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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
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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?
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What is SECE CRIF?
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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.
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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.
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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.
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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
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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.
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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%
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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.
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Why would a country want to join
SECE CRIF?
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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.
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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
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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.
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How it will all work?
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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
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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:
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What will ensure CRIF success?
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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
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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.
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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.
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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.
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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.
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Why join now vs. later?
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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.
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What is expected of countries?
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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).
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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.
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Thank you for your attention!
Contact details:
202 458 5414