1. World Bank
Washington Risk Management Workshop
October 27, 2005
Building Effective Public Private Partnerships: A Case Study of Turkish Catastrophe Insurance Pool
Eugene N. Gurenko, Ph.D., CPCU, ARe
Sr. Insurance Officer
World Bank*
*currently on staff exchange with Munich Re

2. Presentation Outline:
Historical Background
Main Features of TCIP
Program of World Bank Assistance to TCIP
Status of Program Implementation

3. Turkey’s Seismic Risk Exposure
Existence of the North Anatolian and East Anatolian faults.
Since 1894, around 120 earthquakes with magnitude over 5.0 took place in the country.
Current situation: 70% of the population lives in the 1st and 2nd earthquake zones.

4. Last 50 Years: Earthquakes in Excess of 6.8

5. Historical Background
Country Risk Exposure to Earthquakes
Expected annual economic losses due to earthquakes around $1 billion
Marmara and Duzce Earthquakes’ death toll >18,000; damage >$10 billion
During the last few years over 100 earthquakes ranging from 4.0 to 6.2 on Richter Scale.
The Afyon (2002) and and Bingöl (2003) are latest reminders.
Istanbul is the worst risk - expected direct economic loss from intensity VIII event in excess of $25 billion and its estimated probability is rather high.
Source: DASK, Bosphorus University, Munich Re

6. Historical Background
Insurance Industry
Supply
Low capital base and low level of reserves against earthquakes in the domestic insurance industry
Around 600,000 policies with EQ cover
Demand
Poor prospects of expanding EQ coverage since Disaster Law mandated funding of replacement of dwellings nearly free of charge
Inadequate understanding and management of EQ risk by households and contractors
In 1999, about 2% EQ insurance penetration outside Istanbul and
15% in Istanbul; almost 0% in low-income of property market

7. Historical Background
Government
Continuous government fiscal exposure to earthquakes
Losses were financed with external borrowings and donor assistance
Annual exceedance probability (%)
Economic loss (US$, mill.)
% GDP
0.5
11,406.0
6.20
5.0
3,476.0
1.90
20.0
24.5
0.01
Source: World Bank, Christoph Pusch, 2004.
Potential severity of earthquakes underscores the importance of catastrophe risk transfer programs such as TCIP

8. Historical Background
World Bank’s Concerns
Bank Emergency Loans
Erzincan Earthquake Reconstruction Loan of $240 million
Turkey Emergency Flood & Earthquake Recovery (TEFER) Loan of $369 million
Marmara Earthquake Emergency Reconstruction Project (MEER) of $505 million
Limitations of World Bank Emergency Lending
Cannot provide all liquidity needed
Large emergency loans crowd out important development lending
Bank is ill equipped to provide instant liquidity after disasters (a record-breaking MEER took >1 year to make money available)
Reliance on Bank’s retroactive lending and emergency donor relief is unsustainable due to frequency of catastrophes

9. Historical Background of TCIP
The ever present country’s risk exposure and its devastating economic consequences led to the establishment of TCIP as a public-private partnership, which brought together the GoT, the World Bank, international reinsurers and reinsurance brokers. The Pool commenced its operations on 09/27/00.

10. Main Features of TCIP TCIP Objectives
Ensure most domestic dwellings have affordable EQ insurance.
Reduce government fiscal exposure by transferring catastrophe risk to international reinsurers.
Overtime, build up TCIP’s capital base to insure against larger events
Encourage risk mitigation and safer construction practices

11. Main Features of TCIP Legislation Amendment of the Disaster Law:
no more government interest-free loans to homeowners
Enactment of Earthquake Insurance Decree Law:
EQ insurance is made compulsory
TCIP is created as the sole-source provider of EQ coverage up to $50,000
Pending Enactment by the Parliament of EQ Insurance Law
introduces penalties
enhances the Decree law
5 years since the launch of TCIP, enactment of Disaster Insurance
Law still remains an important outstanding issue.

12. Main Features of TCIP
Compulsory EQ cover for all registered residential dwellings
Stand-alone product, separate from fire (homeowner’s) insurance
Cover up to $50,000 per dwelling & none for contents
15 rating categories based on hazard zone and the type of buildings
Cover in excess of TCIP (>$50,000) is obtainable from private insurers
Private insurers distribute TCIP policies acting as agents
2% deductible
Online (web-automated) policy underwriting and data management
Independent (hired by TCIP) loss adjusters are used
Outsourced extensively (no public employees)
Premium reserves held in creditor-proof escrow accounts fully separated from government funds

13. TCIP Coverage: Risks Covered
Main Features of TCIP
TCIP Coverage: Risks Covered
Earthquake
Fire and explosion following
Land slides following
DASK
All material damages, including damages to building foundations,
stairs, elevators, roofs, chimneys, main and shared walls, corridors,
in insured buildings caused by:
All damages are covered up to insured value less the deductible

14. Main Features of TCIP: Affordability
Premium rates for a 100 square meter flat (USD)
Zones/Type
Coverage
Steel
Reinforced concrete
($27,000)
Amassed
Stone and
Brick
($19,300)
Others
($10,360)
Zone I 60 74 57
Zone II 42 53 37
Zone III 23 28 18
Zone IV 15 12 8
Zone V 10 6
Average premium - $46
Source: DASK, 2005

15. Main Features TCIP
TCIP has no public employees

16. Main Features of TCIP Distribution System
27 authorized insurance companies.
State of the art integrated country-wide IT system that enables over 10,000 agents to produce TCIP policies in under 1 minute
TCIP
Insurers
Agents
Acquisition Costs: 12,5% for risks located in Istanbul 17,5% for risks situated outside
Homeowners
Finding alternative distribution channels and expanding
The existing ones is the main focus of TCIP management

17. Main Features of TCIP: Financial Aspects
Annual accounts, transactions and expenditures are audited by the Under-secretariat of Treasury and an independent auditing firm.
TCIP’ income is exempt from any taxes and duties.
Expenditures of the TCIP are limited to: - claim payments & loss adjustment fees. - reinsurance premiums - operational expenses - payments for public relations & publicity campaigns - payments for consultancy services - payments for scientific research and studies
By the end of 2005, TCIP surplus was approaching $120 mm

18. Information Technology Aspects
Main Features of TCIP:
Information Technology Aspects
A unique IT System allows real time on line policy sales, premium booking, claim advice through Internet
A Call Center giving service to homeowners for general information, claim advice, policy details and to users (agents selling policies) for IT information
A Disaster Recovery Center in Ankara securing the data of the whole System
Use of SMS (short message service) within the GSM (global system for mobile) for policy renewals, claim advice, etc.

19. Information Voice and Video Network
Main Features of TCIP:
Information Voice and Video Network
İstanbul
Maslak
Kadıköy
Güneşli
Zincirlikuyu
İzmir
Bursa
Kayseri
Network & Infrastructure
Ankara
Denizli
Adana
Antalya
Gaziantep
155 Mbit/s
8-10 Mbit/s
34-44 Mbit/s
2-4 Mbit/s
1 Mbit/s
Modern state-of-the-art IT capabilities has won TCIP the
E-government project of the year award in 2003.

20. Main Features of TCIP TCIP Claim Paying Capacity >$1 bn
Overall protection against losses up to $1 billion in the first 5 years
Reinsurance program of A+ quality with dozens of international reinsurers of $750 mm.
World Bank up to $17 million on the first loss basis and on 40/60 basis proportional basis with reinsurers or TCIP, up to $163 million.
TCIP’s own surplus funds - $120 mm
If claims exceed TCIP’s available financial resources, GoT acts as reinsurer of last resort
Turkish Government
>$1 bn
World Bank
Reinsurance
Reinsurance
$1 bn
Reinsurance
World Bank
TCIP
Private reinsurance is by far the largest
source of TCIP’s claims paying capacity

21. Main Features of TCIP Role of private reinsurance industry
world’s leading reinsurers have an important advisory role
reinsurance is instrumental to the financing of TCIP’s risk
high quality reinsurance is essential to making the program credible among policyholders
A plus quality of reinsurance coverage
largest reinsurers such as Swiss Re and Munich Re and Axa Re and Partner Re are behind the program.
Over $ 1 billion in claims paying capacity, with reinsurance
accounting for about 70 percent

22. Main Features of TCIP Insurance product on its own merits
Lowest long-term average premium compared to similar international programs
Price stability for homeowners
High credit quality of insurance coverage (200+ Return Period w/o resorting to gov).
Quick, uncontested settlement to permit speedy relief to victims
Coverage of multiple events
Low 2% deductible
TCIP offers consumers highly attractive
terms of coverage on highly affordable terms

23. World Bank Support to TCIP
Technical Assistance to TCIP:
Modeling and pricing of property risk
Insurance policy design
Developing TCIP policy distribution and accounting systems
Underwriting, rating and operational guidelines
Public relations campaign
Training
Investment policy and fund management
Improving regulatory framework and enforcement of building codes

24. Capital Support and Advisory Assistance to TCIP
World Bank Support to TCIP
Capital Support and Advisory Assistance to TCIP
Risk capital ($180 mm contingent capital facility)
Financing of reinsurance premium ($40 mm in premium costs - 2nd year)
Advisory assistance by Bank insurance staff (original design of program and ongoing modifications)
World Bank’s financial support to TCIP has been instrumental
In making the program financially sound and affordable

25. Status of TCIP Today Facts and figures Total No. of Policies 2,232,795
Total Coverage (YTL) 85,264,394,670
Total Annual Premium (YTL) 143,794,964
Avg. Coverage (YTL)
Avg. Premium (YTL) 64
Growth by # of policies (%)
Renewal Rate (%)
Total # of Claim Files 5,751
Total Claims Paid (YTL)
($60,903,139,050)
($102,710,689)
($27,143)
($46)
($ )
($106,871,000)
Capital Surplus ($)
Source: DASK, 2005

26. Status of TCIP Program Today
Insurance penetration
Penetration ranges between 8-26%
(No. 000)
13,150,000 houses
2,220,000 policies
Source: DASK
While national average penetration is 17%, 26% of homes
In most disaster prone Marmara zone have TCIP policies

27. Status of TCIP Today Socio-demographic highlights
Composition of TCIP insured housing
stock by unit size
Composition of TCIP insured housing
stock by type of use
TCIP is essentially a program of low and middle class homeowners

28. Remaining Major Challenges
Enactment of Disaster Insurance Law
Introduce tighter enforcement mechanisms
Build stronger reserves to protect the program against
more severe but less frequent events (up to 300 year loss)
Reduce the lapse ratio (currently 33 percent)
Create stronger incentives for agents and their insurers
to sell more business
Continue public information campaign to further raise the risk
awareness of population and raise insurance penetration
Raising the level of insurance penetration remains the main
key challenge of the program

29. Thank you for your attention!