July, 2012 Catastrophe Insurance Overview AIIF 2012, Baku, Azerbaijan

- 2 - Contents 1.Catastrophes and man-made disasters 2.Insurance industry response to large losses Capacity and rates Cat modeling Rules and regulations 3.Caucasus Cat risks Insurance market 4.Chartis experience in the region

- 3 - Source: Swiss Re

highlights According to Swiss Re catastrophes and man-made disasters claimed about lives and resulted in economic losses of over US$ 370B in With insured losses of US$116B 2011 makes it second worst year for insurance industry (second only to 2005 with US$120B in insured losses). Japan Earthquake: - Total economic losses – US$ 210B (estimate) - Insured losses – US$ 35B, the most expensive earthquake event Losses recovered are big in absolute terms but represents only a fraction of total losses revealing the low penetration. In comparison New Zealand earthquake caused US$15B in economic losses of which US$12B were insured losses. Thailand flood caused roughly $12B of insured losses, the most expensive flood loss in history. Loss from US tornados, risk that was not considered as Cat for modeling purposes, exceeded $20B

- 5 - Industry response - Very high loss ratio due to unprecedented sequence of Cat events - Due to economic stagnation/crisis investment income has fallen and will not support the overall performance - Soft market cycle has hit the rock bottom - Existing Cat models require significant overhaul having failed to provide level of accuracy needed to support the pricing tools - Capacity migration from Cat areas to non-Cat areas - Property rates gone up 5-15% for Cat capacity at 2012 renewal - Existing Cat modeling tools will continue to undergo significant changes - Companies will use multiple modeling methods and work out internal customized adjustment tools

- 6 - Rules and regulations  By far not all buildings comply with earthquake codes and main designation of the codes is to minimize loss of lives (this applies both to earthquake and fire, etc. codes/regulations)  Recent earthquakes in countries with varying degree of development and earthquake zones (Chile, New Zealand, Haiti and Japan) showed that building codes require significant review as they revealed that potential impact of earthquakes is severely underestimated  Examples: –New Zealand is mapped as zone 2 (in 0-5 scale, 5 being the worst) for earthquake and it was hit by 2 devastating quakes within the least 2 years –Flood risk for Thailand was considered as “incidental exposure” by insurance industry and sends strong signal for more risk prevention and mitigation measures to be put in place

- 7 - Caucasus

- 8 - Cat risks in Caucasus  Almost entire region lies in a seismic zone. Earthquake is potentially the most destructive risk both in terms of loss of lives and economic losses  Low frequency of earthquake creates a false sense that the risk is low  Recent large scale earthquakes increased public awareness but insurance penetration against earthquake remains low even in developed countries  Certain areas of the region have significant exposure to flood and landslides also

- 9 - Azerbaijan insurance market  Azerbaijan has made an impressive progress by increasing the local market capacity from US$100M in 2008 to $250M in But this is still a small number and the country relies on international markets for placement of larger risks.  Property insurance loss ratio is relatively low at around 10% but this statistics may be misleading in the absence of low frequency high severity Cat events With the latest real estate boom and large scale investment into infrastructure projects in Baku risk accumulation needs to be carefully monitored Low penetration ratio of insurance services may result in significant burden on government in case of large scale earthquake

Chartis in Caucasus  AIG/Chartis has fully licensed local operation in Azerbaijan since 1999 as the first major international insurer entering the market  Georgia operation started in 2005  We have been integral part of the Caucasus market during the evolution period by providing expertise, educating customers and providing technical assistance to our partners

Chartis experience in Property insurance  We closely monitor and control accumulation in key areas  Chartis Commercial Property has a market leading expertise and has increased per risk gross capacity to $1.5 Billion on a worldwide basis.  We provide practical recommendations to our clients/partners to minimize losses using our in-house risk engineering capabilities (next slide with more info)  We have an unmatched experience to efficiently/quickly settle large losses worldwide  We understand the local needs, we speak the local language and we are just around the corner to reach us!

Chartis Risk Engineering  We can conduct a comprehensive review of your property and the associated risks. Our engineers will not only assess the fire protection and emergency response but also the management programs in place to reduce these risks. The impact of a major loss will be analyzed with facility management, and any resulting business interruption impact risks will be assessed.  Sprinkler Design/Approval - Our engineers can review sprinkler design drawings and calculations helping to ensure that sprinkler systems are designed and installed in accordance with either international or local standards.  Project Planning - We can assist with managing any project to verify that building designs not only meet local building regulations, but also use materials accepted by the general insurance market. We can also help ensure that fire and security protection is commensurate with the proposed risk.  Best Practice Assessment – Chartis’ Commercial Property Engineering team has risk evaluation tools to rate each of your operations against industry best practice standards. We will also be able to demonstrate those areas that can improve your rating.  Risk Improvement Trending - Our account engineers can trend Risk Improvements to see if there are issues that need to be addressed at a group level. Seminars can be arranged to address these issues.  Business Continuity Planning (BCP) - Business interruption loss can often exceed the costs associated with Property Damage. We can assist with the development of comprehensive BCP plans, single stage business impact analyses (BIA) and plan tests. Issues addressed could include: single sourced materials, critical equipment, interdependencies and key customer concerns.

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