Implementing ICPs: Assessment as the First Step Implementing ICPs: Assessment as the First Step. Mexico’s (CNSF) experience José Gerardo López Hoyo Vice-president of Analysis and Sectorial Studies Comisión Nacional de Seguros y Fianzas (CNSF) Insurance and Sureties National Commission

Content Regulatory Changes / Regulatory Development in Mexico On the road to International Standards (assessments). Mexico’s assessment experience Final Considerations / next steps

Regulatory Changes in Mexico. 40% Corporate Governance (independent actuaries, Fit & Proper, external auditors). 40% Risk Based Scheme (Capital and Liabilities) 10% Market Transparency 10% Public Policies 54% Investment regime 41% Public policies 5% Corporate government 30% Liberalization schemes (investments, foreign investment) 30% New insurance business lines 30% Public policies 10% Market Conduct New Laws 1935 Insurance Institutions and Mutual Societies General Law (LGISMS) 2013 Insurance and Sureties Institutions Law (LISF) Directive Regulation Solvency Regulation Solvency Regulation + Three Pillars

Regulatory Development in Mexico. Solvency Regulation “+” Three Pillars (S-II type) Solvency Regulation 2015 IAIS ICP’s Revision (4) 2003 IAIS ICP’s Revision (2) 2011 IAIS ICP’s Revision (3) 1994 IAIS is formed 1999 IAIS Insurance Core Principles (ICP) (1) Directive Regulation 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

On the road to International Standards (assessments). Assessment processes: Facilitate identifying financial and economic vulnerabilities; Assess vs. International Standards and detect gaps in the regulatory structures and practices. Provide elements for regulatory framework reforms. Spectrum of assessment mechanisms Self assessment coordinated by another supervisor Self assessment based on accepted methodologies Self assessment coordinated by external assessor FSAP (WB-IMF) Self assessment

On the road to International Standards (assessments). ICP’s assessment: Assessment Mechanisms: Degree of rigor Implementation (complexity) Self assessment Self assessment based on accepted methodologies Self assessment coordinated by external assessor Self assessment coordinated by another supervisor Financial Sector Assessment Program (FSAP) O=observed: All essential criteria is met without any deficiency. LO=largely observed: Minimum issues to fulfillment. MNO=mostly not observed: Clear limits for adequate fulfillment NO=not observed: An action plan must be prepared for its fulfillment. NA: not applicable

Mexico’s experience1993-2006 O LO MNO NO P-1: Organization of the Insurance Supervisor P-2: Licensing P-3: Changes in Control P-4: Corporate Governance P-5 Internal Controls P-6: Assets P-7: Liabilities P-8: Capital Adequacy and Solvency P-9: Derivatives P-10: Reinsurance P-11: Market Conduct P-12: Financial Reporting P-13: On-site Inspection P-14: Sanctions P-15: Cross Border business Operations P-16: Coordination and Cooperation P-17: Confidentiality NO MNO LO O

Self-assessment vs FSAP 2011 P-1: Conditions for effective insurance Supervision P-2: Supervisory objectives P-3: Supervisory authority P-4: Supervisory process P-5 Supervisory cooperation and information sharing P-6: Licensing P-7: Suitability of persons P-8: Changes in control and portfolio transfers P-9: Corporate governance P-10: Internal controls P-11: Market analysis P-12: Reporting to supervisors and off-site monitoring. P-13: On-site inspection P-14: Preventive and corrective measures. P-15: Enforcement or sanctions. P-16: Winding-up or exit from the market. P-17: Group-wide supervision P-18 Risk assessment and management. P-19 Insurance activity P-20 Liabilities P-21 Investments P-22 Derivatives and similar commitments P-23 Capital adequacy and solvency P-24 Intermediaries P-25 Consumer protection P-26 Information, disclosure and transparency toward markets P-27 Fraud P-28 Anti-money-laundering, combating the financing of terrorism P-1: Conditions for effective insurance Supervision P-2: Supervisory objectives P-3: Supervisory authority P-4: Supervisory process P-5 Supervisory cooperation and information sharing P-6: Licensing P-7: Suitability of persons P-8: Changes in control and portfolio transfers P-9: Corporate governance P-10: Internal controls P-11: Market analysis P-12: Reporting to supervisors and off-site monitoring. P-13: On-site inspection P-14: Preventive and corrective measures. P-15: Enforcement or sanctions. P-16: Winding-up or exit from the market. P-17: Group-wide supervision P-18 Risk assessment and management. P-19 Insurance activity P-20 Liabilities P-21 Investments P-22 Derivatives and similar commitments P-23 Capital adequacy and solvency P-24 Intermediaries P-25 Consumer protection P-26 Information, disclosure and transparency toward markets P-27 Fraud P-28 Anti-money-laundering, combating the financing of terrorism P-1: Conditions for effective insurance Supervision P-2: Supervisory objectives P-3: Supervisory authority P-4: Supervisory process P-5 Supervisory cooperation and information sharing P-6: Licensing P-7: Suitability of persons P-8: Changes in control and portfolio transfers P-9: Corporate governance P-10: Internal controls P-11: Market analysis P-12: Reporting to supervisors and off-site monitoring. P-13: On-site inspection P-14: Preventive and corrective measures. P-15: Enforcement or sanctions. P-16: Winding-up or exit from the market. P-17: Group-wide supervision P-18 Risk assessment and management. P-19 Insurance activity P-20 Liabilities P-21 Investments P-22 Derivatives and similar commitments P-23 Capital adequacy and solvency P-24 Intermediaries P-25 Consumer protection P-26 Information, disclosure and transparency toward markets P-27 Fraud P-28 Anti-money-laundering, combating the financing of terrorism NO MNO LO O

FSAP 2011 Recommendations… With respect to ICP-3: “Approve the LISF to grant required powers to the CNSF for a more efficient supervision.” “The introduction of an explicit mechanism for the appointment or withdrawal of the CNSF’s president or the members of the CNSF’s Board is recommended together with a mandate to publish the removal reasons whenever the president or a Board member is dismissed from duty. Consideration on the introduction of a term of office should be made.” “The supervisory authority should have full discretion on resource allocation in accordance with its mandate, objectives, and the perceived risks. The supervisory agency needs to be able to hire key senior technical staff, in particular, when the new solvency regime enters in force. This could include consulting arrangements or direct salary supplements for high-level professional qualifications.” With respect to ICP-9 and ICP-10: “Pass the new law strengthening corporate governance and internal controls of the supervised entities.” “A more intrusive supervisory approach should accompany the new law to permit proper monitoring and enforcement of the new governance and internal controls requirements. This will require additional resources.” With respect to ICP-27: “The new law should grant explicit power to the CNSF to require that the intermediaries or institutions have specific measures to prevent or detect the frauds in their operations, including providing counter-fraud training to management and staff. This is included in the current proposed law.”

FSAP 2011 Recommendations… Downgrades: With respect to ICP-6: “Consideration should be made to introduce a transition period separating all life and nonlife operations, or appropriate measures should be introduced to warrant a segregated treatment of the risks on both a going-concern and a winding-up situation.” With respect to ICP-15: “Consider providing the CNSF with the power to arrange for a compulsory transfer of the obligations under the policies from a failing insurer to another willing insurer. This is explicitly addressed in Article 485 of the new proposed law.” With respect to ICP-16: “Requirements with respect to the maximization of the value of the liquidated assets and on the efficiency of the process should be included in the law to improve the procedure in winding up insurers. Article 393 of the LISF covers this recommendation.” With respect to ICP-25: “Given the existing level of insurance literacy, more detailed guidelines pertaining to the offering, sales operations, and financial services of the insurance and surety institutions, seeking to protect the public should be issued. Given the low insurance penetration and insurance culture in Mexico, requirements for more clarity and transparency in the contracts aiming to protect insurance consumers is needed. The CNSF, together with CONDUSEF, should continue to increase their efforts in this area.” With respect to ICP-28: “Implement the missing AML-CFT requirements of the FATF recommendations.”

FSAP 2011 Recommendations… Upgrades: With respect to ICP-18: “It is recommended to formalize the requirement to have a Risk Committee when a defined complexity and/or size of the institution are reached, as recommended in the LISF.”

Self assessment 2016 O LO MNO NO P-1: Conditions for effective insurance Supervision P-2: Supervisory objectives P-3: Supervisory authority P-4: Supervisory process P-5 Supervisory cooperation and information sharing P-6: Licensing P-7: Suitability of persons P-8: Changes in control and portfolio transfers P-9: Corporate governance P-10: Internal controls P-11: Market analysis P-12: Reporting to supervisors and off-site monitoring. P-13: On-site inspection P-14: Preventive and corrective measures. P-15: Enforcement or sanctions. P-16: Winding-up or exit from the market. P-17: Group-wide supervision P-18 Risk assessment and management. P-19 Insurance activity P-20 Liabilities P-21 Investments P-22 Derivatives and similar commitments P-23 Capital adequacy and solvency P-24 Intermediaries P-25 Consumer protection P-26 Information, disclosure and transparency toward markets P-27 Fraud P-28 Anti-money-laundering, combating the financing of terrorism P-1: Conditions for effective insurance Supervision P-2: Supervisory objectives P-3: Supervisory authority P-4: Supervisory process P-5 Supervisory cooperation and information sharing P-6: Licensing P-7: Suitability of persons P-8: Changes in control and portfolio transfers P-9: Corporate governance P-10: Internal controls P-11: Market analysis P-12: Reporting to supervisors and off-site monitoring. P-13: On-site inspection P-14: Preventive and corrective measures. P-15: Enforcement or sanctions. P-16: Winding-up or exit from the market. P-17: Group-wide supervision P-18 Risk assessment and management. P-19 Insurance activity P-20 Liabilities P-21 Investments P-22 Derivatives and similar commitments P-23 Capital adequacy and solvency P-24 Intermediaries P-25 Consumer protection P-26 Information, disclosure and transparency toward markets P-27 Fraud P-28 Anti-money-laundering, combating the financing of terrorism NO MNO LO O

Final Considerations Regulatory adequacy is a continuous process. Market changes   conditions change   regulation change; The best way to confirm that market is changing is by considering what is happening in other jurisdictions and knowing what is happening in their markets. There is always a resistance to change / modify existing conditions. Support is helpful (international institutions, government entities, Congress, Industry associations, etc.). Self-assessments give us an idea on where we are. Third party assessments support the required change. Next steps FSAP 2016 (partial) Self assessment 2016-2017 (Revised ICP’s  2015)

Implementing ICPs: Assessment as the First Step Implementing ICPs: Assessment as the First Step. Mexico’s (CNSF) experience José Gerardo López Hoyo Vice-president of Analysis and Sectorial Studies Comisión Nacional de Seguros y Fianzas (CNSF) Insurance and Sureties National Commission