Eugene N. Gurenko, Ph.D., CPCU, ARe Sr. Insurance Officer World Bank*

1. 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 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 • 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) 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 Istanbul17,5% 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. 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. Main Features of TCIP: Information Voice and Video Network İstanbul Maslak Kadıköy Güneşli Zincirlikuyu İzmir Bursa Kayseri Network & Infrastructure Ankara Adana Denizli Gaziantep Antalya 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 Turkish Government • 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 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 • 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) 38.000. Avg. Premium (YTL) 64 Growth by # of policies (%) 12.51 Renewal Rate (%) 33.5 Total # of Claim Files 5,751 Total Claims Paid (YTL) 9.692.668 ($60,903,139,050) ($102,710,689) ($27,143) ($46) ($6.923.334) ($106,871,000) Capital Surplus ($) 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!