Reinsurance Concepts| AIIF 2015| Baku, 2 nd July 2015 a AIIF Conceptional ideas for reinsurance structures 1

a The main drivers of earnings volatility 2

a 3 UW results drive overall P&C profitability Risk factors leading to UW volatility Earnings Contribution to earnings volatility* * Source: ER&C data; based on data from P&C companies in the US, Canada, France, Germany, Italy, UK, Japan, Australia Based on the observations from the last decade, the UW result has been more volatile than current investment result and also realised gains/losses. This makes the UW volatility and performance to a key driver of P&C insurers' bottom line and value generation. Current UW yearPast UW years Company's specific risk Systematic risk Price Legal reforms UW process UW cycle Macroeconomic factors Claim reserves Frequency of medium local events Large events Inflation Line size Portfolio diversification

a 4 Industrial Lines – Increasing Retention Leads to Higher Loss Ratio Volatility The retention ratios of the large European players in corporate business are quite different. Based on the observation period , there is a clear correlation between retention ratio and loss ratio volatility: Players with a comparably higher retention are facing are higher net loss volatility. Source: Companies Disclosure 2012 Retention RatioCorrelation Retention & Loss Ratio Volatility* * Average retention and standard deviation of net loss ratio from , exception Talanx retention average

a The Azerbaijan insurance market has consistently shown growth rates in recent years, which requires a continuous strengthening of the capital base. Retained earnings are a key contributor to finance future growth. Underwriting volatility and performance is the key driver of P&C insurers' bottom line and value generation. The tendency in Reinsurance buying behaviour is to strive for higher retention ratios especially on Commercial and Industrial books. We see first signals for the same direction also in Russia, partly also due to loss activity and increased reinsurance costs at the lower end. There is a distinct correlation observable between higher retention ratios and higher result volatility especially for large single risk business (Property and Construction). 5 Conclusions Companies need to find the right balance between volatility and reinsurance budgets.

a Volatility reduction through reinsurance 6 How to quantify the positive impact of reinsurance on earnings stability?

a 7 Structural outline Typical non-proportional reinsurance program in the Russian market threshold of large losses First step Define scope of cover: utilize diversification effects over similar lines of business and/or legal entities

a 8 Structural outline Typical non-proportional reinsurance program in the Russian market threshold of large losses Second step Increase retention of severity covers and define retention for frequency protection 2 nd step

a 9 Structural outline Typical non-proportional reinsurance program in the Russian market threshold of large losses 3 rd step Third step Define risk preference on basis of annual result in terms of AAD and AAL (transfer frequency uncertainty) 3 rd step Ideal effect if structured properly: reduction of r/i budget with less ceded margin, thus increased net result comparable net loss volatility and, moreover, capital requirements from an economic perspective thus, extremely efficient protection in terms of volatility and frequency phenomenon, utilizing diversification over lines of business

a 10 Multiline Multiyear Aggregate XL Graphical Illustration Contributing Sublayer … … Contributing Sublayer Marine Marine Contributing Sublayer Engineering Engineering Contributing Sublayer Property Property Annual liability Year 1Year 2 Year 3 Annual deductible Profit Commission at commutation Overall limit Annual premium Retention

a Efficient severity protection 11 Facultative Value Propositions

a 12 Facultative Solutions by Swiss Re Our offering: provide a facultative solution to make best use of cedent retention, treaty protection and complementary, tailor-made coverage.

a 13 Facultative Solutions Our Offering Optimised facultative structure in combination with non-proportional treaties covering peak risks and protecting fluctuations between locations. Example : Non-proportional treaty with a retention of 2.5m and one reinsurance treaty layer of 7.5m xs 2.5m. Client needs protection on all locations in excess of 10m MPL.

a 14 Facultative Solutions Our Offering Spot-Re (non-prop.) Selective facultative structure in combination with non-proportional treaties covering few peak risks of an account to optimise reinsurance costs. Cautious with uncertain MPL-estimates and Interdependencies. Example : Non-proportional treaty with a retention of 2.5m and one reinsurance treaty layer of 12.5m xs 2.5m. One location exceeds the treaty capacity and the cedent needs to protect this peak.

a Facultative Solutions Our Offering Carve-Out of Perils 15 Mostly used for Natural Catastrophe perils, typically in regions where few accounts expose the cedent in a region where he usually doesn’t write business (gross/net protection). Also common for Terrorism peril which usually is excluded from obligatory treaties. Example : Surplus treaty per risk and Cat-XL on occurance basis. Cedent follows a loal client on an International Insurance Program for his plant in Mexico. Cedent buys out this peril on this location. Policy extract: Sublimits Earthquake : Germany€ 50,000,000 Austria€ 25,000,000 Mexico€ 30,000,000 Others€ 20,000,000 As per today Swiss Re has capacity available for all NatCat-scenarios !

a Facultative Solutions Our Offering Facultative Facilities (coded-XL) 16 Solution for cedents with non-proportional treaties growing into larger accounts of a homogenous class missing the critical mass for a treaty limit increase. Cedent does not have to pay for unused treaty limit any longer but only for accounts that expose the Fac. Facility. Example : Non-proportional treaty with a retention of 5m and reinsurance treaty layers of 25m xs 5m. Cedent writes a homogenous portfolio with few risks above treaty capacity.

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