1. Making better reinsurance decisions… Placing Reinsurance Coverage for Turkish Catastrophe Insurance Pool Key Lessons for other countries James Vickers Managing Director, Willis Re June 3rd, 2003 World Bank conference on “Financing the Risks of Natural Disasters,” Washington DC, June 2-3, 2003 ©Copyright 2003 Willis Limited all rights reserved.

2. Making better reinsurance decisions… Introduction Mounting fiscal pressure encouraging Governments to transfer catastrophe liabilities from “disaster borrowing” and “tax reserves” to private sector As a precondition to accessing World Bank Funds post the 1999 Izmit Earthquake the Turkish Government agreed to commit to privatisation and the export of their domestic earthquake risk exposure

3. Making better reinsurance decisions… Introduction Through the instigation of the Turkish Catastrophe Insurance Pool (TCIP) the Turkish Government now provide a role model for others. TCIP is now firmly established with in excess of 1,800,000 policies currently in force Many lessons have been learnt. Purpose of this presentation is to provide an insight into the “placing of reinsurance risk for TCIP”

4. Making better reinsurance decisions… Key Lessons – Sufficient Committed Parties World Bank: Hugely influential not only in terms of providing “seed capital” but also in securing support from both the Turkish Government and Reinsurers. Provided crucial credibility for the entire Project Turkish Treasury: The effective client. Totally committed to the project and demonstrated a great ability to manage the sometimes conflicting interests of all parties to achieve the desired result.

5. Making better reinsurance decisions… Key Lessons – Sufficient Committed Parties Milli Re and the Turkish Insurance Industry: Accepted the role as the manager and distributors of the policies providing crucial practical expertise Reinsurance Brokers: Provided vital analysis, structuring and execution skills Reinsurers: Provided the risk transfer capacity

6. Making better reinsurance decisions… Key Lessons – Tender Process World Bank procurement rules dictated that all aspects of TCIP be tendered. Concern raised by reinsurance practioneers (brokers and reinsurers) that tender rules were unworkable within the Reinsurance Market Working with the World Bank a tender process was developed which suited both the practices of the reinsurance market and World Bank constraints.

7. Making better reinsurance decisions… Key Lessons – Tender Process The overriding message from this process: “a compelling desire of all parties concerned to secure a common goal in achieving a scheme that was both designed around and implemented for the good of the Turkish people”

8. Making better reinsurance decisions… Key Lessons – Structured Process World Bank instituted a structured process to ensure detailed risk assessment to ensure the validity of the concept through to actual risk transfer. Four main categories 1.Review of Loss Potential & Catastrophic Risk Modelling 2.Risk Allocation – Burden on Central Budgets & Fiscal benefits 3.Role of Insurance Sector, Reinsurance & Capital Markets 4.Hazard Mitigation

9. Making better reinsurance decisions… Key Lessons – Risk Assessment and Modelling All parties recognised the importance of risk assessment to validate the proposed operation of TCIP. The outputs of the modelling process were critical in providing reinsurers with the pricing comfort to allow them to commit significant capacity.

10. Making better reinsurance decisions… Key Lessons – Role of Co-ordination & Administration The ability of the World Bank and the Turkish Treasury to practically implement the scheme so soon after 1999 Izmit Earthquake was due to the strong influence and professional guidance of the appointed manager – Milli Re As an experienced buyer of major catastrophe reinsurance programmes on their own account Milli Re have not only the requisite skills but the necessary credibility with reinsurers.

11. Making better reinsurance decisions… Key Lessons – Distribution and Claims Settlement The private Turkish insurance industry already had in place both the distribution system through their agents and the claims settling ability to implement the scheme. The World Bank and the Turkish treasury were able to sub-contract these functions to a well established and professional industry

12. Making better reinsurance decisions… Key Lessons – Early involvement of Reinsurers Even before the concept had been fully endorsed by the Turkish Government key reinsurers had been approached and their ideas collated. This early involvement allowed a broad consensus to be built up ensuring that reinsurers were prepared to commit substantial capacity once the scheme was finalised

13. Making better reinsurance decisions… Key Lessons – Innovative Reinsurance Structure Many different structures were considered during the structuring process. Driven by potential early cash flow constraints and an uncertain development pattern in the initial stages the following structure was developed.

14. Making better reinsurance decisions… Key Lessons – Innovative Reinsurance Structure Conventional cover for 12 month period USD 18,000,000 xs USD 2,000,000 USD 20,000,000 xs USD 20,000,000 USD 68,000,000 xs USD 40,000,000 Option to purchase additional cover as exposures increased USD 81,000,000 xs USD 108,000,000 USD 189,000,000 xs USD 189,000,000 USD 162,000,000 xs USD 378,000,000

15. Making better reinsurance decisions… Key Lessons – Total Capacity Provided Over the last three years Reinsurers have provided the necessary capacity to fully protect TCIP’s exposures. Actual capacity is as follows 2000 USD 540,000,000 2001 USD 830,000,000 2002 USD 700,000,000 Based on the current supply of capacity by the global reinsurance industry we believe that TCIP’s capacity requirements will continue to be satisfied.

16. Making better reinsurance decisions… Key Lessons – Total Capacity Provided

17. Making better reinsurance decisions… Key Lessons – Ongoing Development Timing of the start up of TCIP created challenges in terms of exposure growth expectation and cash flow. Other external issues impacted TCIP: 1.Turkish economy suffered a severe recession in 2001 2.Global reinsurance market suffered the largest ever loss in the 9/11 World Trade Centre disaster

18. Making better reinsurance decisions… Key Lessons – Ongoing Development Reinsurers were flexible and the consortium of brokers were able to negotiate some substantial improvements mid term such as:  Amending the basis of premium adjustment as the growth expectations were not realised  Inclusion of No Claims Bonuses mid term Doubtful whether Capital Markets would be able to provide a similar level of flexibility

19. Making better reinsurance decisions… Summary – Key lessons  Involvement of the World Bank to provide capital, structure and rigor to the process.  Committed involvement of Turkish Treasury to ensure the delivery of fiscal benefits and necessary legal structures  Need for an experienced local manager to operate the scheme and manage the risk transfer process  Creation of a robust risk assessment model to demonstrate the validity of the scheme to all parties including reinsurers

20. Making better reinsurance decisions… Summary – Key lessons  Early involvement of major reinsurers  Ensure flexibility within risk transfer scheme in early stages of development  Constantly monitor and fine tune the risk transfer process as exposures develop