Crisis Appearance in Reinsurance Development: Former Soviet Union

1. Crisis Appearance in Reinsurance Development: Former Soviet Union Dmitry GARMASHDeputy Managing director, PhD Unity Re Ltd. IIIInternational conference«Insurance in Central Asia», Almaty, Kazakhstan, 19-20 March 2009

2. 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

3. …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

4. …and beyond 2008 • 2008 among the last 10 years happened to be: • the 4thas 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 – 60billion USD loss for 4Q 2008 = world maximum since 2002 (Time Warner – 54 billion USD)

5. Former USSR market World reinsurance premium distribution: 26% 3% 56% 9% 2% 4% Source: Swiss Re - Sigma • 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

6. 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)

7. Russia & CIS before 2008… Source: Asia Insurance Review;Forinsurer.com; FSIS of RF; Orien Insurance; RP News.

8. …and beyond 2008 Reinsurance sector – “downstream”-direction: mediated, smoothed, buffered effect of crisisuncertainty for period & scales of effect Reinsurance Insurance Industrial, commercial, banking sectors • 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

9. Market position Assets Capitalization Change of benchmarks

10. Change in business environment

11. Change in key points of analysis

12. Change in rating approach • 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)

13. Change in market challenges • 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

14. THANKS FOR YOUR ATTENTION! Unity Re Ltd Moscow, Russian Federation T: +7 495 956 6589 F: +7 495 956 6598 E: re@unityre.ru W: www.unityre.ru