Worldwide reinsurance market And the Russian case

1. Worldwide reinsurance market And the Russian case PRE's view

2. Worldwide reinsurance market And the Russian case Worldwide Reinsurance trends • The Reinsurance industry has lived up to its role – “black swan” events volatility absorption: • 2011 • The reinsurance industry can absorb volatility over the short term (2011: 3 of the 15 most expensive Cat events (for the last 40 years) • $12bn+ cash-out payments for Japan EQ • …but needs to deliver appropriate returns in the medium term: Excellent results in the industry 2012

3. Worldwide reinsurance market And the Russian case Insurers and Reinsurers – our upcoming challenges • Anemic economic environment • Persistent low interest rates • Increased regulatory pressure • Climate change • Mid-term inflation return?

4. Worldwide reinsurance market And the Russian case Are Russian Property per risk XL too expensive? • + “Yes” + • Historic results good to satisfactory. Around 70-80% of all our treaty years deliver a technical (pure loss ratio consideration) “profit” to reinsurers. • Portfolio performance of reinsurers is depending on participation (or not) at few “key burners” • But overall it is NOT brilliant anymore! And: • Treaties are very volatile and often have a very high limit, which is very capital intense, causing high capital costs, which are NOT reflected in the below information!

5. Worldwide reinsurance market And the Russian case Are Russian Property per risk XL too expensive? (2) • - No - • According to our analysis, large claims (xs. USD 0.1m) happen more often (frequency doubled between 2007 and 2010) - and are far more frequent*: * Displayed (in USD) is average of all known fgu. losses xs USD 0.1m out of a sample of about 20 treaties, comprising between USD 200 and 320m of annual GNPI / SUPI of property per risk XL treaties. Numbers are weighted and undiscounted, losses “Protek” and “Konkordia” are taken out.

6. Worldwide reinsurance market And the Russian case Are Russian Property per risk XL too expensive? (3) • - No - • Claims used to be by tendency overreserved by Russian cedants in the past (e.g., 2008 and 2009). Recent underwriting years (2010 and 2011), however, see an increase in incurred loss ratio*. We have to take that into account in pricing. * Displayed are all property per risk XL treaties in Russia, as per PRE results in the underwriting years 2008 – 2011, so it is based on a significant monetary amount of claims. Shown is the percentage of incurred loss ratio at the beginning of each development year (“DY”) compared to the “ultimate” loss ratio as of today, March 2013. Read: UWY 2009 (the yellow curve) shows around 112% in DY 2, meaning that at the beginning of 2010 (beginning of the second development year), the loss ratio was 112% of the ultimate, i.e. the year was overreserved initially.

7. Worldwide reinsurance market And the Russian case Russian specifics I : “All Cover XL” • In most markets, XL are designed to cover certain segments of certain parts of insurance portfolios, e.g.: Typical case in Western markets Cargo Liab. Entire property portfolio Energy Engineering Industrial “Fire” International International International Fac R/I Other treaty R/I ALOP, DSU, CBI, MBI etc. Separate Quota Share All Risk (gross or net) XL Cat XL and / or Proportional program Utilities Our XL Inward risks CIS, Fine Arts, Jewellers’ Block and other specific covers … CPM

8. Worldwide reinsurance market And the Russian case Russian specifics II : “All Cover XL” • In Russia, XL cover slightly wider Extreme case – but realistic… Cargo Liab. Entire property portfolio Energy Engineering Industrial “Fire” International International International Fac R/I Other treaty R/I ALOP, DSU, CBI, MBI etc. All Risk Utilities Our XL Inward risks CIS, Fine Arts, Jewellers’ Block and other specific covers … CPM

9. Worldwide reinsurance market And the Russian case How we price – and how we would price cheaper (1) • We price by Burning Cost, where we have sufficient claims, otherwise we use exposure curves and pareto or other distributions (especially for higher layers). • We try to do this as granulated as possible, i.e. separated by engineering / property, industrial / commercial, energy / non-energy, collateral / non-collateral business etc.. As of 2013, we analyse warehouse portfolio separately (nearly 50% of all claims – warehouse claims).

10. Worldwide reinsurance market And the Russian case How we price – and how we would price cheaper (2) • Main driver to get it cheaper: Accuracy and quality of information! • - Increases our trust in the capabilities of the cedant to control its own business • - Helps us to replace assumptions (by tendency conservative) by information • - Helps us to taylor-made offers better • Other drivers: Adequate retention, “vertical retention”

11. Worldwide reinsurance market And the Russian case Typical shortcomings of submissions • - Explain profiles produced: Gross / net of costs and outgoing / incoming reinsurance, UW or calendar year, period or snapshot, PML or TSI • - Use the original currency of historical data, also for the claims. Explain, how portfolio has changed (e.g., why certain claims today could not happen anymore) • - Advise all (even those which developed subprio) claims in the past xs. claims threshold, which should be far below priority and communicated! Do not show claims which did not hit the treaty in the past and would not hit it in future.

12. Worldwide reinsurance market And the Russian case Typical shortcomings of submissions (contd.) • - Inform us about your Russian business partners iro. incoming / outgoing reinsurance of all risks with sum insured (limit, PML, LL respectively) of > USD 200m. This helps reinsurers to manage their per risk accumulation exposure control. • - If you want to cover Cat, show us the regional split and known accumulations – this will be appreciated greatly by reinsurers. • - Engineering: For LOD treaties show us the split of projects maturities