1. Financing the Risk of Natural Disasters A Reinsurer‘s Perspective on the TCIP Münchener Rück Munich Re Group Speaker: J.-Adrian von Lucius, Senior Executive Manager Munich Reinsurance Company, Munich Washington, 2nd-3rd June 2003

2. A Reinsurer‘s Perspective on the TCIP 2 vLu Washington 06/2003 Contents 1.Background Information to the TCIP 1.1 The establishment of the TCIP 1.2 The objectives of the TCIP 1.3 Main characteristics of the TCIP 2.The Situation of the TCIP Today 2.1 Some facts and figures 2.2 Main observations 3.TCIP from a reinsurer’s perspective 3.1 The role of reinsurance 3.2 Why did Munich Re participate? 3.3 Munich Re’s experience so far 3.4 Outlook for sustained reinsurability 4.Conclusions

3. A Reinsurer‘s Perspective on the TCIP 3 vLu Washington 06/2003 1. Background Information to the TCIP Courtesy of www.wowturkey.com

4. A Reinsurer‘s Perspective on the TCIP 4 vLu Washington 06/2003 1.1 The establishment of the TCIP Turkey is heavily exposed to natural catastrophes. –the main exposure is related to earthquake –the 1999 Marmara earthquakes caused 18.243 deaths and economical loss of USD 2,400,000,000 * –during the last 12 months over 60 earthquakes ranging from 4.0 to 6.2 on Richter Scale have occurred. The Afyon earthquake in February 2002 has been the most damaging earthquake in 2002. The “latest” large earthquakes recorded were in Izmir in April 2003 (5,6 Richter Scale) ** and Bingöl May 2003 (Richter Scale 6,4) –major earthquake in Istanbul is expected to have tremendous impact on financial and human resources (*) Source: PM Ecevit’s Press Conference 17.8.00 (**) Source: Websites of Bosphorus University (Kandili Observatory) and DASK

5. A Reinsurer‘s Perspective on the TCIP 5 vLu Washington 06/2003 1.1 The establishment of the TCIP –public and private partnership (initial co-operation between the Government of Turkey, the World Bank, brokers and reinsurers) ‒ commencement of the Turkish Catastrophe Insurance Pool (TCIP) September 2000 This constant and very real exposure with severe economic consequences has lead to the implementation of the concept of “Natural Catastrophe Risk Management“ at country level:

6. A Reinsurer‘s Perspective on the TCIP 6 vLu Washington 06/2003 1.2 The Objectives of the TCIP >> –to ease the financial strain on public and private finances in case of an earthquake (“Catastrophe Risk Management”, “Country Risk Management”) –to achieve risk distribution and at the same time to spread the financial charge arising from earthquake to international reinsurance and capital markets (risk pooling, risk sharing, risk transfer) –to decrease the dependency on reinsurance by building up own funds within the Pool

7. A Reinsurer‘s Perspective on the TCIP 7 vLu Washington 06/2003 1.2 The Objectives of the TCIP –to provide earthquake coverage for households at affordable premiums –to use the insurance system as a means of supporting constructions in accordance with the earthquake building code (requirements deriving from risk management) –to increase risk awareness and demand for insurance within the society

8. A Reinsurer‘s Perspective on the TCIP 8 vLu Washington 06/2003 1.3 Main Characteristics of the TCIP >> –earthquake insurance compulsory for all insurable residential buildings (e.g. exclusion of all buildings constructed after 27.12.1999 without a construction license) –rates are based on the square meter reconstruction prices and vary according to construction type and seismological exposure –First Loss insurance basis up to a pre-designated maximum amount (approx. USD 24,000). For buildings with higher sums insured => complementary insurance via conventional insurance system

9. A Reinsurer‘s Perspective on the TCIP 9 vLu Washington 06/2003 1.3 Main Characterstics of the TCIP ‒ deductible of 2% of the sum insured to be borne by the insured ‒ insurance companies and their distribution channels acting as distributors only – not as risk carriers. They have no responsibility to pay the claims ‒ centralization of policy issuance and statistical data on internet-based online system (see homepage www.dask.com.tr) www.dask.com.tr ‒ Pool is managed by a Board of 7 members. Milli Re is “Operational Manager” of TCIP. Pool has no staff of its own

10. A Reinsurer‘s Perspective on the TCIP 10 vLu Washington 06/2003 2. The Situation of the TCIP Today

11. A Reinsurer‘s Perspective on the TCIP 11 vLu Washington 06/2003 2.1 Some Facts and Figures ‒ a total of 2,054,000 policies in force as of March 2003, reducing to 1,840,000 in April * ‒ policy production levelling off, tendency to decrease ‒ countrywide penetration only 16% of total insurable dwellings (est. at 13 million) in spite of advertising efforts on large scale. Penetration rate in Istanbul city 27,3% ‒ high concentration of policies in the greater Istanbul region (40% of total number of policies issued) ‒ since June 2001 the acquisition commission differentiates between Istanbul and rest of country to promote better geographical spread (*) Source: DASK

12. A Reinsurer‘s Perspective on the TCIP 12 vLu Washington 06/2003 2.1 Some Facts and Figures 43,3% 43,5%43,3% Policy Number Development At best: Static number of policies 42.7% Source: i.a. DASK website (*) Cresta Zones 1+3

13. A Reinsurer‘s Perspective on the TCIP 13 vLu Washington 06/2003 2.2. Main Observations –penetration goals not achieved leading to insufficient fund-building –legal enforcement needs to be improved –pool revenues as yet not commensurate with reinsurance costs –loss mitigation not yet addressed –insurance companies’ estimations of cross-selling potential not realised

14. A Reinsurer‘s Perspective on the TCIP 14 vLu Washington 06/2003 3. The TCIP from a Reinsurer‘s Point of View

15. A Reinsurer‘s Perspective on the TCIP 15 vLu Washington 06/2003 3.1 The Role of Reinsurance ‒ world’s leading reinsurers have an important advisory role in the conception and operation of the TCIP ‒ as capacity provider, reinsurance is instrumental to the financing of the TCIP ‒ reinsurers are the main risk carriers ‒ attracting high quality reinsurers is necessary for placement, especially when higher penetration is achieved

16. A Reinsurer‘s Perspective on the TCIP 16 vLu Washington 06/2003 3.2 Why did Munich Re Participate? ‒ to support the Turkish market and the World Bank ‒ the TCIP project as such is sound ‒ professional management of the TCIP ‒ the objectives of the Pool concur with the strategy of Munich Re in the Turkish market ‒ no conflict between Munich Re’s commitment to the Turkish market and to individual local insurance companies ‒ possibility of achieving a homogeneous portfolio (company and geographical spread) ‒ efficient placement process of reinsurance programme

17. A Reinsurer‘s Perspective on the TCIP 17 vLu Washington 06/2003 3.3 Munich Re‘s Experience so far ‒ co-operative working relationship with the TCIP, the World Bank and the intermediaries ‒ all players need to be flexible as the Pool is still in its developing stage ‒ claims so far not affecting the reinsurance cover, although several claims have occurred and have been settled by the Pool >>

18. A Reinsurer‘s Perspective on the TCIP 18 vLu Washington 06/2003 3.3 Munich Re‘s Experience so far ‒ involvement of competing brokers will not guarantee more competitive reinsurance costs ‒ capacity - and especially sound capacity - has a price ‒ pooling of various professional ideas and approaches leads to better solutions The present placement procedure is efficient and appears to be the best way to place a cover of this size:

19. A Reinsurer‘s Perspective on the TCIP 19 vLu Washington 06/2003 3.4 Outlook for Sustained Reinsurability Threats to reinsurability: Lack of incentives for companies to market policies ↳ low penetration and ensuing lack of funds ↳ uncertainty of the development of the Pool ↳ insufficient reinsurance protection ↳ unattractiveness to sufficiently rated reinsurers

20. A Reinsurer‘s Perspective on the TCIP 20 vLu Washington 06/2003 3.4 Outlook for Sustained Reinsurability How can reinsurability be maintained? ‒ Reinsurance must be adequately priced ↳ scarcity of capital, hard market cycle ↳ the right price attracts capacity (capacity costs money) ↳ the reinsurance industry also needs to achieve returns => “Back to Basics” ↳ reinsurers must earn money to build up earthquake reserves! >>

21. A Reinsurer‘s Perspective on the TCIP 21 vLu Washington 06/2003 3.4 Outlook for Sustained Reinsurability How can reinsurability be maintained (ctd.)? ‒ is there enough sound reinsurance capacity available in case of high penetration (leading to very high exposures)? –Alternative Risk Transfer can be a solution (top-up covers) –continuation of sound management of the Pool –more balanced geographical spread –government support in passing the necessary laws (enforcement of compulsory insurance and penalty in case of non-compliance)

22. A Reinsurer‘s Perspective on the TCIP 22 vLu Washington 06/2003 4. Conclusions

23. A Reinsurer‘s Perspective on the TCIP 23 vLu Washington 06/2003 4. Conclusions ‒ TCIP is a viable project also from a reinsurer’s view ‒ strong commitment / actions required by all parties concerned (Government / lawmakers, insurers, reinsurers, intermediaries and World Bank) ‒ TCIP must be economically viable for all parties involved (insureds, risk carriers, distributors) ‒ the issues of penetration, geographical spread etc. must and can be overcome ‒ the TCIP experience and lessons learned can well serve as a “benchmark” model of how to apply risk management concepts to the management of major natural catastrophes at country level

24. Thank you for your interest. J.- Adrian von Lucius Münchener Rück Munich Re Group