsidies for the Provisions Fund, the accounting treatment to be used for its recording will be the Capital Method, in accordance with the International Financial Reporting Standards. Consequently, such subsidies will be recorded with a charge to the account of the asset received and a credit to account 313002 Technical Provisions Fund – Subsidies – detail account. If the contributions are made in non-monetary assets, such assets will be recorded at their fair value, understood as such, the amount by which an asset can be exchanged between a willing buyer and a willing seller who are properly informed.

Art. 9.- When the Guarantee Company or the Reinsurer receives Donations for the Provisions Fund, the corresponding asset account will be charged and account 313003 Technical Provisions Fund – Donations – detail account will be credited. In case that the donated resources are of a non-monetary nature, such goods will be recorded at their fair value.

Art. 10.- When the Guarantee Company or the Reinsurer receives Non-refundable Contributions for the Provisions Fund, which are different from those established in Article 6 of these Standards, and whose destination is to cover risks of a specific sector, the corresponding asset account will be charged and account 313004 Technical Provisions Fund – Non-refundable Contributions – detail account will be credited. The Guarantee Company or the Reinsurer must establish the necessary off-book controls to prepare the corresponding reports on the failed guarantees of the sectors covered with these contributions.

Art. 11.- If the Guarantee Company or the Reinsurer receives for the Provisions Fund other contributions that the regulations or the statutes of the Guarantee Company or the Reinsurer determine, a charge will be made to the respective account and account 3130040801 Technical Provisions Fund – Non-refundable Contributions – Others will be credited.

Use of Provisions Fund
Art. 12.-The Provisions Fund will be used only to be applied to the losses of the exercise, once the annual profits of previous exercises and the voluntary reserves that the Guarantee Company or the Reinsurer has constituted by that date have been exhausted.

For this purpose, the application of losses of an exercise to the Provisions Fund will be made in the following order:
a) To that constituted with non-refundable contributions; b) To that constituted with the profits of each exercise and registered as insolvency provisions; and c) To that constituted with subsidies and donations.

CHAPTER IV
OTHER PROVISIONS AND VALIDITY

Art. 13.- The Provisions Fund must be invested in accordance with what is established in Articles 62, 63 and 88 of the Law of the Reciprocal Guarantee System for Micro, Small and Medium Rural and Urban Enterprises.

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

Repeal
Art. 15.- These Standards repeal the "Accounting Standards for the Technical Provisions Fund of Reciprocal Guarantee Companies and Reinsurers of Reciprocal Guarantee Companies" (NCSGR-003), approved by the Board of Directors of the Superintendence of the Financial System in Session No. CD-50/2004 of December 22, 2004, whose Organic Law was repealed by Legislative Decree No. 592 which contains the Law of Supervision and Regulation of the Financial System, published in the Official Journal No. 23, Volume No. 390, dated February 2, 2011.

Unforeseen Aspects
Art. 16.- The aspects not provided for in regulatory matters in these Standards will be resolved by the Central Bank of Reserve of El Salvador through its Committee of Standards.

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