Building Effective Public Private Partnerships: Building Effective Public Private Partnerships: A Case Study of Turkish Catastrophe Insurance A Case Study of Turkish Catastrophe Insurance

PoolPool

Eugene N. Gurenko, Ph.D., CPCU, AReEugene N. Gurenko, Ph.D., CPCU, ARe

Sr. Insurance OfficerSr. Insurance Officer

World Bank*World Bank**currently on staff exchange with Munich Re*currently on staff exchange with Munich Re

Washington Risk Management WorkshopWashington Risk Management Workshop

October 27, 2005October 27, 2005

2

Presentation Outline:Presentation Outline:

Historical BackgroundHistorical Background Main Features of TCIP Main Features of TCIP Program of World Bank Assistance to TCIPProgram of World Bank Assistance to TCIP Status of Program ImplementationStatus of Program Implementation

3

Existence of the North Anatolian and East Anatolian faults.

Since 1894, around 120 earthquakes with magnitude over 5.0 took place in the country.

Current situation: 70% of the population lives in the 1st and 2nd earthquake zones.

Turkey’s Seismic Risk Exposure

4

Last 50 Years: Earthquakes in Excess Last 50 Years: Earthquakes in Excess of 6.8of 6.8

5

Expected annual economic losses due to earthquakes Expected annual economic losses due to earthquakes around $1 billionaround $1 billionMarmara and Duzce Earthquakes’ death toll >18,000; Marmara and Duzce Earthquakes’ death toll >18,000; damage >$10 billion damage >$10 billion During the last few years over 100 earthquakes During the last few years over 100 earthquakes ranging from 4.0 to 6.2 on Richter Scale. ranging from 4.0 to 6.2 on Richter Scale. The Afyon (2002) and and Bingöl (2003) are latest The Afyon (2002) and and Bingöl (2003) are latest reminders.reminders.Istanbul is the worst risk - expected direct economic Istanbul is the worst risk - expected direct economic loss from intensity VIII event in excess of $25 billion loss from intensity VIII event in excess of $25 billion and its estimated probability is rather high.and its estimated probability is rather high.

Source: DASK, Bosphorus University, Munich Re

Country Risk Exposure to EarthquakesCountry Risk Exposure to Earthquakes

Historical Background

6

Historical BackgroundHistorical Background

SupplySupply Low capital base and low level of reserves Low capital base and low level of reserves

against earthquakes in the domestic insurance against earthquakes in the domestic insurance industryindustry

Around 600,000 policies with EQ cover Around 600,000 policies with EQ cover DemandDemand Poor prospects of expanding EQ coverage Poor prospects of expanding EQ coverage

since Disaster Law mandated funding of since Disaster Law mandated funding of replacement of dwellings nearly free of charge replacement of dwellings nearly free of charge

Inadequate understanding and management Inadequate understanding and management of EQ risk by households and contractorsof EQ risk by households and contractors

Insurance IndustryInsurance Industry

In 1999, about 2% EQ insurance penetration outside Istanbul and In 1999, about 2% EQ insurance penetration outside Istanbul and 15% in Istanbul; almost 0% in low-income of property market15% in Istanbul; almost 0% in low-income of property market

7

Historical BackgroundHistorical Background

Continuous Continuous government fiscal government fiscal exposure to exposure to earthquakesearthquakes

Losses were Losses were financed with financed with external external borrowings and borrowings and donor assistancedonor assistance

GovernmentGovernment

Potential severity of earthquakes underscores the importance of Potential severity of earthquakes underscores the importance of catastrophe risk transfer programs such as TCIPcatastrophe risk transfer programs such as TCIP

Annual exceedance probability (%)

Economic loss (US$, mill.)

% GDP

0.5 11,406.0 6.20

5.0 3,476.0 1.90

20.0 24.5 0.01

Source: World Bank, Christoph Pusch, 2004.

8

Historical Background Historical Background

Bank Emergency LoansBank Emergency Loans Erzincan Earthquake Erzincan Earthquake

Reconstruction Loan of Reconstruction Loan of $240 million$240 million

Turkey Emergency Flood & Turkey Emergency Flood & Earthquake Recovery Earthquake Recovery (TEFER) Loan of $369 (TEFER) Loan of $369 millionmillion

Marmara Earthquake Marmara Earthquake Emergency Reconstruction Emergency Reconstruction Project (MEER) of $505 Project (MEER) of $505 millionmillion

Limitations of World Bank Limitations of World Bank Emergency LendingEmergency Lending

Cannot provide all liquidity neededCannot provide all liquidity needed Large emergency loans crowd out Large emergency loans crowd out

important development lendingimportant development lending Bank is ill equipped to provide instant Bank is ill equipped to provide instant

liquidity after disasters (a record-liquidity after disasters (a record-breaking MEER took >1 year to make breaking MEER took >1 year to make money available)money available)

Reliance on Bank’s retroactive lending Reliance on Bank’s retroactive lending and emergency donor relief is and emergency donor relief is unsustainable due to frequency of unsustainable due to frequency of catastrophescatastrophes

World Bank’s ConcernsWorld Bank’s Concerns

9

Historical Background of TCIPHistorical Background of TCIP

The ever present country’s risk The ever present country’s risk exposure and its devastating economic exposure and its devastating economic consequences led to the establishment consequences led to the establishment of TCIP as a public-private partnership, of TCIP as a public-private partnership, which brought together the GoT, the which brought together the GoT, the World Bank, international reinsurers and World Bank, international reinsurers and reinsurance brokers. The Pool reinsurance brokers. The Pool commenced its operations on 09/27/00.commenced its operations on 09/27/00.

10

Main Features of TCIP Main Features of TCIP

Ensure most domestic dwellings have Ensure most domestic dwellings have affordable EQ insurance.affordable EQ insurance.

Reduce government fiscal exposure by Reduce government fiscal exposure by transferring catastrophe risk to international transferring catastrophe risk to international reinsurers.reinsurers.

Overtime, build up TCIP’s capital base to Overtime, build up TCIP’s capital base to insure against larger eventsinsure against larger events

Encourage risk mitigation and safer Encourage risk mitigation and safer construction practicesconstruction practices

TCIP ObjectivesTCIP Objectives

11

Main Features of TCIPMain Features of TCIP

Amendment of the Disaster Law:Amendment of the Disaster Law:– no more government interest-free loans to no more government interest-free loans to

homeowners homeowners Enactment of Earthquake Insurance Decree Law:Enactment of Earthquake Insurance Decree Law:

– EQ insurance is made compulsoryEQ insurance is made compulsory– TCIP is created as the sole-source provider of TCIP is created as the sole-source provider of

EQ coverage up to $50,000EQ coverage up to $50,000 Pending Enactment by the Parliament of EQ Pending Enactment by the Parliament of EQ

Insurance LawInsurance Law– introduces penalties introduces penalties – enhances the Decree lawenhances the Decree law

LegislationLegislation

5 years since the launch of TCIP, enactment of Disaster Insurance

Law still remains an important outstanding issue.

12

Main Features of TCIPMain Features of TCIP

Compulsory EQ cover for all registered residential dwellings Compulsory EQ cover for all registered residential dwellings Stand-alone product, separate from fire (homeowner’s) insuranceStand-alone product, separate from fire (homeowner’s) insurance Cover up to $50,000 per dwelling & none for contentsCover up to $50,000 per dwelling & none for contents 15 rating categories based on hazard zone and the type of 15 rating categories based on hazard zone and the type of

buildingsbuildings Cover in excess of TCIP (>$50,000) is obtainable from private Cover in excess of TCIP (>$50,000) is obtainable from private

insurersinsurers Private insurers distribute TCIP policies acting as agentsPrivate insurers distribute TCIP policies acting as agents 2% deductible2% deductible Online (web-automated) policy underwriting and data Online (web-automated) policy underwriting and data

managementmanagement Independent (hired by TCIP) loss adjusters are used Independent (hired by TCIP) loss adjusters are used Outsourced extensively (no public employees)Outsourced extensively (no public employees) Premium reserves held in creditor-proof escrow accounts fully Premium reserves held in creditor-proof escrow accounts fully

separated from government fundsseparated from government funds

13

TCIP Coverage: Risks CoveredTCIP Coverage: Risks Covered

All material damages, including damages to building foundations,stairs, elevators, roofs, chimneys, main and shared walls, corridors, in insured buildings caused by:

All damages are covered up to insured value less the deductible

•Earthquake•Fire and explosion following•Land slides following

•Earthquake•Fire and explosion following•Land slides following

DASK

Main Features of TCIP

14

Main Features of TCIP: Main Features of TCIP:

Affordability Affordability

Zones/TypeZones/Type

Coverage Coverage

SteelSteel

Reinforced Reinforced concreteconcrete

($27,000)($27,000)

AmassedAmassed

Stone andStone and

BrickBrick

($19,300)($19,300)

OthersOthers

($10,360)($10,360)

Zone IZone I 6060 7474 5757

Zone IIZone II 4242 5353 3737

Zone IIIZone III 2323 2828 1818

Zone IVZone IV 1515 1212 88

Zone VZone V 1212 1010 66

Premium rates for a 100 square meter flat (USD)

Source: DASK, 2005 Average premium - $46

15

Main Features TCIPMain Features TCIPT u rk ish C a ta stro p he In su ra nce P o o l O rg an iza tio n a l S truc tu re

C la im A d ju s te rs IT P ro v id e rs

R e in su ra n ceC a p ita l M a rke ts

W o rld B a nk

P o licy D is trib u to r(In su ra n ce C o m p a n y)

P o licy D is trib u to r(In su ra n ce C o m p a n y)

P o licy D is trib u to rIn su ra n ce C o m p a ny

P o licy D is trib u to rIn su ra n ce C o m p a ny

P o o l M an a ge m en t Co m p a ny(M illi R e )

B o a rd o f D ire c to rs G e n era l D ire cto ra te o f In sura n ceO ve rs ig h t/P rog ram Im p le m e n ta tion

TCIP has no public employees

16

Main Features of TCIPMain Features of TCIP

27 authorized insurance companies.

State of the art integrated country-wide IT system that enables over 10,000 agents to produce TCIP policies in under 1 minute

Acquisition Costs: 12,5% for risks located in Istanbul17,5% for risks situated outside

TCIP

Insurers

Agents

Homeowners

Distribution SystemDistribution System

Finding alternative distribution channels and expandingThe existing ones is the main focus of TCIP management

17

• Annual accounts, transactions and expenditures are audited by the Under-secretariat of Treasury and an independent auditing firm.

TCIP’ income is exempt from any taxes and duties.

Expenditures of the TCIP are limited to: - claim payments & loss adjustment fees.- reinsurance premiums- operational expenses- payments for public relations & publicity campaigns- payments for consultancy services- payments for scientific research and studies

Main Features of TCIP:

Financial Aspects

By the end of 2005, TCIP surplus was approaching $120 mm

18

Information Technology Aspects

A unique IT System allows real time on line policy sales, premium booking, claim advice through Internet

A Call Center giving service to homeowners for general information, claim advice, policy details and to users (agents selling policies) for IT information

A Disaster Recovery Center in Ankara securing the data of the whole System

Use of SMS (short message service) within the GSM (global system for mobile) for policy renewals, claim advice, etc.

Main Features of TCIP:

19

Information Voice and Video Network

Main Features of TCIP:

Antalya

İzmir

Denizli

BursaAnkara

Kayseri

GaziantepAdana

İstanbul

ZincirlikuyuGüneşliKadıköy

Maslak

34-44 Mbit/s 2-4 Mbit/s1 Mbit/s

155 Mbit/s 8-10 Mbit/s

Net

wo

rk &

In

fras

tru

ctu

re

Modern state-of-the-art IT capabilities has won TCIP theE-government project of the year award in 2003.

20

Main Features of TCIPMain Features of TCIP

Overall protection Overall protection against losses up to $1 against losses up to $1 billion in the first 5 yearsbillion in the first 5 years

Reinsurance program of Reinsurance program of A+ quality with dozens A+ quality with dozens of international of international reinsurers of $750 mm.reinsurers of $750 mm.

World Bank up to $17 World Bank up to $17 million on the first loss million on the first loss basis and on 40/60 basis basis and on 40/60 basis proportional basis with proportional basis with reinsurers or TCIP, up to reinsurers or TCIP, up to $163 million.$163 million.

TCIP’s own surplus funds TCIP’s own surplus funds - $120 mm- $120 mm

If claims exceed TCIP’s If claims exceed TCIP’s available financial available financial resources, GoT acts as resources, GoT acts as reinsurer of last resortreinsurer of last resort

TCIP Claim Paying CapacityTCIP Claim Paying Capacity

TCIP

Reinsurance

Reinsurance

World Bank

Reinsurance

World Bank

$1 bn

>$1 bnTurkish Government

Private reinsurance is by far the largest source of TCIP’s claims paying capacity

21

‒ world’s leading reinsurers have an important world’s leading reinsurers have an important advisory roleadvisory role

‒ reinsurance is instrumental to the financing of reinsurance is instrumental to the financing of TCIP’s riskTCIP’s risk

‒ high quality reinsurance is essential to making the high quality reinsurance is essential to making the program credible among policyholdersprogram credible among policyholders

‒ A plus quality of reinsurance coverageA plus quality of reinsurance coverage‒ largest reinsurers such as Swiss Re and Munich Re largest reinsurers such as Swiss Re and Munich Re

and Axa Re and Partner Re are behind the and Axa Re and Partner Re are behind the program.program.

Over $ 1 billion in claims paying capacity, with reinsurance accounting for about 70 percent

Main Features of TCIPMain Features of TCIP

Role of private reinsurance industry

22

Lowest long-term average premium compared to Lowest long-term average premium compared to similar international programssimilar international programs

Price stability for homeowners Price stability for homeowners High credit quality of insurance coverage (200+ High credit quality of insurance coverage (200+

Return Period w/o resorting to gov). Return Period w/o resorting to gov). Quick, uncontested settlement to permit speedy Quick, uncontested settlement to permit speedy

relief to victimsrelief to victims Coverage of multiple eventsCoverage of multiple events Low 2% deductibleLow 2% deductible

Main Features of TCIPMain Features of TCIPInsurance product on its own merits

TCIP offers consumers highly attractiveterms of coverage on highly affordable terms

23

World Bank Support to TCIPWorld Bank Support to TCIP

– Modeling and pricing of property risk Modeling and pricing of property risk – Insurance policy design Insurance policy design – Developing TCIP policy distribution and Developing TCIP policy distribution and

accounting systemsaccounting systems– Underwriting, rating and operational Underwriting, rating and operational

guidelines guidelines – Public relations campaignPublic relations campaign– TrainingTraining– Investment policy and fund managementInvestment policy and fund management– Improving regulatory framework and Improving regulatory framework and

enforcement of building codesenforcement of building codes

Technical Assistance to TCIP:Technical Assistance to TCIP:

24

Capital Support and Advisory Assistance to TCIPCapital Support and Advisory Assistance to TCIP

Risk capital ($180 mm contingent capital Risk capital ($180 mm contingent capital facility)facility)

Financing of reinsurance premium ($40 mm in Financing of reinsurance premium ($40 mm in premium costs - 2premium costs - 2ndnd year) year)

Advisory assistance by Bank insurance staff Advisory assistance by Bank insurance staff (original design of program and ongoing (original design of program and ongoing modifications)modifications)

World Bank Support to TCIPWorld Bank Support to TCIP

World Bank’s financial support to TCIP has been instrumental In making the program financially sound and affordable

25

Status of TCIP TodayStatus of TCIP Today

Total No. of Policies 2,232,795

Total Coverage (YTL) 85,264,394,670

Total Annual Premium (YTL) 143,794,964

Avg. Coverage (YTL) 38.000.

Avg. Premium (YTL) 64

Growth by # of policies (%) 12.51

Renewal Rate (%) 33.5

Total # of Claim Files 5,751

Total Claims Paid (YTL) 9.692.668

Facts and figures

Source: DASK, 2005

($60,903,139,050)

($102,710,689)

($27,143)

($46)

($6.923.334)

Capital Surplus ($) ($106,871,000)

26

Status of TCIP Program TodayStatus of TCIP Program Today

Insured17%

Non-Insured83%

Source: DASK

Insurance penetration

13,150,000 houses

2,220,000 policies

37133

372116

1.077

1.700

600

2.350

750

2.250

1.300

4.200

151 48

Akdeniz D. Anadolu Ege G.D. Anadolu İç Anadolu Karadeniz Marmara

Policies

Houses

Penetration ranges between 8-26%

(No. 000)

While national average penetration is 17%, 26% of homesIn most disaster prone Marmara zone have TCIP policies

27

Status of TCIP TodayStatus of TCIP Today

75 m2 -20%

76-100 m238%

101-125 m220%

126-150 m213%

150 m2 +9%

Socio-demographic highlights

Composition of TCIP insured housing stock by unit size

Business5%

Residential93%

Others1% Bureau

1%

Composition of TCIP insured housing stock by type of use

TCIP is essentially a program of low and middle class homeowners

28

Remaining Major ChallengesRemaining Major Challenges

•Enactment of Disaster Insurance Law •Introduce tighter enforcement mechanisms•Build stronger reserves to protect the program against more severe but less frequent events (up to 300 year loss)•Reduce the lapse ratio (currently 33 percent)•Create stronger incentives for agents and their insurers to sell more business•Continue public information campaign to further raise the risk awareness of population and raise insurance penetration

Raising the level of insurance penetration remains the main key challenge of the program

29

Thank you for your attention!Thank you for your attention!