XIV INTERNATIONAL SYMPOSIUM RISK MANAGEMENT IN INSURANCE AND BANKING SECTOR

1. Presenter: • Serbia Boško Petrović Generalni direktor GENERALI REOSIGURANjE SRBIJA a.d.o. XIV INTERNATIONAL SYMPOSIUMRISK MANAGEMENT IN INSURANCE AND BANKING SECTOR Reinsurance risk managamentNatCat RISK & RISK TRANSFER Zlatibor, 19-22. maj 2016.

2. AGENDA Reinsurance introduction Underwriting risk Impact of reinsurance Economic analysis of reinsurance NatCat risk in Serbia

3. Reinsurance Introduction “REINSURANCE IS INSURANCE FOR INSURANCE COMPANIES” Reinsurance (retrocession) Reinsurer Reinsurance (cession) Reinsurer Brokers, Direct Insurer Brokers, Direct Direct insurance Insured Brokers, Agents, Direct

4. Reinsurance Introduction How much risk who can accept? Size of loss Nuclear attack Mega Tsunami Meteorite Catastrophic Capital markets High Storm Earthquake Group Life Reinsurers Medium Auto Požar LIFE Insurers Low Robbery Insured

5. Reinsurance GLOBAL REINSURERS Global market http://www.theactuary.com

6. Reinsurance Serbian market The majority ownership of state-owned insurance company Dunav Osiguranje. Leading regional and the largest reinsurer in Serbia DUNAV RE Ownership of GOS insurance company. It deals only with reinsurance of GOS insurance companies and its subsidiary in Montenegro Ownership of VIG RE zajišťovna, Prague Active in the markets of Serbia, Bosnia and Herzegovina, Montenegro and Macedonia GENERALI REINSURANCE WIENER RE Ownership of The Lawrence Re Ireland Ltd, reinsurers based in Dublin, Republic of Ireland. Operates within the Fondiaria-Sai Gruppo headquartered in Italy. • Reinsurance activities may be carried out exclusively through domestic reinsurers. • Minimal amount of founding capital is EUR 4.5 Mio. • From the point of monitoring and reporting to the NBS has the same treatment as the insurance company. • The total market reinsurance premiums in 2013 year - about 66 million EUR. • Any liberalization of reinsurance market is expected after the Serbian entry into the WTO (World Trade Organization). DDOR RE

7. Underwriting risk

8. Underwriting Risk Introduction Because insurance companies face several risks when performing their business, they must hold capital in order to assure their solvency position. The higher the volatility of results, the higher the capital required to take the risks. P&c segment: UW The risk associated with the insurance liabilities arising from the subscription of insurance contracts

9. Underwriting Risk Definition P&c segment: UW is composed by the following component: Reserving risk uncertainty about the claims reserves development around its expected value (the risk that the actuarial reserves are not sufficient to cover all the technical liabilities related to the incurred claims) Pricing & Cat risk uncertainty about the adequacy of the premium earned to cover future claims, expenses and extreme events SRB SRB

10. Underwriting Risk Definition • Risk is defined as the likelihood of adverse deviation from the expected result • It is measured by the associated Risk adjusted Capital (RaC) in accordance with a given capital adequacy. • According to its risk appetite, the insurance company may decide to remain resilient within a given range of expected results • For example, a company decided to hold capital to cover 99,5% of the expected results (Solvency II requirement). A worst result can occur with the probability of <0,5%, which means once in every 200 years or more • The higher the volatility of results, the higher the capital required to take the risk. Probability Probabilitydensityfunction SRB SRB ImbalanceinGrossportfolio Company’sLevel ofResilience Expectedresult Result 1in200years RaCRiskadjustedCapital

11. Impact of reinsurance

12. Impact of reinsuranceBenefits of reinsurance Reductionofthevolatilityofunderwritingresults Capitalreliefandflexiblefinancing Moreunderwritingopportunity • Possibilitytounderwritelarger&morecomplexrisks • Acceptinglargersharesofindividualrisks,thusimprovingtheleadingpositionandshapingthemarket • Writewiderportfoliowithoutincreasingthecapitalneed • Managerisksandcapitalin • themostefficientway • Protectionagainstlargefluctuationanddeviationfromexpectedlosses SRB SRB Accesstoexpertiseandservices Financialsecurity Profit&Growth • Supporttomeetsolvencyrequirements • Canleadtoahighercreditorinvestmentrating • Stabilityofincomeandliquidity • Reinsurancecapitalisoftencheaperthanothercapital • Reductionofoperatingcostswiththereinsurancecommission • Reinsurerscansupportinareassuchasproductdevelopment,pricing,underwritingandclaimsmanagement

13. Economic analysis of reinsurance

14. Economic analysis of reinsuranceCost of reinsurance – operating reinsurance result Cost of reinsurance Operating reinsurance result (after-tax) OR = (TRR+ FRL) * (1-T) with: TRR = Technical reinsurance result FRL = Financial return loss T = Tax rate SRB SRB • The difference between ceded premiums and recoveries and commissions is the technical reinsurance result, visible in the Profit & Loss statement of the cedant. • Moreover the cedant “loses” the possibility to invest the ceded assets, and this represents a financial return loss. • The sum of technical reinsurance result and financial return loss is the Operating reinsurance result (Pre-tax), which is expected to be negative for the cedant, but it is partially offset by the impact of taxation. Reinsurancerepresentsacostforthecedant!

15. Economic analysis of reinsuranceValue creation The reinsurance contract is beneficial if the cost of capital saved compensates for the costs incurring out of the reinsurance activity (operating reinsurance result). If this is the case, economic value is created

16. Economic analysis of reinsuranceBreak-even premium One application of the value creation calculation is the break-even premium. The maximum premium the cedant is willing to pay to obtain the coverage is the Break-even premium, defined as the premium which results in zero value creation. Currentreinsurancepremium Break-evenpremium +Valuecreation = The premium that is currently being paid for a reinsurance cover The value creation expected from the reinsurance cover based on the current premium and exposure The premium which results in no value creation represents the maximum price the cedant should pay for the reinsurance protection • If the premium the market can offer is below the break-even premium, the reinsurance contract is beneficial to the cedant. • A market premium above the break-even premium would mean the reinsurance contract is destroying value for the cedant.

17. Economic analysis of reinsuranceReinsurance allows a so-called win-win situation for both parties • Reinsurance allows a so-called WIN-WIN situation for both the Insurer (Cedant), that can transfer the risk at a cost lower than that of own capital and the Reinsurer who can better retain the same risk due to the diversification benefit of its own portfolio • Diversification benefit of the reinsurer • Principle «law of large numbers» • Pooling of independent (uncorrelated) risks reduces volatility in results • Reinsurers pursue diversification by operating • Across geographies • Across lines of business • Business running along different periods of time • The higher the diversification, the less capital is needed, thus a lower price could be offered Theinsurercantransfertheriskatacostlowerthanthatofowncapital Thereinsurercanbetterretainthesameriskthanthecedant

18. Generali Group reinsurance analysis - REPThe method

19. NatCat risk in Serbia

20. NatCat perils in Serbia The total damage caused by natural disasters in Serbia in 2014 amounted 1.7 billion EUR* PROBLEMS? A very small number of Insurance contracts for these risks • Ineffective preventive measures: • Outdated fire protection systems • Insufficient capacity of the irrigation system • Outdated anti-hail systems etc. SRB SRB REASONS? • Unfavorable economic situation • The low level of insurance culture • The insurance company does not have sufficient financial capacity to be able to accept the risk of catastrophic event insurance by affordable price • & terms Izvori: Zvanična izjava ministra za vanredne situacije u Vladi Srbije Velimira Ilića, 11.03.2015 http://data.euro.who.int/e-atlas/europe/countries/serbia/serbia-flood-map.html seismo.gov.rs/

21. NatCat perils in Serbia The total damage caused by natural disasters in Serbia in 2014 amounted 1.7 billion EUR* THE CONSEQUENCE? In Serbia, due to natural disaster, dominant way of financing citizens' properties rehabilitation is to use funds from the State Budget SRB From the point of Insurance sector what we can do? Izvori: Zvanična izjava ministra za vanredne situacije u Vladi Srbije Velimira Ilića, 11.03.2015 http://data.euro.who.int/e-atlas/europe/countries/serbia/serbia-flood-map.html seismo.gov.rs/

22. We should follow their examples RO TR Turkey solution: TCIP/DASK Romanian solution : PAID scheme Pool against Natural Disasters Turkish Catastrophe Insurance Pool

23. Forming NatCat Insurance Pool RE / INSURANCE SECTOR SERBIAN NatCat INSURANCE POOL ( SNCIP ) RS GOVERNMENT Main purpose To assist the people & the Government to repair or reconstruct dwellings ( houses ) damaged by natural disasters

24. SERBIAN NatCat INSURANCE POOL ( SNCIP ) Legal frame: ? • Insurance is Mandatory • local government enforces • penalties for non-inusrance • government subsidises premium for those on social aid • Structured as joint-stock pool company • Approved insurers as shareholders • each to contribute a minimum amount of capital • With non more than __% • SNCIP will pay dividends from profit as they arise • Government participation? • Reinsurance • Risk to be transferred to external reinsurance markets • Supervision • Supervised by National Bank of Serbia (NBS) • Governance • To hire professional management SRB Scope of coverage: • Multiperils coverage: EQ, landslide and flood • Obligatory for residential properties in both the public and private sectors, no coverge for commercial nor industrial buildings

25. The questions that arise: Who should be effected by mandatory NatCat insurance? Are foreign Insurers operating in Serbia are about to establish NatCat Pool? Thank you for your attention