1. Crisis Appearance in Reinsurance Development: Former Soviet Union Dmitry GARMASH Deputy Managing director, PhD Unity Re Ltd. III International 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 4 th as per the amount of insured losses the 3 rd 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 – 60 billion USD loss for 4Q 2008 = world maximum since 2002 (Time Warner – 54 billion USD)

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

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. CountryNumber of insurance (reinsurance) companies Insurance premium non-life, USD Inward reinsurance premium, USD Out-ward reinsurance premium, USD Russia857 (29)29,6 billion2,536 billion2,2 billion Ukraine446 (1)3,6 billion1 billion1,27 billion Kazakhstan41 (0)1,2 billion130 million510 million Azerbaijan30 (1)175 millionn/a Uzbekistan27 (1)56 million4,8 million22 million Tajikistan15 (0)27,5 million24 thousand18,5 million Kyrgyzstan14 (0)5 millionn/a Source: Asia Insurance Review; Forinsurer.com; FSIS of RF; Orien Insurance; RP News. Russia & CIS before 2008…

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

10. MarketsNew niches sources by rising demand for alternative capacity Stake on ‘soft’ niches Stake on reliable cooperation & own audit and evaluation of partners CedantsRising role of R/I in backing insurer’s stability  additional demand + reconsideration of retentions/limits policies Increasing number of markets in security lists to decrease individual credit risk exposure of cedant BrokersGlobal increase of brokers’ role as distribution channel – lower acquisition costs, attracting various-scale businesses, regional clients, alternative capacity Competition & New players Growth of price competition + softening of alternative markets Селекция игроков за счет ухода и M&A Regulatories & legislation Strengthening & restructurisation of state influence to (re) insurance sector Capital & ratingRise of qualitative requirements to capital & rating Rise of demand for international rating More tough conditions for rating & capital modelling Change in business environment

11. Market positionClients’ field cover; speed of reaction; capacity; rating ManagementProfessional selection of staff; corporate unity; ERM Corporate strategyIntensifying development; optimization & rationalization Investments, liquidity, financial mechanism Tough control of accounts receivable; quality of investments & assets; conservative strategy CapitalizationTough control of reserves adequacy; retro cover & additional counterparty selection Change in key points of analysis

12. 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) Change in rating approach

13. 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 Change in market challenges

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