Catastrophic risks do we have enough protection reinsurers view

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1 Image: used under license from Shutterstock.com Catastrophic risks do we have enough protection reinsurers view IV. International Istanbul Insurance Conference Istanbul, 25 th September 2014 Jürgen Brucker

2 Agenda 1. Insurance in the Turkish market versus Eastern European markets 2. Future scenario of the Turkish market 3. Loss events worldwide Loss examples and their economical impact/effect 5. Current position - cession rates / equity 6. Current catastrophic coverage 7. Nat cat models and their limitations 8. Summary and outlook Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 2

3 Insurance in the Turkish market versus Eastern European markets Image: -Oxford- / Getty Images

4 Penetration Non-Life (%) Development of Eastern European markets with respect to primary insurance penetration in a global perspective Per-capita income and primary insurance Non-Life penetration 5,0 4,5 4,0 3,5 Slovenia United States United Kingdom Canada Ireland Germany France Australia 3,0 2,5 2,0 1,5 1,0 0,5 Ukraine India Spain South Africa Czech Republic Croatia Portugal Italy Bulgaria Poland Israel Brazil Hungary Estonia China Turkey Greece Mexico Russia Slovakia Romania Belarus Latvia Austria Belgium Denmark Japan Finland Sweden 0,0 year: GNI per Capita in purchasing power parities (PPP-US$) Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 4

5 Nearly 7% of the global gross domestic product arises from Eastern Europe, in 2013 more than 3.7 tn Regional split of global GDP 2013, in % Total: 56,232 bn MENA 4.8 Sub-Saharan Africa 2.0 Latin America 8.0 North America 24.9 Mature Asia/ Pacific 11.9 Regional split of population 2013, in % Total: 7.1 bn Eastern Europe 6.0 Western Europe 5.7 North America 4.9 MENA 6.3 Sub-Saharan Africa 12.3 Developing Asia 19.0 Western Europe 22.6 Latin America 8.6 Mature Asia/ Pacific 3.5 Eastern Europe 6.7 Emerging Asia 52.6 Source: Munich Re Economic Research, IHS Global Insight Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 5

6 Russia accounts for more than 40% of total Eastern European GDP with the second largest economy, Turkey, lacking far behind GDP share within Eastern Europe 2013, in % Total: 3,774 bn Czech Republic 4.0 Hungary 2.6 Rest of Eastern Europe 22.8 Poland 10.2 Turkey 16.6% or 627bn Slovakia 1.9 Russia 42.0 Source: Munich Re Economic Research, IHS Global Insight Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 6

7 Poland is remarkably strong in Life business, but Russia is still dominating Eastern European insurance markets in general Regional split of primary insurance premiums 2013 Eastern Europe, in % Total: 72 bn* P&C: 48 bn 22,9 8,2 3,8 23,1 14,7 7,4 2,5 15,0 Czech Republic Hungary Poland Russia Slovakia 19,1 2,0 35,3 Turkey Rest of Eastern Europe 13% or 9.4bn C Life: 19 bn * Including Health insurance 3,0 Czech Republic Poland Slovakia Rest of Eastern Europe 30,1 Hungary Russia Turkey 22,1 7,0 6,5 10,6 11,9 7,9 34,0 Czech Republic Hungary Poland Russia Slovakia Turkey Rest of Eastern Europe Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 7

8 The Czech Republic has the highest insurance density and penetration in P&C, Slovakia in Life respectively Primary insurance penetration (premiums in % of GDP) and density (premiums per capita) Insurance penetration P&C 2013, in % Insurance density P&C 2013, in Czech Republic 2,4 Czech Republic 338 Poland 1,8 Poland 188 Slovakia 1,3 Slovakia 176 Hungary 1,2 Hungary 121 Turkey 1,1 Russia 119 Russia 1,1 Turkey 94 0,0 1,0 2,0 3, Insurance penetration Life 2013, in % Insurance density Life 2013, in Slovakia 1,7 Slovakia 223 Poland 1,6 Czech Republic 211 Hungary Czech Republic 1,5 1,5 Poland Hungary Turkey 0,2 Turkey 18 Russia 0,1 Russia 14 0,0 0,5 1,0 1,5 2, Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 8

9 Country profile Turkey Insurance market Turkey Development of premiums, in mn Non-Life Line of business split 2012, in % 1% 2% 0% 1% 0% 4% 12% Life Non-Life 4% 6% 51% Real growth of GDP and premiums, in % 20 Forecast GDP, real (% change, p.a.) Life premiums, real growth (in % p.a.) P&C premiums, real growth (in % p.a.) 20% Motor Engineering Health General Liability MAT Other Property Accident Workers Comp. Credit Legal Exp. Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/2014 9

10 Future scenario of the Turkish market Image: used under license from Shutterstock.com

11 Strong growth of Gross national income per capita since 2000 in all Eastern Europe countries Gross national income per capita, in 000 PPP* USD (purchasing power parity) 35,0 30,0 28,1 27,0 27,8 30,4 25,0 20,0 15,0 10,0 16,6 17,9 24,3 24,1 20,2 19,6 16,3 13,8 13,3 9,2 21,5 18,9 12,9 13,7 14,6 23,1 10,3 12,6 16,2 22,2 5,0 0,0 Czech Republic Hungary Poland Russia Slovakia Turkey e * Purchasing Power Parity (PPP) - A rate of exchange that accounts for price differences across countries allowing for international comparisons of income and prosperity levels. At the PPP US$ rate, PPP US$1 has the same purchasing power in the domestic economy as $1 has in the United States. Source: Munich Re Economic Research, World Bank Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

12 Several Eastern European countries are top global growth primary insurance markets over the projection period Top 25 countries* according to real (inflation adjusted) CAGR** , in % P&C 1 India Indonesia China Malaysia Turkey Colombia Singapore Mexico Russia Thailand United Arab Emirates Poland Brazil Israel South Africa South Korea Argentina Iran Taiwan Ireland Norway Australia United States Venezuela Switzerland 2.2 Life 1 Indonesia Brazil China India Colombia Thailand Poland Philippines Malaysia Chile Mexico Luxembourg Portugal Israel Russia Norway Argentina Singapore Hong Kong Taiwan South Africa South Korea Sweden Italy United States 2.5 Source: Munich Re Economic Research * Based on the 50 largest insurance markets in 2013 according to premium volume (for P&C and Life, respectively) **Compound Annual Growth Rate (CAGR) = annual average growth rate /09/

13 Stronger Growth in Life than in P&C business is expected Expected Life and P&C real (inflation adjusted) growth of PI premiums until 2020, in % Real CAGR* Life ,00 Ukraine Size of bubble: total (Life and Non- Life) primary insurance premium volume ,00 Poland Slovakia 5,00 Slovenia Lithuania Latvia Estonia Turkey Russia Hungary Czech Real CAGR* P&C Rep. 0, ,00 5,00 10,00 15,00 *inflation adjusted compound average annual growth rate Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

14 Loss events worldwide Image: used under license from Shutterstock.com

15 Global Natural Catastrophe Update Loss Events Worldwide 2013 Geographical overview Floods Canada, June Flash floods Canada, 8 9 July Winter Storm Christian (St. Jude) Europe, October Floods Europe, 30 May 19 June Meteorite impact Russian Federation, 15 February Earthquake China, 20 April Floods USA, 9 16 September Severe storms, tornadoes USA, May Hailstorms Germany, July Severe storms, tornadoes USA, May Typhoon Fitow China, Japan, 5 9 October Typhoon Haiyan Philippines, 8 12 November Hurricanes Ingrid & Manuel Mexico, September Floods Australia, January 880 Loss events Earthquake (series) Pakistan, September Floods India, June Heat wave India, April June Natural catastrophes Geophysical events (earthquake, tsunami, volcanic activity) Hydrological events (flood, mass movement) Extraterrestrial events (Meteorite impact) Selection of significant loss events Meteorological events (storm) Climatological events (extreme temperature, drought, wildfire) Source: Geo Risks Research, NatCatSERVICE As at January 2014, 2014 Munich Re 22/09/

16 NatCatSERVICE Loss events worldwide Number of events Number Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) 2014 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at February /09/

17 NatCatSERVICE Loss events worldwide Overall and insured losses bn US$ Overall losses (in 2013 values)* Insured losses (in 2013 values)* *Losses adjusted to inflation based on country CPI Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at February /09/

18 NatCatSERVICE Significant loss events worldwide costliest events ordered by insured losses Date Event Affected area Overall losses in US$ m original values Insured losses in US$ m original values Fatalities Hurricane Katrina, storm surge USA: LA, New Orleans, Slidell; MS, Biloxi, Pascagoula, Waveland, Gulfport; AL; FL 125,000 62,200 1, Earthquake, tsunami Japan: Honshu, Aomori, Tohoku; Miyagi, Sendai; Fukushima, Mito; Ibaraki; Tochigi, Utsunomiya 210,000 40,000 15, Hurricane Sandy, storm surge Bahamas, Cuba, Dominican Republic, Haiti, Jamaica, Puerto Rico, USA, Canada 68,500 29, Hurricane Ike USA, Cuba, Haiti, Dominican Republic, Turks and Caicos Islands, Bahamas 38,000 18, Hurricane Andrew USA: FL, Homestead; LA; Bahamas 26,500 17, Floods Earthquake Thailand: Phichit, Nakhon Sawan, Phra Nakhon Si Ayuttaya, Pathumthani, Nonthaburi, Bangkok USA: CA, Northridge, Los Angeles, San Fernando Valley, Ventura, Orange 43,000 16, ,000 15, Hurricane Ivan, storm surge USA, Caribbean, Venezuela, Colombia, Mexcio 23,000 13, Earthquake New Zealand: Canterbury, Christchurch, Lyttelton 16,000 13, Hurricane Wilma Bahamas, Cuba, Haiti, Jamaica, Mexico, USA 22,000 12, Source: Munich Re, NatCatSERVICE, Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at February /09/

19 The most expensive natural catastrophes ever recorded took place in the largest economies in absolute terms The four natural catastrophes with the highest overall losses in US$ bn (in 2012 values) Japan 2011 (earthquake and tsunami) Japan 1995 (earthquake) USA 2005 (Hurricane Katrina) China 2008 (Earthquake Annual average The four natural catastrophes with the highest insured losses in US$ bn (in 2012 values) USA 2005 (Hurricane Katrina) Japan 2011 (Earthquake and tsunami) USA, Karibik 2012 (Hurricane Sandy) USA 1992 (Hurricane Andrew) Annual average Source: Munich Re Geo Risks Research, Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

20 Loss examples and their economical impact/effect Image: Munich Re

21 The overall economic effect results from both the direct and the indirect effects Economic effects of natural catastrophes Overall effect Direct losses Direct consequences of the forces of nature Usually not directly evident from the development of GDP* Personal injury Direct economic losses, e.g. damage to capital assets and resources Indirect effects = positive + negative indirect effects All effects not caused directly by the natural catastrophe but by the resultant direct losses Indirect effects are usually changes in GDP compared with the hypothetical development of GDP in the absence of a natural catastrophe Negative indirect effects, e.g. through Loss of production due to destroyed installations Degradation of human capital Damaged and destroyed infrastructure Often higher inflation Frequently, an increase in government debt Positive indirect effects, e.g. through Reconstruction stimulus Prosperity incentives, e.g. construction of new, betterquality houses Creative destruction, e.g. the destruction fosters innovation; new production facilities are more modern than those destroyed *) Exemptions are droughts and heat waves which directly impair GDP Source: Munich Re Economic Research Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

22 Natural catastrophes represent a great economic challenge, particularly for emerging economies Distribution of direct losses* across country groups 3,0% 2,5% Average percentage of direct losses with respect to GDP 2,0% 1,5% 1,0% 0,5% 0,0% Industrialised economies Emerging economies Developing economies *) Only natural catastrophes included in Munich Re s catastrophe classes 4-6 are shown here. Emerging economies are those countries whose inhabitants have a middle percapita income on average. According to the World Bank, middle income is between US$ 1,036 and US$ 12,615 (based on 2012 figures). Countries with lower average income are referred to as developing economies here, and countries with higher income as industrialised economies; source: Munich Re NatCat SERVICE, Economic Research 22

23 The Marmara earthquake in Turkey in 1999 caused widespread damage including to 32% of the production facilities Direct economic losses: US$ 12bn Of the 1,062 companies located in the Kocaeli region, 345 (32%) were damaged On average, these companies were out of production for 35 days It was not until 18 months after the earthquake that capacity utilisation returned to levels roughly similar to those seen prior to the catastrophe Image: dpa Picture Alliance / Pierre Verdy Source: Munich Re Geo Risks Research, Economic Research, Claas Menny (2011): Effects of natural catastrophes on companies: An empirical study of the Maramara earthquake from 17 August 1999, dissertation, KIT; 22/09/

24 Example: Although the earthquakes in Haiti and New Zealand were of roughly similar strength, the effects in Haiti were far worse, i.a. due to the relatively lower level of insurance penetration Haiti earthquake (2 Jan. 2010) Magnitude 7.0 New Zealand earthquake (4 Sep. 2010) Magnitude 7.1 Image: Benjamin J. Myers / Corbis Image: dpa Picture Alliance / David Alexander Overall losses US$ 8bn Overall losses US$ 6.5bn Insured losses US$ 200m (2.5%*) Insured losses US$ 5.2bn (80%*) Cumulative indirect effect** -3.5% of GDP Cumulative indirect effect** -0.4% of GDP Houses destroyed 285,000 Houses damaged 100,000 Fatalities 222,570 (2.5% of the population) Fatalities 0 *) Ratio of insured losses to overall losses, **) Calibration based on von Peter, von Dahlen and Saxena (2012): Unmitigated Disasters? BIS Working papers No Source: Munich Re Geo Risks Research, Economic Research; source right-hand photo: National Geographic, UN Development Programme, IFRC; 22/09/

25 Example: Hurricane Gustav caused higher absolute damage in the USA, but lower relative damage than in Jamaica. This is explained, in part, by the countries respective absolute economic strength and economic level of development USA Jamaica Image: dpa Picture Alliance / Landov Bates Image: dpa Picture Alliance / Collin Reid GDP 2008* US$ 14,292bn GDP 2008* US$ 14bn GDP per capita 2008** US$ 43,161 GDP per capita 2008** US$ 7,437 Overall losses* US$ 4.3bn Overall losses* US$ 0.21bn Overall losses (relative to GDP) 0.03 % Overall losses (relative to GDP) 1.5% Fatalities 11 Fatalities 15 *) In original values, **) In 2005 values and purchasing power parity; source: Global Insight, Tropical Cyclone Report: Hurricane Gustav from the National Hurricane Center; Munich Re Geo Risks Research, Economic Research; 22/09/

26 In emerging economies, government debt often rises significantly following natural catastrophes* Per-capita debt in industrialised economies Per-capita debt in emerging economies 50% 60% Hypothetical development without catastrophe = trend = baseline 0% -50% -100% -150% Confidence band for estimate Years after catastrophe 40% 20% 0% Figure on the left: for industrialised economies there is no statistically significant deviation in percapita debt versus its trend (= baseline ) after the natural catastrophe takes place in year 0 Figure on the right: emerging economies must expect on average a statistically significant increase in per-capita debt (nearly 30% after five years) Source: Melecky M. et Raddatz C.(2011): How Do Governments Respond after Catastrophes? World Bank; Munich Re Economic Research; *) In this analysis, only weather-related (climatic) natural catastrophes is accounted for 22/09/

27 Example: In Chile, government borrowing increased by around 70% in the earthquake year of 2010 Government debt Chile in bn pesos Government debt (left axis)) Growth rate of government debt (right axis) Start of 2010: Earthquake in Chile Source: Munich Re Economic Research, IMF Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

28 Insurance cover significantly helps economic recovery following a natural catastrophe Illustration of indirect effects in the short and medium term GDP level Several years Occurrence of catastrophe End of reconstruction Hypothetical GDP development without catastrophe Increase in GDP from the economic stimulus of reconstruction (= indirect positive effects) GDP losses following the catastrophe (= indirect negative effects) Time GDP development in countries with low insurance market penetration GDP development in countries with high insurance market penetration Besides the direct losses from a natural catastrophe (e.g. buildings destroyed), there are also indirect losses (e.g. loss of production in a destroyed factory), which can seriously impact economic output in subsequent years "Positive" indirect effects (e.g. reconstruction boosting the economy) cannot usually compensate for the "negative" indirect effects Insurers provide funds, thus limiting indirect losses Three scientific studies of recent years all came to the same conclusion: Higher insurance market penetration helps to overcome the indirect consequences of natural catastrophes Source: MR Economic Research; graph based on Hallegatte S. et al. (2010): "The Economics of Natural Disasters. 22/09/

29 Current position - Cession rates / equity Image: used under license from Shutterstock.com

30 Business model appears to be more relevant than company size in explaining cession rate Quantitative analysis: Size vs. cession per business model Non-Life cession rate 60% US Comm. US personal US commercial 50% Global diversified Bermuda Bancassurer 40% EU diversified Lloyds 30% Global divers. Emerging markets Japanese 20% EU divers. Chinese Other 10% 0% US Pers Size Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

31 Bn TRY Equity development does historically not reflect business growth Equity to NWP-Ratio declines over time Turkey Equity position of NL insurance companies 16,0 Equity vs Net Written Premium 120% 14,0 12,0 9* 110% 83% 103% 12,4 NWP 14,5 100% 80% 10,0 10,0 Equity / NWP in % 60% 8,0 6,0 4,0 51% 41% 6,7 6,3 5,7 5,6 5,1 5,0 5,1 Equity % 6,9 40% 20% 0% Source: Hazine Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

32 The current Turkish cession behavior currently does not reflect capital intensity following Solvency II excl. Cat Cession Ratios vs Solvency II Capital intensities Ceded and retained Business 4% 4% 9* 78% 96% 96% 22% Fire & Gen Dmg* MTPL MoD Retained Cession SII Capital necessary per premium unit written 54% 9* 33% 28% 28% 12% 6% 21% 26% 22% Fire and Gen Dmg* MTPL MoD Premium Reserve * Including Engineering and Subsidized Agriculture Insurance ** per 100 TRY, 3 yrs development, after Diversification Source: Hazine, Munich Re analysis 22/09/

33 Current catastrophic coverage Image: used under license from Shutterstock.com

34 NatCat Capacity (without faculative and int. Programs) Split of Nat Cat capacity requirements bn Total Total 10 Total Total Additional 2-3bn for facultative covers and int. programs to be added EQ Japan - 55bn w.o. Government scheme Demand for RI is smaller as some programs from int. comp. are placed with H.O. 8 6 Cat XL TCIP Cat XL TCIP Cat XL TCIP 12 Low retention levels in proportional covers Low attachment points for Cat XL covers 4 2 M Fire prop. Eng. prop. Others M Fire prop. Eng. prop. Others M Fire prop. Eng. prop. Others Further substantial increase expected from TCIP (currently 6,5mio insured 2017:9-10mio) Subdued growth rate due to depreciation of TRY vs Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

35 Nat cat models and their limitations Image: used under license from Shutterstock.com

36 Vendor models Multi-Model Comparison Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

37 Model components Seismic Hazard Vulnerability Exposure Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

38 Seismic Hazard Ground Motion Prediction Equation (GMPE): selection, applicability, calibration, uncertainty Site effects: global and regional studies, Vs30 maps (resolution) Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

39 Vulnerability Regional differences Building stock (building height distribution). Ground motion response (pga, 1 s ) Construction year, building codes Retrofing, special seismic devices Mean damage ratio (converting damage to economical loss) Historical losses/calibration Construction/reconstruction labor costs Uncertainty Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

40 Vulnerability Construction year, building codes Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

41 Exposure Distribution of insured values GIS information Building stock: distribution per regions/countries, differences rural and urban areas. Use of Cadaster information. Distribution of building heights. Cultural/regional differences Detailed information from our clients Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

42 Exposure Building stock: distribution per regions/countries, rural and urban areas differences. Example: % of buildings with masonry walls and wood by municipalities (no main cities) Source: DANE, dane.gov.co Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

43 Summary and outlook Image: used under license from Shutterstock.com

44 Summary and outlook Overall strengthen capital position of Turkish insurance companies Following the introduction of a new solvency regime re-thing cession practice Standard Turkish EQ model (vendor or own) is needed and to be used Currently nat cat model uncertainties are to be considered Lower model uncertainties be means of improved data quality Improve risk assessment and risk management procedures especially for highly exposed risks and industries Consider additional balance sheet protection cover Catastrophic risks do we have enough protection reinsurers view / Jürgen Brucker 22/09/

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