1. Reserving and Pricing in Liability Insurance 2 nd International Istanbul Insurance Conference 30 September 2010 Prepared by Thomas Cordier, FCAS, FIA Aon Benfield Analytics

2. 1 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Key Message Investing in strong technical capabilities now is critical for future success

3. 2 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Agenda Section 1Some facts about the Turkish liability market Section 2Playing by the rules Section 3Summary

4. 3 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Agenda Section 1Some facts about the Turkish liability market Section 2Playing by the rules Section 3Summary

5. 4 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Some Facts about the Turkish Liability Market Source: Turkish Treasury, Insurance Supervision Board

6. 5 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Some Facts about the Turkish Liability Market Growth of non-life business Source: Turkish Treasury, Directorate General of Insurance Non-life Premium Production of the last 5 years 0 2.000 4.000 6.000 8.000 10.000 12.000 20052006200720082009 Years TL million 0 5 10 15 20 25 30 % premiumsincrease

7. 6 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Some Facts about the Turkish Liability Market How much can the Turkish market continue to grow? Country P&C GWP ($B) GDP ($B) Premium/GDP U.S. 462.33 14,256.30 3.2% U.K. 71.93 2,174.53 3.3% Germany 67.10 3,346.70 2.0% France 62.66 2,649.39 2.4% Italy 44.09 2,112.78 2.1% Spain 33.08 1,460.25 2.3% Russia 12.48 1,230.76 1.0% Austria 9.13 384.91 2.4% Poland 5.89 430.08 1.4% Turkey 5.61 617.10 0.9%

8. 7 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Some Facts about the Turkish Liability Market Profitability of insurance companies over the last 5 Years 0,00 1.000,00 2.000,00 3.000,00 4.000,00 5.000,00 6.000,00 7.000,00 8.000,00 9.000,00 10.000,00 20052006200720082009 years TL million 0 5 10 15 % equityprofitroe Source: Turkish Treasury, Directorate General of Insurance

9. 8 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Some Facts about the Turkish Liability Market  Amendment of reserve regulation (2008)  High inflation levels (CPI circa 10% since 2005, was much higher previously)  Use of tariffs or regulator approval in a number of lines of business  Medical Malpractice reform (July 2010)  New reserving guidelines (expected in late 2010)  MTPL limits have increased to TL 175,000 ( March 2010)- further increase to TL 200,000 (January 2011) Recent events affecting liability lines in Turkish Liability lines

10. 9 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Agenda Section 1Some facts about the Turkish liability market Section 2Playing by the rules Section 3Summary

11. 10 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Playing by the rules Recent developments  Increase in case reserve level for large liability claims observed in a number of Central and Eastern Europe countries  High inflation  Increase in MTPL limits  New reserving requirements Impact: make projections more uncertain, actuaries increase ultimates. Reinsurers have already responded by increasing rates heavily. Are we going to see an increase in reserves for primary insurers? Have reinsurers over-reacted to these changes? Actuarial drivers of reserving and pricing

12. 11 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Playing by the rules Tariffs  Write liability lines at an unprofitable rate (legal minimum) may make sense because it allows cross-selling opportunities  How to identify customers who are genuinely profitable overall and those who aren’t?  Generalized Linear Models (GLM) combined with good underwriting standards provide a way of monitoring expected gains/loss per insured by line and overall. In the long run, companies with the most advanced rating system will end-up writing more “good risks”, leaving less profitable risks to their competitors (anti-selection). This remains true even in the presence of tariffs. Regulatory constraints

13. 12 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Playing by the rules Capital  Overall worldwide trend towards more disclosure and a better understanding of risk (e.g.: Solvency II in Europe, Solvency Modernization Initiative in US)  Lack of consistency within a company may lead to: –Deteriorating underwriting results –Increased volatility in earnings –Increased regulatory capital requirements Companies with an embedded internal capital model and a coherent risk management framework will be better equipped than others to face future uncertainty. Risk Management and Internal Model

14. 13 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Playing by the rules Formulating a risk appetite that can flow down to all areas of the business  Use of proportional reinsurance can help support growth  As capital is built-up, shift to non-proportional reinsurance to cede less profit and reduce volatility of earnings  Insurers also benefit from brokers and reinsurer’s technical expertise Internal Model helps optimize reinsurance program and it ensures that your company receives sufficient capital credit for your reinsurance program Reinsurance to support growth and reduce volatility of earnings

15. 14 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Playing by the rules Reinsurance to manage capital

16. 15 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Agenda Section 1Some facts about the Turkish liability market Section 2Playing by the rules Section 3Summary

17. 16 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Summary  The Turkish liability market is going through a period of great changes  Even in the presence of tariffs companies can select the best risks by using GLM and a strong underwriting process  An embedded risk management process and a well-designed internal model will help optimize capital  Reinsurance is a great tool to align a company’s exposure to its risk appetite, manage capital and reduce earnings volatility Companies that invest in strong analytical capabilities now will gain a decisive competitive advantage for the next few years

18. 17 Reserving and Pricing in Liability Insurance | Thomas Cordier International Istanbul Insurance Conference | 30 September 2010 Contact List Thomas Cordier, FCAS, FIA Aon Benfield London Analytics +44 207 522 8244 thomas.cordier@aonbenfield.com thomas.cordier@aonbenfield.com Müge Diren Aon Benfield Istanbul Senior Account Executive +90.212.282.7100 muge.diren@aonbenfield.com muge.diren@aonbenfield.com