Dr. Volker Deville, Allianz SE

1. Beyond the Crisis: Risk and SecurityExecutive Panel IIIAnnual Meeting of the International Insurance SocietyMadrid, June 8, 2010 Dr. Volker Deville, Allianz SE

2. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

3. Recognizing risk and acting accordinglyis a cornerstone of civilization What types of risks do we face? Which risks disappear over time? Which new risks are evolving? Can we predict, avoid or mitigate risks? The role of lighthouses, insurance and diplomacy

4. Looking at security, which risks are most significant? Longevity Poverty Recession Health and care Disability Default Accidental, other death Financial / monetary crisis Locusts, funghi, bacteria Property destruction, liability Biometric Risks Economic Risks Drought and floods Climate change Hurricanes, hail, storms Genetic change Natural Risks Civilisation Risks Earthquakes and vulcanos Crime, terror and war Source: Allianz SE GPP

5. 31 We always looked for safety and security against many risks World Wars Financial crisis very high Civilization Risks Economic Risks high Impact Natural Risks Longevity Biometric Risks Volcano medium 1600 1900 2010 2060 1000 History and Future Note: Timelog scaleSource: Allianz SE GPP

6. 31 Who handles risk and security? Mitigators’ map insurers governments fire fighters Natural insurers social security systems doctors, hospitals Biometric Risk insurers long-term investors global institutions Economic central banks military security forces scientists police lawyers, judges, insurers Civilization fire fighters Immediate, local action Quick, large-scale action Long-term, global action Type of Action Source: Allianz SE GPP

7. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

8. Tectonic Risk: Volcanoes • Volcano eruptions are well understood, but difficult to predict and impossible to prevent. Insurers cover a limited part of the exposure. • 79 Vesuv, Italy (Roman cities destroyed) • 1169 Etna, Italy (15,000 victims) • 1883 Krakatau, Indonesia (36,000 victims, tsunami and „vulcanic winter“) • 1983 Mount St. Helen, USA (57 victims, $ 860m loss) • 1985 Navado del Ruiz, Colombia (23.000 victims, $ 230m loss) • 1991 Pinaturbo, Philippines ($ 860m loss, global temperature reduction by 0.5 degree for 2 years) • 2006 Sidoarjo Mud Volcano, Indonesia (10.000 homeless, 50.000 with health problems, $ 3bn loss) • 2010 Eyjafjallajökull, Iceland (wide-spread air traffic disruption, $ 1.7 bn loss) Eyjafjallajökull, 2010 Source: Wikipedia (picture provided as public domain) Sources: www.knowledge.allianz.com, wikipedia Other Impact(climate change, relocation, health hazards) Business Interruption(e.g. lava, gas or ash) Physical Damage(e.g. pyrolastic or lava flow) • Tomorrow: • More comprehensive risk assessment • New forms of cover (e.g. Allianz AGCS for business interruption also caused by vulcanic ash) • Today: • Case-by-case management • Some analysis by big reinsurers

9. 31 Insured Claims (bn USD) 40 35 30 25 20 15 10 5 0 1970-79 1980-89 1990-99 2000-09 2010-19 Wind Storms: Frequency and damage potential increase • Global warming triggers more natural catastrophes • Global temperature will increase by 2-6° C in next 100 years – despite Copenhagen summit • Precipitation will change drastically and cause floods, drought, bush fires and crop destruction • Since 1970, weather related claims have increased 15 times • Corporations demand safety concepts, catastrophe protection, and insurance solutions • People do not prepare, build in flood-risk-areas, do not insure enough • Actions: new energy investments, catastrophe bonds, new pricing models In 2005, hurricane Katrina devastated Southern parts of the US. 1.800 people died, 80% of New Orleans covered with water, $160 bn damage, $ 45 bn insured. Sources: Allianz SE; Digitalized Globe 2017 conference; IPCC report 2007; own estimations

10. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

11. World population grows – and ages Projection until 2050 billion people % • The world population will grow to 9.0 billion in 2050 • This year, we will witness the “birth peak” (135 mio. newborns) • In 2050, number of people aged 80 and above will be four times as much as today (400 mio.) • Germany 2007: Out of €360 billion annual rental payments, 63% came from public pay-as-you-go system, already 37% from private funded systems - this will increase Source: UN and World Bank population projections HNPStats as of June 2009; own calculations

12. Longevity will increase health expenses –40% are spent for ages 70-79, 30% for ages 80+ Age: Health care costs(in 2002 USD per capitaand per age cohort) 80+ 75-79 70-74 65-69 50-64 20-49 0-19 Sources: Kotlikoff & Haigst (2005), NBER Working Paper No. 11833; Allianz GPP

13. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

14. 5 US government unveils three economic stimulus packages and bank rescue package (initial value $ 200bn) 15 EU, IMF provide €750 bn stabilization package for Euro zone 7 US mortgage lenders placed under govern-mental control 14 Greece’sdeficit restated; bailout necessary Rating downgrades of subprime mortgage papers 4 Bank run on Northern Rock 8 Investment bank fails Consequences for the real economy Crisis in financial markets Caja Sur nationalized 9 US government bails out CDS provider AIG with $180bn Beyond the Crisis? Not yet! Mortgage papers, banks, money markets, derivatives, sovereign states: All leveraged business models are scrutinized – less so insurance Q3 2007 Q2 2008 Q2 2007 2007 2008 2009 2010 1 Early indicators: US housing market, top economists 2 13 - 2.2 % real GDP in 2009 3 Money market distortions; central bank interventions 6 10 12 First invest-ment bank collapses G20 Iceland: Financial system collapses Program of $ 1.1 tn issued to revitalize world economy 11 Secular changes in banking 16

15. The Financial Crisis has presented some fundamental issues (I) New under-standing of risk Strategic answers Financial crisis Global risks

16. What exactly means financial risk? • Actuarial models assume stochastic distribution of natural events (like death) • Economic models for financial instruments assume stochastic distribution of behaviour (e.g. of market participants) • During the crisis, however, behaviour was not stochastic, but deterministic: everybody was looking for the exit • Hence, financial risk modelling for normal times has to be completed by a „crisis bifurcation“, i.e. emergency modus for a worst case crisis

17. The Financial Crisis has presented some fundamental issues (II) New under-standing of risk New importance of ethics Strategic answers Financial crisis Global risks

18. Ethics - How should we act to avoid wrongdoings? • The crisis raised questions for morally right actions • How to regain trust of financial services providers? • How to avoid systemic risk for the global financial markets? • How to ensure customer’s money? • How to incentivize managers, aligning business and ethics? • How to tackle complexity, transparency, sustainability? • How to .... • Insurance is a social business • The main reason for insurance remains • the assumption and reallocation of risk in our society Statue of German philosopher Immanuel Kant (1724-1804) in Königsberg (Picture provided as public domain by German Bundestag) Source: Allianz SE, GPP

19. The Financial Crisis has presented some fundamental issues (III) New under-standing of risk New importance of ethics New regulatory environment Strategic answers Financial crisis Macro economic implications Change in customer behavior Change in financial markets • Global risks • Recession • Governments own banks • Inflation, currency problems • Protectionism • Low interest rates Exploding public deficits

20. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

21. Example India First of all, Civilization Risk has culture-specific meanings In India, risk protection is specific because of specific life situations • A typical middle-income household has less than €1000 annual income • One of the biggest investments is the wedding of the children – high cancellation or delay expenses can be insured • Typical assets include mules and other cattle; property (i.e. animal) insurance is important • Micro insurance (with NGOs) is available for poor rural households • Use of modern technology like SMS lower administrative costs

22. 31 How to estimate the degree of Civilization Risk? Degree of civilization risk is determined by affected people and value destruction Large Climate change (manmade) Biologic changes(genetics, biodiversity) War Amount of people affected Terror Development Probabilityof events Accidents andaccidental deaths Propertydestruction Resource scarcity Crime low Liability high Small Low High Value destruction Source: Allianz SE, GPP

23. Domains of security forces and insurance increasingly overlap:Non-fighting forces; piracy; acts of terror / organized crime; cyber attack losses • Military forces follow 3 types of activities • „classic wars“ against other states • „non-classic wars“ against non-state actors (terrorists, pirates) or in non-state territory (space, internet) • „non-wars“ to stabilize regime, help civilians Sources: Allianz SE GPP. Picture provided online by US federal government as public domain • Although different in strategy, armed non-state actors aim at similar targets • hostile actions against states and their security forces • hostile actions against other non-state actors and civilians • friendly actions to help supporting civilians and organizations • Security and insurance get more interlinked • clients request cover against damages regardless of their source • risk assessment and precaution are often similar for state security and insurers

24. Beyond the Crisis: Risk and Security 1. Risk and Security 2. Natural risks 3. Biometric risks 4. Economic risks 5. Civilization risks 6. Strategic implications

25. More actors will compete in the insurance markets • Car manufacturers: Telematics technologies, using real time data of car driving, allowing better pricing and claims handling than our traditional processes • Asset managers: continously increase their business in all product types for old-age-savings • Asian Post Offices: Postal insurers run by states – and other state-owned entities - enjoy competitive advantages • Telecom companies: Mobile finance products are offered especially to low-end customers (point of sale = mobile phone) • Coffee shops and other new kinds of distributors will gain room Mobile financial products are already sold to telecom users in Africa and India

26. New Global Governance G20 upgrades international organizations both for politics and international business. JP G20 UN KR CN NATO RU US UK IN DE FR EU ES SA BR ZA • Macroprudential supervision, avoidance of systemic risk, and better regulated or less leveraged (near-)banks are cornerstones of the new regime • The worldwide, regional and sectoral capital allocation will change due to new long-term risk assessments in all asset classes • Some supranational organizations will be re-positioned in the new global financial architecture

27. Many organizations define the space to operate Public sector Private sector central banks political institutions clubs supervisors associations IMF GA IIS United Nations IAIS IASB BIS G20 FSB CEIOPS European Union CEA ECB BaFin Germany GDV (NAIC) USA CIRC China Source: Allianz SE GPP Map 2010 (20 selected examples)

28. Beyond the crisis: Challenges for insurers around the globe Winning products and financial strategies Strategic risks and challenges Slow down climate change; secure agriculture/housing infrastructure; offer investment/insurance products Climate Change: Irregularities in rainfall impact agriculture; more storm damages Expand now both private insurance products and public social security systems Demography: Social unrest of poor people aged 55+ due to gap in pension/health/care financing Assessment and Strategy options Customers: more demand for insurers’ security, cover, pricing, digital access and transparency Ensure capital strength, continue expense discipline, offer transparent and easy access (e-insurance) Rebalance global institutions, recalibrate regulation, deleverage risky activities, support core business Financial System: Banks, sovereign borrowers and others face financial difficulties States to manage fiscal deficits and global cooperation simultaneously; insurers have the same interest Globalization: Due to the crisis, protectionism and inflation may occur again

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