A BRIGHT LOOK AT THE PRESENT AND WHAT THE FUTURE HOLDS JULY 07, 2011 TOMAS SINICKI, NEXUM INSURANCE TECHNOLOGIES 2nd International Insurance Forum Azerbaijan Insurers Association

EXCITING TIMES NEW MTPL ERA

Key novelties New law aimed at increasing awareness of importance of insurance through stricter adoption of compulsory insurance Compulsory insurance Bureau organization – Implementation of regulations related to compulsory insurance – Market facilitator (not regulator) Common MTPL database – Exchange of information among stakeholders – Fraud prevention/detection

NEW MTPL ERA Great expectations Greater penetration => increase in the number of insureds Greater insurance awareness => boost in sales of voluntary insurance products Greater premium Greater claims

NEW MTPL ERA Example: acceleration of Russian MTPL market Compulsory MTPL in Russia since 2003 People perceiving CMTPL as a State imposed tax dropped from 40% in 2005 to 30.4% in 2006 CMTPL was a catalyst, which significantly raised insurance awareness of population and encouraged purchasing other types of insurance Source: Rogozin, 2006

NEW MTPL ERA Example: acceleration of Lithuanian non-life insurance market Number of non-life policies nearly doubled (95.4%) Premium went up substantially (65.2%) Claims were quick to catch up (63.8%) Source: Lithuanian Insurance Supervision Authority

NEW MTPL ERA 1991 Independence from the Soviet Union Modern insurance market 2002 Compulsory MTPL Motor Insurers’ Bureau 2004 EU membership (COBX membership) Printed policy (templates still in use) 2007 Internet sales take off The so-called ‘white policy’ Example: acceleration of the Lithuanian MTPL market (key events)

NEW MTPL ERA Example: acceleration of Lithuanian non-life insurance (second jump) Second wave of growth after joining EU More focus on cost control Loss ratio remains stable Combined ratio goes down due to decreasing cost ratio Source: Lithuanian Insurance Supervision Authority

NEW MTPL ERA Implications for business acquisition management Balancing portfolio away from dependence on Motor is very challenging in many markets Example: in Poland Motor business acquisition costs have been growing steadily over the last decade Source: Kwiecien & Poprawska, 2011

NEW MTPL ERA Implications for operations management Increase in the volume of business leads to greater administrative challenges – Keeping acceptably low MTPL loss ratio in the long run is extremely difficult – Cost control will become the most important management component – Expect greater focus on process efficiency Increase in the number of claims leads to challenges on the client service side and concerns over efficiency improvement – Typically ignored at the outset of the industry; often recalled too late – Expect greater focus on process efficiency – Poor systems not only cost too much but also leave you without data useful for fraud detection More investment in information technologies – Efficiency in business acquisition and claims handling will be pivotal – Aim at becoming less human intensive than your peers from the start

WHAT ELSE HAS WORKED FOR US CHANNELS

BANCASSURANCE Insurance market in the Baltic States benefitted enormously from bancassurance – Non-life insurance intermediation was seen by a bank as a profit center – First home/car purchases were financed by loans in Adoption of compulsory MTPL law coincided with very loose credit policies by Scandinavian banks – Development of insurance market cannot be attributed solely to adoption of compulsory MTPL law – Cross/up-selling was much easier in times of prosperity Conclusion – Vital channel, not only for life but also (increasingly) non-life insurance – Work on persuading banks to get involved early

ALTERNATIVE CHANNELS Internet – In the Baltic, real take-off in 2007 – Today, over 50% of MTPL policies are bought online Mobassurance – Distribution of policies using mobile operators’ infrastructure and network – In the Baltic started in September 2010 in Estonia – A significant competitor to all major traditional distributors of insurance

SO WHAT CONCLUSIONS

Based on experience in other markets, one can say that given appropriate legal circumstances, market acceleration can be very fast We should expect gains but also prepare for investment in efficiency because pressure on managing costs will increase significantly Balancing portfolio will be an important challenge and is sure to be forgotten Getting banks involved early on may help balance portfolios with less effort than otherwise required

CONCLUSIONS Putting alternative channels to use may come sooner than in most European markets and that would be beneficial to both consumers and insurers In the long run, closer cooperation among market participants will create more discipline and help challenge fraud issues Starting slightly later provides certain advantages; the key is using them properly

THANK YOU