World Bank Contribution to Global Insurance Markets: A Market Perspective

1. June 2, 2003 Assessing the World Bank Contribution to the Development of Global Insurance Markets: A Market Perspective Sean Mooney New York

2. Agenda • Introduction to Guy Carpenter • What the “Market” wants • What the World Bank is doing • What the World Bank can do • Case Study • Conclusion

3. Guy Carpenter & Co., Inc. • The reinsurance intermediary subsidiary of Marsh & McLennan Companies • MMC is a global professional services firm with annual revenues exceeding $10B. Core businesses: • Risk and insurance • Investment management • Consulting • MMC has approx. 59,000 employees who provide analysis, advice and transactional capabilities to clients in more than 100 countries.

4. Guy Carpenter & Co., Inc. • 49 offices in 22 countries - 2200 employees • Leading catastrophe risk reinsurance intermediary: • Over $3B in catastrophe reinsurance premium • Over $35B in Limits placed annually • Intermediary for numerous governmental catastrophe programs

5. What the “Market” wants • Reinsurance is a global business • Reinsured natural disaster exposures are heavily concentrated - USA, Europe, Japan • Better diversification = better risk profile • Strong desire for additional diversifying risk • As such, the “Market” welcomes the development of new catastrophe insurance markets • Preference for market-based solutions

6. What The World Bank is Doing • TCIP is the case study for Public/Private partnership: • World Bank worked with Turkish Govt throughout • Brought together the necessary resources and expertise. • Successful first effort • Enthusiasm for the efforts of the World Bank • Reinsurers support efforts in other countries

7. What The World Bank Can Do • Reinsurers recognize that developing economies can benefit from external funding and expertise in: • Risk mitigation • Set up of catastrophe insurance programs • Catastrophe risk transfer techniques • Reinsurance • Capital markets • Organization and funding required for these • World Bank is well suited to this task

8. What The World Bank Can Do • Reinsurers recognize that The World Bank is unique: • Mission to help the World’s poor • Expertise in large, complex project management • Not profit motivated • Can provide low-cost funding • Important to developing countries • Private market natural disaster experts do not share all of these attributes

9. What The World Bank Can Do • Reinsurers see key roles of World Bank: • Impartial Interface with Government bodies • Project management, if required • Funding for studies: • Mitigation • Feasibility • Insurance and risk transfer • Low cost financing of “retained” risks -- e.g. reinsurance program deductibles.

10. What The World Bank Can Do • Reinsurers expect even smoother future projects: • Benefits of experience • All parties understand processes and approaches better e.g.: • Reinsurance broker and reinsurer interaction • World Bank tender process • Reinsurers applaud and encourage World Bank efforts

11. Case Study:Taiwan Residential Earthquake Insurance Pool (TREIP)

12. Case Study: Taiwan Residential Earthquake Insurance Pool (TREIP) • Formed April 1, 2002 • Formed as a result of Chi-Chi Earthquake, 9/21/1999 • Lack of Residential Earthquake Insurance cover • Vulnerability of Taiwan to Earthquakes

13. Chi-Chi Earthquake • September 21, 1999, 1:47 am (local time) • Magnitude 7.3 -7.7 • Central part of Taiwan

14. Chi-Chi Earthquake • Over 2,400 lives were lost • More than 10,000 people were injured • Over 5,000 buildings collapsed Taiwan’s worst disaster since the Shin-Chu Taichung earthquake of April 1935, magnitude 7.1, where 3,325 lives were lost.

15. Vulnerability of Taiwan to Earthquakes • Taiwan is a seismically active region • Affected by many earthquakes each year • Taiwan is being compressed and forms a transitional zone between two areas of subduction, as a result of the collision between the Philippine and Eurasian plates

17. Lack of Residential Earthquake Insurance cover • Prior to the Chi-Chi earthquake, only about 1% of the residences in Taiwan had earthquake insurance • Earthquake insurance was available as an endorsement to long term fire policies

18. Taiwanese Government’s Main Goal • Availability of earthquake damage compensation to Taiwan residents • Concern as to whether compensation would be available to most residents following an event • Includes a quasi-mandatory purchase of earthquake cover

19. Secondary Goals • Affordable Insurance • Minimize government budget exposure • Ministry of Finance (MOF) required all insurance companies to provide coverage for residential earthquake risk • Public/Private cooperative solution

20. Characteristics of Taiwan • Taiwan is a small island, but is one of the most densely populated countries in the world. • The earthquake risk is very high. Taiwan has numerous fault lines, and relatively high probabilities of activity along the fault lines. • Traditionally residents are reluctant to purchase property insurance. This is a global trait, but appears to be relatively higher in Taiwan.

21. Characteristics of Taiwan (Continued) • Until TREIP, residential insurance policies in the main were purchased for the life of the mortgage. • Single family western-style residences are rare (seven percent of all households).

22. Insurance Policy • Fixed Premium per Household: NT$ 1,459 • Building, maximum sum insured amount: NT$1.2 million • Contingent Living Expenses (CLE): NT$180,000 • No cover for contents • Flat Rate (no variation by location or type of structure)

24. FundingStructure of TREIP Pro Rata Layer 4 Layer 3 Layer 2 Layer 1

25. Program Administration • TREIP managed by Central Reinsurance Corporation (CRC) • Part owned by the Government • Long time reinsurer of Taiwanese and international risks • Professional/ well established expertise in reinsurance

26. Current Situation • Number of Policies as of 12/31/2002: 495,824 • Total Exposure: NT$ 750 Million • Take-up Rate: 8.7%

27. Summary • TREIP successfully launched • Stable financial support • Excellent public/private partnership • Strong reinsurance support • Achieving key goal of availability

28. Achieving Strong Support from Reinsurers: Lessons Learned • Professional Management of TREIP • High Quality Data • Adequate original pricing • Legal structures in place to manage disputes • Defined claims settlement process

29. Role for the World Bank? • Taiwan is a relatively wealthy economy with substantial resources thus able to: • Fund • Feasibility studies • Earthquake risk assessment (modeling) • Domestically retained substantial risk • Other economies not in the same position: • World Bank can provide the foregoing for less developed economies

30. Conclusion • World Bank should continue its efforts: • Improve economies of developing nations • Simultaneously, help the international risk transfer markets function more efficiently

31. June 2, 2003 Assessing the World Bank Contribution to the Development of Global Insurance Markets: A Market Perspective Sean Mooney New York