world bank group preparatory shareholders’ meeting on sece crif sarajevo, bosnia and herzegovina...

World Bank World Bank GroupGroup

Preparatory Shareholders’ Meeting on SECE CRIF Sarajevo, Bosnia and Herzegovina

SECE CRIF: Main Building Blocks

Eugene N. GurenkoLead Insurance Specialist, GCMNB March 16-17, 2009


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?


What is SECE CRIF?


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.


Why can’t the market do this on its own?

0

10

20

30

40

50

60

70

80

90

100

%

Houses insured against natural perils

•Catastrophe risk is difficult to price and manage.

•Lack of demand contributes to the problem.


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.


Main features of the SECE CRIF: Is there any international experience in catastrophe risk pooling?

Table 1. Specialized catastrophe insurance pools world-wide, 2008.

Country Institution Cover Type Algeria CCR EQ PPP France NatCat/CCR EQ/FL/WS/LS/S PPP

Caribbean region CCRIF EQ/WS PPP Indonesia Maipark EQ Private

Japan JERe EQ PPP New Zealand EQC EQ PPP

Norway Norsk Naturskedepool WS/FL PPP Spain Consorcio EQ/FL/WS/LS PPP

Taiwan TREIP EQ PPP Turkey TCIP EQ PPP

US (CA) CEA EQ PPP US FEMA FL PPP

US (FL) Citizens WS/FL Public US (FL) FHCF WS Public

Notes: EQ-earthquake; FL- flood; WS – windstorm; LS – landslide; S – subsidence; PPP – public private


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.


Wouldn’t low risk countries subsidize high risk countries?

Regional diversification effects: an Example – 2nd 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%


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.


Why would a country want to join

SECE CRIF?


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. 1.12.0

17.0

1.3 1.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Euro, bn

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.


25 25

10

2

0

5

10

15

20

25

CHF mm

Minimum capital

Organizational expenses

IT

Management

Risk modelling

Underw riting and actuarial services

Transaction costs compared: National vs. regional scheme


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.


How it will all work?


16

Business model in support of a stand-alone catastrophe insurance cover

Insureds(Clients)

Europa Re Agents

Government/Shareholders

CapitalROI

GrossPremium

Coverage

CedingPremium

R/I capacityTA

NetPremium

Coverage

Claim payment Claim paymentClaim payment

Underwriting Business GenerationUnderwriting andRisk & 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


EUROPA Re

Country A:Primary Insurers

Country A:Homeowners & SMEs

premium coverage

Country B:Primary Insurers

Country B:Homeowners & SMEs

premium coverage

Country C:Primary Insurers

Country C:Homeowners & SMEs

premium coverage

-premium-risk info

-premium-risk info

-premium-risk info

-underwriting tools-pricing guidelines-reinsurance coverage-claims management training

Country-shareholders

Management Company

Independent BoardBoard Chairman

Reinsurers

-premium-risk info -retrocession

Governance

Lenders

Donors

-sub-debt

-grants

Countries -equity

Capitalizationsources

Insurance Operations

Swiss Federal Office of Private Insurance

Supervision

Country Insurance Regulators

Risk management

CEO

SECE CRIF at glance:


What will ensure CRIF success?


Four arrows of success

1Strong 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

Professional management Good governance3

4


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.


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.


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.


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.


Why join now vs. later?


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.


What is expected of countries?


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).


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.


Thank you for your attention!

Contact details:

[email protected]

202 458 5414