1. World Bank Group Preparatory Shareholders’ Meeting on SECE CRIF Sarajevo, Bosnia and Herzegovina SECE CRIF: Main Building Blocks Eugene N. Gurenko Lead Insurance Specialist, GCMNB March 16-17, 2009

2. World Bank Group Agenda  What is SECE CRIF?  Why join SECE CRIF?  How will it all work?  What will ensure the success?  Why join now vs. later?  What is expected of countries?

3. World Bank Group  What is SECE CRIF?

4. World Bank Group Main features of SECE CRIF  What is SECE CRIF?  Catastrophe reinsurance pool owned by SECE countries whose sole objective is to increase the number of homes and SMEs insured against natural disasters in the member states by the private insurance market.  What perils will it cover?  EQ and Flood  Why would governments own a reinsurance company?  To facilitate demand for private catastrophe insurance through proactive policies such as public information and awareness building campaigns, instilling confidence in consumers, etc.

5. World Bank Group Why can’t the market do this on its own? Catastrophe risk is difficult to price and manage. Lack of demand contributes to the problem.

6. World Bank Group Wouldn’t membership in CRIF be against the market competition Articles of the Stabilization and Association Agreement with EU?  …to the extent this program (or state aid to this program) may:  (i) object to, prevent, restrict or distort competition;  A: CRIF will not prevent, restict or distort competition in the insurance market as private insurance companies will continue selling their existing catastrophe insurance products as before; participation in the program will be voluntary and pricing of the insurance products will be in line with the market.  (ii) abuse its dominant position in the territories of the Community or SEE countries;  A: There will be no abuse; CRIF will be a rather small venture compared to the main other reinsurance players in the market.  (iii) distort or threatens to distort competition by favouring certain undertakings or certain products.  A: Government contributions toward CRIF equity will be small and insignificant compared to the overall amount of risk capital required by the program - but even then the reinsurance premium charged by CRIF will account for the full cost of equity capital contributed by governments at the prevailing market rate.

7. World Bank Group Main features of the SECE CRIF: Is there any international experience in catastrophe risk pooling?

8. World Bank Group Will insurance coverage be affordable for homeowners and businesses?  Premium rates will vary based on:  Proximity to EQ faults and flood zones;  Buildings structural characteristics;  And chosen deductibles and sum insured  With the technical premium estimates being around around €20-40 for a house with an insured limit of €30,000 and a 2- 3% deductible.  These rates however are only preliminary indications subject to change based on further advances in risk modeling and the cost of retrocession.

9. World Bank Group Wouldn’t low risk countries subsidize high risk countries? Regional diversification effects: an Example – 2 nd year of operations Diversification effects : costs of risk capital Each country benefits from diversification effect proportionally to it’s risk exposure  no cross-subsidisation, fair diversification relief for all participants  Assumed penetration: 6% of residential building stock in capital cities and 4% outside  Resulting diversification effect: 49.4%

10. World Bank Group What is the exit strategy for government shareholders?  Government shareholders will be able to sell up to 30% of their shares in 3 years from the commencement of SECE CRIF operations and up to 100% within 5 years to private investors.  Upon exit government shareholders will receive at least the full amount of their principal equity contribution plus accrued interest.

11. World Bank Group  Why would a country want to join SECE CRIF?

12. World Bank Group Projected cost of recent earthquakes in the region in 2008 vs. resources available from EU Solidarity Fund Can reduce budget exposure to natural disasters; Can enable households to receive immediate payouts; Can reduce physical vulnerability of housing stock; Can boost growth of local insurance industry; Lower premiums through risk diversification. In the environment of global financial crisis low catastrophe insurance coverage may result in a major financial and fiscal shocks as losses will have to be absorbed by already stretched government and household budgets.

13. World Bank Group Transaction costs compared: National vs. regional scheme

14. World Bank Group What will be the benefits for both clients and local insurers selling stand-alone catastrophe insurance policies?  Homeowners in member countries will receive access to affordably priced reliable catastrophe insurance coverage, which will protect them from financial consequences of natural catastrophes.  Domestic insurers participating in the program will receive (i) insurance commissions from sales of new insurance product; (ii) risk premium from partial risk retention; (iii) access to new clients; (iv) technical assistance in pricing, underwriting and risk management of catastrophe risk from the Facility; (v) access to competitively priced long-term reinsurance capacity.

15. World Bank Group  How it will all work?

16. World Bank Group 16 Business model in support of a stand-alone catastrophe insurance cover Insureds (Clients) Europa ReAgents Government/ Shareholders Capital ROI Gross Premium Coverage Ceding Premium R/I capacity TA Net Premium Coverage Claim payment Underwriting Business Generation Underwriting and Risk & Capital Management Distribution Channel Insurer CRIF (Europa Re) will be registered as a reinsurance company in Switzerland It will provide long-term reinsurance capacity to private insurers offering stand-alone cat coverage It will provide underwriting, pricing and risk management support to participating companies

17. World Bank Group EUROPA Re Country A: Primary Insurers Country A: Homeowners & SMEs premiumcoverage Country B: Primary Insurers Country B: Homeowners & SMEs premiumcoverage Country C: Primary Insurers Country C: Homeowners & SMEs premiumcoverage - premium -risk info - premium -risk info - premium -risk info - underwriting tools -pricing guidelines -reinsurance coverage -claims management training Country- shareholders Management Company Independent Board Board Chairman Reinsurers - premium -risk info -retrocession Governance Lenders Donors -sub-debt -grants Countries -equity Capitalization sources Insurance Operations Swiss Federal Office of Private Insurance Supervision Country Insurance Regulators Risk management CEO SECE CRIF at glance:

18. World Bank Group  What will ensure CRIF success?

19. World Bank Group Four arrows of success 1 Strong government commitment Start-up situation...... and a clear goal: Sound insurance regulations Strategic focus on increasing rates of cat coverage in participating countries –Increased rate of insurance coverage –Eventual privatization –Minimum cat coverage –Low demand Professional management 2 Good governance 3 4

20. World Bank Group Strong government commitment to the program  The success of CRIF will depend on countries’ willingness and ability to:  create the enabling regulatory and legal framework for the operations of the program;  carry out extensive public information and awareness campaigns about the availability and benefits of catastrophe insurance products;  Carry out policies that will encourage sound disaster risk management practices by homeowners and companies, e.g.:  linking mortgages in disaster prone areas to catastrophe insurance  limiting post-disaster aid to a defined amount or a fraction of insured limit  actively participate in program’s governance through shareholders meetings and participation on policy advisory board.

21. World Bank Group Professional operational management  CRIF will be managed by an independent insurance services company (Management Company) with dedicated full time and highly experienced technical staff.  Management company will be selected through a global tender on the basis of:  technical qualifications of proposed management team;  IT capabilities  cost  To ensure the quality of CRIF operations, compensation of Management Company will be linked to the operational performance of CRIF.  The company will adopt the state of the art risk management systems.

22. World Bank Group Good governance  Good governance will be crucial to the success of EUROPA RE.  One the key elements of good governance envisaged by the business plan is a clear separation of company’s business operations from the government ownership of the facility.  To ensure the success of the program, EUROPA Re will have an independent professional Board of Directors consisting of reputable insurance/reinsurance professionals with well established track record in the industry.  Overall strategic oversight and policy decisions will remain with company’s shareholders which will developed and exercised through Annual Meetings of Shareholders and Advisory Policy Board.

23. World Bank Group Sound regulatory framework  EUROPA RE will be domiciled in Switzerland – the country with one of the most advanced and sound regulatory regimes in the world.  Besides minimum capital requirements required under Solvency I, as of 2011 the company will have to comply with risk-based solvency requirements prescribed by Swiss Solvency Test – which results in an almost 10 fold increase in the amount of solvency capital required for a catastrophe reinsurer.

24. World Bank Group  Why join now vs. later?

25. World Bank Group Benefits of leadership  Founding shareholders of EUROPA RE will benefit from:  Free country risk assessment studies and technical assistance work (funds are limited);  Additional capital gains/equity upside potential (besides the guaranteed interest on their equity contributions);  Earlier access to affordable coverage for homeowners and SME.

26. World Bank Group  What is expected of countries?

27. World Bank Group Next steps  Sign the shareholders’ agreement by no later than May 1, 2009 and send it back to RCC.  Send the letter to RCC specifying the contact persons that will be representing the country in the program.  Deposit your equity contribution to the facility’s account within 1 month after signing the Shareholders Agreement - the size of country equity contributions will be determined as follows:  2.163 x Total Number of Housing Units (according to the country latest Census, but no less than $1 mm and no more than $5 mm).

28. World Bank Group For future country shareholders  Upon receipt of country commitment letters, Homburger (the law firm handling the registration of the company) will dispatch to the countries a package of Shareholders’ Documents, including its Business Plan and Shareholders’ Agreement.  Countries will then be invited to the first Founding Shareholders’ Meeting to be held in the second week of December 2008 for an official ceremony of signing the Agreement and launching the program.

29. World Bank Group  Thank you for your attention!  Contact details:  egurenko@worldbank.org egurenko@worldbank.org  202 458 5414