UNDERWRITING PROBLEMS IN CURRENT MARKET CONDITIONS Svetlana CHEPELEVA Deputy Managing director, Chief underwriter Unity Re Ltd. 01 October, 2007 Dagomys, Russia

Basic market statements (2006): Direct insurance GPW (non-life) – $22,29 млрд. (  23,1%) Inward R/I GPW – $3,05 млрд.(  20,2%) Inward R/I / direct business – 13,7% Basic market tendencies in Russia: strengthening of financial abilities of market players; decrease in ‘scheme’ share of business; further M&A development; higher requirements for capital and portfolio structure. Price market trend  underwriting problem as one of the most negative tendencies!

International market: 2006 – loss ratio stabilization, slight market softening; positive dynamics of profits and combined ratio; price trend (rates) stabilization. Russian market: consumer-oriented market and dumping policy; claims, claims and claims; soft in-ward R/I business from CIS neighbours; M&A + western orientation; technical u/w problems.

Consumer oriented market and dumping policy: current market = consumer’s market – not seller’s one; dumping is already a development strategy – not just a tactical tool for competition struggle in the market; extensive development (blowing up NPW without paying enough attention to service, quality and financial back); ‘non-profiled’ in-ward reinsurance and reciprocity; no market barriers for actually bad risks.

Losses: large claims-portents – Azovsteel, Protek, Vestel, Admiral; a rapid growth of classic fire claims; unpredictable results for new & promoted classes, e.g. title insurance and state-contract liability insurance; stop writing of some classes of business (marine, aviation). Soft business from CIS: a very formal approach to insurance  orientation for a minimum policy premium; a dumping squeeze of insurers with no market barriers for bad risks  a significant lack of economical element in the tarification; a final burden of the above is transferred to reinsurer!

М&A and western orientation: much of business is reoriented to foreign markets; need for capitalization rise  leaving the market or searching investor who is often interested in developing ‘scheme’ business – not the classic (re)insurance;

Technical underwriting problems: CAR: placement on annual basis + covering a partly completed construction + rates do not relate to period of construction; agriculture risks: a lack of adequate documentary base and practice for handling accounts, controlling claims; short periods of coverage with no short-rate calculation applicable; Property/CAR: rates are applicable to limit of indemnity – not to a whole insurable value/TSI; a lack of specialized u/w approaches to different types of property (rate for metallurgical plant = rate for office building); stocks & warehouses: the capacity of tens of million dollar is requested without an adequate MDP applicable.

Estimated R/I capacity - Russia: ClassNet capacity, million $. Gross capacity (with treaties), million $ Property25400 Energy15200 CAR20250 Marine hull50120 Cargo50100 Aviation hull535

Factors of further development: forthcoming of the next phase of insurance cycle  firm market and rise of loss ratio! large man-made disasters predicted for nearest future; M&A and capitalization  need for RoE growth  struggle for market share, clients and sales  R/I as the alternative tool for earning  rising NPW  dumping! forcing of market position of foreign global insurers.

Thanks for your attention! Questions and comments: Mob.: