World economic crisis as an external auditor of insurance companies in Russia

1. World economic crisis as an external auditor of insurance companies in Russia Speaker: Hannes Chopra, CEO ROSNO, President Allianz Eurasia Sep 16, 2009

2. AGENDA 2 Crisis impact on legal entities 3 Crisis impact on individuals 4 Challengers for Russian insurers 5 …and their response 6 Summary account 7 Allianz Eurasia risk management 8 ROSNO capital management 9 Example of ROSNO solvency control Our support for sustainable market 10 How it all started 1 1

3. 1 How it all started – the typical story Intrinsic qualities of Russian economy External factors Results Russian economy is heavily dependant on basic materials extraction, processing and export Raw materials prices tumbled in 2nd half of 2008 as a result of global economy slowdown Key Russian enterprises had to cut down production by as much as 50-70% as revenues plummeted Inability to raise capital and refinance existing debt Russian economy requires foreign investments to grow Massive foreign capital drain out of Russia = Stable national currency and stock market as an important prerequisite for economic development Flight to safety out of emerging countries and assets denominated in their currencies Ruble devaluation and Russian stock market fall Russian economy in recession Global economic crisis eventually reached Russia in autumn 2008

4. 2 Economic slowdown having impact on the insurance market: legal entities Russian plants producing less and making far less investments in fixed assets Seeking savings across organizations, corporate insurance expenses being reviewed • Prior to the crisis Russian companies widely used offering quality health insurance to attract top talent • Once things got worse they started implementing cost-cutting initiatives • Many companies slashed their insurance budgets • VMI: Market declined by 9% (6m09 to 6m08). The main support came from the non-risk segment, whose share increased both in MRD and regions. The rise in non-risk GPW is confirmed by the distinct increase in the payout ratio from 41% to 57%. • Property: In 6m 2009 Property segment slightly less than the overall market, the payout ratio did not change compared to 6m 2008. • MOD: In 6m 2009 a 49% slump in new car sales together with depressed consumer spending caused a 28% decrease in MOD premiums. MOD payout ratio* rose dramatically from 52% in 6m 2008 to 86% in 6m 2009. In response to the situation FSSN published average tariffs for car models Industrial production index, YoY 123,6% Fixed capital expenditures index, YoY 125 120 117,4% 115 111,7% 110 106,2% 105,5% 104,7% 105 Crisis impact on insurance lines 100 97,7% 95 93,9% 90 85,7% 84,6% 85 84,4% 80,0% 1Q 2Q 3Q 4Q 1Q 2Q 2008 2009 Source: ROSSTAT Companies reducing their insurance budgets in response to worsening economic environment Sources: FSSN, ROSNO estimates, Expert RA * GPW Based

5. 3 Economic slowdown having impact on the insurance market: individuals Unemployment shot up, real incomes went down Consumer’s wallets being squeezed • Level of insurance culture in Russia is low and selective as suggested by penetration levels • Most people purchase insurance to get a car loan or only if it is required by law • Growth of real disposable income was an important prerequisite for purchasing voluntary types of insurance and development of insurance culture in Russia Unemployment rate 9,1% 8,6% 7,1% 6,7% 5,9% 5,6% The crisis, having decreased real incomes of Russian people, limited their ability to purchase voluntary insurance, which is vital for development of insurance culture 1Q 2Q 3Q 4Q 1Q 2Q 2008 2009 Real disposable income index, YoY Real wages index, YoY 113,4% 112,9% 115 112,2% • However we are seeing significant improvements in consumer data since the beginning of 2009 as the government stepped up social spending, in particular, having: • Increased unemployment benefits 60% • Increased military salaries 18% • Increased pensions 8.5% as of 1 Mar • Increased public sector salaries by a total of 30% in three tranches – in January, May and a final planned step in September. • These measures will be further enhanced by a planned 26.5% increase in pensions as of 1 Dec. 108,0% 110 106,2% 106,2% 105,0% 105 100,2% 99,8% 100 99,2% 95 96,1% 94,2% • According to study by UniCredit bank Russian middle class* is expected to reach 24 Mio ppl in 2011 despite the crisis as opposed to 21 Mio ppl at 2008 end 1Q 2Q 3Q 4Q 1Q 2Q 2008 2009 Source: ROSSTAT * People making more than $1,000 per month

6. 4 Challenges Russian insurers face aggravated by the crisis Trends Implications • Decreasing demand for insurance products • Change in demand structure • Consumers demand simple, more transparent structure • Increased number of insolvencies in insurance industry • Falling profitability of insurance operations • Increased foreign currency risk exposure • Existing sales networks are underloaded Decrease in overall insurance market size Dramatic shrinkage of certain insurance lines and sales channels Increasing need for end-consumer orientation Upcoming consolidation in insurance sector due to number of insolvencies Increasing meaning of efficiency Increased importance of FX policy followed Some sales networks become inefficient 1 2 3 4 5 6 7

7. 5 …and their response Cashflow and financial management. Back to basics Microscopic portfolio management Lowered tariffs Crisis-tailored products (covering more risks and including more options for the same price) Enhanced risk management Increased efficiency Emphasis on distribution The big task for Russian insurers is to compensate for lower premium per risk with increased efficiency, enhanced risk management and stronger emphasis on distribution

8. 6 Summary account Russian economy in recession Decrease in insurance spending by individuals and legal entities • RF insurers react: • Lower tariffs • Crisis-tailored products • Emphasis on distribution • Improved efficiency • Enhanced risk management World economic crisis Raw materials prices tumbling Inability to pay claims Insolvency and exit from the market Liquidity crunch Foreign capital drain Ruble devaluation Insurers with sustainable business model Russian insurers which responded to crisis by lowering tariffs only will eventually face the situation when they are unable to satisfy incoming claims and face insolvency

9. Regulatory requirements Allianz Eurasia Risk Management Internal requirements Shareholder requirements 7 Allianz Eurasia Risk Management • Allianz Eurasia companies are compliant with FSSN requirements with regard to the minimum authorized capital and solvency margin (Form 6) and maintain the statutory coverage levels for insurance reserves (Form 7) and insurer's own funds (Form 14) • On top of the Russian solvency requirements, ROSNO applies tighter Underlying Operating Performance (UOP) criteria based on the S&P's Capital Adequacy Model • The UOP model is designed to assess the exposure of the insurance business and to compute the amount of capital required to cover the risks involved • Risk Management Dept within ROSNO and Risk Management Committee are responsible for RM implementation • Having more than 100 yrs of experience in world financial markets Allianz has strong risk management practices in place including: • Central risk aggregation and reporting platform • Internal stochastic tools for life and non-life cash flow modelling • New Operational Risk Management platform • Other qualitative tools (e.g. Top Risk Assessment) Allianz Eurasia has one of the most comprehensive RM systems in CIS

10. 8 ROSNO capital management system Regulatory requirements Capital management in ROSNO Key elements Goal Requirements to coverage of own funds Long-term capital forecast With the help of scenario analysis and stress-testing, calculating capital needs for 3 years Requirements to insurance reserves allocation Short-term capital forecast To control compliance to solvency requirements at the end of current quarter Solvency requirements Requirements to minimum level of registered capital Control over timely implementation of corporate procedures, including capitalization increase Effective collaboration of all company units in the process of increase of capitalization and other capital management procedures Net assets requirements Capital management system allows for calculation of capital need for 3-year period in various scenarios of situation development

11. 9 Example of ROSNO Revenue control financial dashboard

12. 10 Our support is needed for a sustainable insurance market Being a responsible insurer we not only effectively control our own solvency… ..but also promote measures for increased financial responsibility IFRS reporting Obligatory IFRS reporting for all insurers Product profitability analysis Significant tax breaks in Life insurance Economically viable tariffs Profit stress testing of new insurance products on regulator level GPW and profitability forecasting Increase of obligatory level of tour operators insurance Cash flow modeling Licensing ofunderwriters and agents We are actively promoting measures aimed at improving current unhealthy ‘short sighted’ business environment in insurance