Crisis Appearance in Reinsurance Development: Former Soviet Union

Dmitry GARMASHDeputy Managing director, PhD

Unity Re Ltd.

III International conference «Insurance in Central Asia», Almaty, Kazakhstan, 19-20 March 2009

International market before 2008…

Situation and tendencies:

• soft market

• enough re- and retro capacity

• high business growth rates (7-15% annually in the average)

• active new investment capital new market players

• active growth of investments and M&A + geographical expansion

• key investment goal – long-term prospective development

• active & significant investment compensation of technical/underwriting results

…and beyond 2008

• double impact: cycle phaze + investment collapse both assets and liabilities of (re)insurers are affected

• investment & technical losses outflow of investors narrowing of available capacity, esp. retro

• stake of active technical correction of results rise of re- and retro cover price by 5-25% av.

• active redistribution of business development strategies + potential movements in and among echelons of international reinsurers

• stake on short-term prospective development

• need for new approach to market regulation

• need for new approach to ratings

…and beyond 2008

2008 among the last 10 years happened to be:

• the 4th as per the amount of insured losses• the 3rd as per the number of nature disasters

• average effect of Ike & Gustav claims on reinsurers’ assets: - 1,5-6,5%• average effect of financial markets dynamics & investment result on

reinsurers’ assets: - 5-30%

Some results:

• ING Group – about 1B euro loss for 2008• Swiss Re – net loss of about 0.86 billion CHF for 2008• Munich Re – profits fall about 2,5 times• AIG – 60 billion USD loss for 4Q 2008 = world maximum since 2002 (Time

Warner – 54 billion USD)

World reinsurance premium distribution:

• Total insurance premium (2007) - 4 trillion USD, non-life segment – about 1,6 trillion USD.

• Total reinsurance NPW (2007) – 168 billion USD (9,8% rise)

Source: International Insurance Fact Book; Standard & Poors

Former USSR market

56%

4%

26%

9%

2%

Source: Swiss Re - Sigma

3%

Russian & CIS before 2008…

• Relatively high economic growth rates growth of insurance & reinsurance sectors (average rate of 20-30% annually)

• Key engines for (re)insurance – investment oriented sectors: mortgages & real estate, consumer credits, construction & development

• Formation of ‘middle class’ in society as a factor of growth development

• Active increase of foreign participation – investments, M&A

• Soft reinsurance market + significant non-price competition

• Premium growth rates much higher than claims growath rates fuzzy cycle dynamics & phazing acceptable aggregate loss ratio (25-40%)

• Stake of western reinsurance treaty security with excessive capacity

• Major business growth factor – economy and market growth thereselves (good performance mainly depends on reliable customer attracting policy)

Country Number of insurance (reinsurance) companies

Insurance premium non-life, USD

Inward reinsurance premium, USD

Out-ward reinsurance premium, USD

Russia 857 (29) 29,6 billion 2,536 billion 2,2 billion

Ukraine 446 (1) 3,6 billion 1 billion 1,27 billion

Kazakhstan 41 (0) 1,2 billion 130 million 510 million

Azerbaijan 30 (1) 175 million n/a n/a

Uzbekistan 27 (1) 56 million 4,8 million 22 million

Tajikistan 15 (0) 27,5 million 24 thousand 18,5 million

Kyrgyzstan 14 (0) 5 million n/a n/a

Source: Asia Insurance Review; Forinsurer.com; FSIS of RF; Orien Insurance; RP News.

Russia & CIS before 2008…

…and beyond 2008

Reinsurance sector – “downstream”-direction: mediated, smoothed, buffered effect of crisis uncertainty for period & scales of effect

Industrial, commercial, banking

sectors

InsuranceReinsurance

Common predictions:

• fall of premiums and slowdown of development

• decrease in number of market players caused by closing business, bankruptcies and M&A

• tough competition among & selection of professional staff

• key survival remedy – struggle for clients, market place & development of new business niches & strategies

Market position

Capitalization

Assets

Change of benchmarks

Markets • New niches sources by rising demand for alternative capacity• Stake on ‘soft’ niches• Stake on reliable cooperation & own audit and evaluation of

partners

Cedants • Rising role of R/I in backing insurer’s stability additional demand + reconsideration of retentions/limits policies

• Increasing number of markets in security lists to decrease individual credit risk exposure of cedant

Brokers • Global increase of brokers’ role as distribution channel – lower acquisition costs, attracting various-scale businesses, regional clients, alternative capacity

Competition & New players

• Growth of price competition + softening of alternative markets• Селекция игроков за счет ухода и M&A

Regulatories & legislation

• Strengthening & restructurisation of state influence to (re) insurance sector

Capital & rating • Rise of qualitative requirements to capital & rating• Rise of demand for international rating• More tough conditions for rating & capital modelling

Change in business environment

Market position Clients’ field cover; speed of reaction; capacity; rating

Management Professional selection of staff; corporate unity; ERM

Corporate strategy Intensifying development; optimization & rationalization

Investments, liquidity, financial mechanism

Tough control of accounts receivable; quality of investments & assets; conservative strategy

Capitalization Tough control of reserves adequacy; retro cover & additional counterparty selection

Change in key points of analysis

• new trend – not just an evaluation but a full-size reengineering tool!

• integral attribute & competitive advantage

• demand for rating gets higher – opportunities of obtaining get lowe due to crisis affecting the key rating factors

• crisis reconsideration of approaches & evaluations, models & qualitative methods

• 43 000 entities rated around the world – in Russia России just 84; in CIS – just about 110

• Forecast for 2008-09: more 45-60 companies WOULD HAVE obtained international rating

• Number of ratings in Russia for 2007 = number of ratings for 1998-2003 = 39

• (re) insurance companies with international ratings = 15 (Russia) + 5 (CIS)

Change in rating approach

• different crisis nature to other world (credit crisis burdened by overall economy overheating)

• dumping as a key marketing tool rise of losses + final burden is on reinsurer!

• “extensification” of development (blowing up the portfolio without enough prudent risk selection and whole book enhancement)

• no market barriers for poor risks

• rise of fraud claims inflow & severity

• rise of accounts receivable receivables management as one of the key tools to be employed with a company during crisis!

• excessive number of market players

• strengthening of roles of major international reinsurers

• back of reciprocity business basics

• more tight binding to world loss ratios, trends, cycle

Change in market challenges

THANKS FOR YOUR ATTENTION!

Unity Re LtdMoscow, Russian Federation

T: +7 495 956 6589F: +7 495 956 6598E: re@unityre.ruW: www.unityre.ru