Sean Mooney New York Assessing the World Bank Contribution to the Development of Global Insurance Markets: A Market Perspective June 2, 2003

Guy Carpenter 2 Agenda Introduction to Guy Carpenter What the “Market” wants What the World Bank is doing What the World Bank can do Case Study Conclusion

Guy Carpenter 3 Guy Carpenter & Co., Inc. The reinsurance intermediary subsidiary of Marsh & McLennan Companies MMC is a global professional services firm with annual revenues exceeding $10B. Core businesses: – Risk and insurance – Investment management – Consulting MMC has approx. 59,000 employees who provide analysis, advice and transactional capabilities to clients in more than 100 countries.

Guy Carpenter 4 Guy Carpenter & Co., Inc. 49 offices in 22 countries employees Leading catastrophe risk reinsurance intermediary: – Over $3B in catastrophe reinsurance premium – Over $35B in Limits placed annually Intermediary for numerous governmental catastrophe programs

Guy Carpenter 5 What the “Market” wants Reinsurance is a global business Reinsured natural disaster exposures are heavily concentrated - USA, Europe, Japan Better diversification = better risk profile Strong desire for additional diversifying risk As such, the “Market” welcomes the development of new catastrophe insurance markets Preference for market-based solutions

Guy Carpenter 6 What The World Bank is Doing TCIP is the case study for Public/Private partnership: – World Bank worked with Turkish Govt throughout – Brought together the necessary resources and expertise. Successful first effort Enthusiasm for the efforts of the World Bank Reinsurers support efforts in other countries

Guy Carpenter 7 What The World Bank Can Do Reinsurers recognize that developing economies can benefit from external funding and expertise in: – Risk mitigation – Set up of catastrophe insurance programs – Catastrophe risk transfer techniques  Reinsurance  Capital markets Organization and funding required for these – World Bank is well suited to this task

Guy Carpenter 8 What The World Bank Can Do Reinsurers recognize that The World Bank is unique: – Mission to help the World’s poor – Expertise in large, complex project management – Not profit motivated – Can provide low-cost funding – Important to developing countries Private market natural disaster experts do not share all of these attributes

Guy Carpenter 9 What The World Bank Can Do Reinsurers see key roles of World Bank: – Impartial Interface with Government bodies – Project management, if required – Funding for studies:  Mitigation  Feasibility  Insurance and risk transfer  Low cost financing of “retained” risks -- e.g. reinsurance program deductibles.

Guy Carpenter 10 What The World Bank Can Do Reinsurers expect even smoother future projects: – Benefits of experience – All parties understand processes and approaches better e.g.:  Reinsurance broker and reinsurer interaction  World Bank tender process Reinsurers applaud and encourage World Bank efforts

Case Study: Taiwan Residential Earthquake Insurance Pool (TREIP)

Guy Carpenter 12 Case Study: Taiwan Residential Earthquake Insurance Pool (TREIP) Formed April 1, 2002 Formed as a result of Chi-Chi Earthquake, 9/21/1999 Lack of Residential Earthquake Insurance cover Vulnerability of Taiwan to Earthquakes

Guy Carpenter 13 Chi-Chi Earthquake September 21, 1999, 1:47 am (local time) Magnitude Central part of Taiwan

Guy Carpenter 14 Chi-Chi Earthquake Over 2,400 lives were lost More than 10,000 people were injured Over 5,000 buildings collapsed Taiwan’s worst disaster since the Shin-Chu Taichung earthquake of April 1935, magnitude 7.1, where 3,325 lives were lost.

Guy Carpenter 15 Vulnerability of Taiwan to Earthquakes Taiwan is a seismically active region Affected by many earthquakes each year Taiwan is being compressed and forms a transitional zone between two areas of subduction, as a result of the collision between the Philippine and Eurasian plates

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Guy Carpenter 17 Lack of Residential Earthquake Insurance cover Prior to the Chi-Chi earthquake, only about 1% of the residences in Taiwan had earthquake insurance Earthquake insurance was available as an endorsement to long term fire policies

Guy Carpenter 18 Taiwanese Government’s Main Goal Availability of earthquake damage compensation to Taiwan residents – Concern as to whether compensation would be available to most residents following an event – Includes a quasi-mandatory purchase of earthquake cover

Guy Carpenter 19 Secondary Goals Affordable Insurance Minimize government budget exposure – Ministry of Finance (MOF) required all insurance companies to provide coverage for residential earthquake risk Public/Private cooperative solution

Guy Carpenter 20 Characteristics of Taiwan Taiwan is a small island, but is one of the most densely populated countries in the world. The earthquake risk is very high. Taiwan has numerous fault lines, and relatively high probabilities of activity along the fault lines. Traditionally residents are reluctant to purchase property insurance. This is a global trait, but appears to be relatively higher in Taiwan.

Guy Carpenter 21 Characteristics of Taiwan (Continued) Until TREIP, residential insurance policies in the main were purchased for the life of the mortgage. Single family western-style residences are rare (seven percent of all households).

Guy Carpenter 22 Insurance Policy Fixed Premium per Household: NT$ 1,459 Building, maximum sum insured amount: NT$1.2 million Contingent Living Expenses (CLE): NT$180,000 No cover for contents Flat Rate (no variation by location or type of structure)

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Guy Carpenter 24 Funding Structure of TREIP Pro Rata Layer 4 Layer 3 Layer 2 Layer 1

Guy Carpenter 25 Program Administration TREIP managed by Central Reinsurance Corporation (CRC) – Part owned by the Government – Long time reinsurer of Taiwanese and international risks – Professional/ well established expertise in reinsurance

Guy Carpenter 26 Current Situation Number of Policies as of 12/31/2002: 495,824 Total Exposure: NT$ 750 Million Take-up Rate: 8.7%

Guy Carpenter 27 Summary TREIP successfully launched Stable financial support – Excellent public/private partnership – Strong reinsurance support Achieving key goal of availability

Guy Carpenter 28 Achieving Strong Support from Reinsurers: Lessons Learned Professional Management of TREIP High Quality Data Adequate original pricing Legal structures in place to manage disputes Defined claims settlement process

Guy Carpenter 29 Role for the World Bank? Taiwan is a relatively wealthy economy with substantial resources thus able to: – Fund  Feasibility studies  Earthquake risk assessment (modeling) – Domestically retained substantial risk Other economies not in the same position: – World Bank can provide the foregoing for less developed economies

Guy Carpenter 30 Conclusion World Bank should continue its efforts: – Improve economies of developing nations – Simultaneously, help the international risk transfer markets function more efficiently

Sean Mooney New York Assessing the World Bank Contribution to the Development of Global Insurance Markets: A Market Perspective June 2, 2003