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Russian Association of Aviation and Space Insurers (RAASI)

XV Aviation & Space Insurance conference

Foreign risks reinsurance - Russia as an

alternative market

ContentsRussia as an alternative market

Confidence

Service

Security

Expertise

The Competition!!!

Suggestions and alternative solutions

Russia as an alternative market

I have been asked to speak to this subject and address the question of how it may be possible to increase the quantity and quality of international risks, both insurance and reinsurance placed in the Russian market.

In essence to debate how Russian Companies can become more attractive as a market place for international risks and thus attract more and better quality risks.

Confidence It is unfortunate but realistic to say that many

international clients and brokers still regard Russia and the Russian insurance/reinsurance market with a high degree of suspicion.

There is a general lack of knowledge both about Russia and the companies operating in that market

There is concern at that lack of transparency in the capital structures, financial reports, the quality of the asset side of the balance sheet and ownership of companies.

There is concern both about the ability to pay claims and perhaps more importantly the willingness to pay valid claims. One of the first questions a broker is often asked when offering Russian security is “will they pay?”.

Confidence - continued There is concern that Russian companies are not regulated

to the same degree as those potentially using their capacity and as a result there is a concern that customer will not be protected and treated fairly.

There is concern that the levels of service, security and expertise are below those available in the main international markets who are Russian companies chief competitors.

Russian companies are often unknown entities to those seeking capacity. Markets, both clients and brokers, still prefer to deal with people they know and trust.

Confidence - continued

There is a concern that the Russian markets do not fully appreciate international business procedures and practises together with the terms and conditions commonly acceptable in those markets which are outside of Russia.

Some potential clients and brokers are concerned that much of the Russian gross capacity depends on reinsurance. The view is that following a series of poor market results these capacities could be lost putting in jeopardy the available capacity from Russian companies. Clients still seek and prefer a good degree of continuity.

Confidence - Suggestions

There are no easy answers and it is certain that any improvement in the business flow into Russia will take many years of hard effort on the part of all parties.

The companies and brokers alike should take every opportunity to promote knowledge of Russia and the companies operating in this market. One way of achieving this is by targeted travel and attendance at the many international conferences. This has the dual advantage of introducing the company and improving that company’s own knowledge base of overseas markets and market practice.

Build your real capital bases, grow your net retentions and expand the types and forms of business you will consider.

Confidence – Suggestions - continued Seek to co-operate with your Regulators and development

Ministries in the promotion of the Russian market.

Ensure that your regulations allow you to transact business in line with international practices and thus enhance your abilities to respond to loss situations and payments promptly. You are in the business of paying losses and your performance in that area will either attract new customer of frighten them away!!!

Education and knowledge – perhaps the most important of all. Understand the needs and procedures in the markets you seek to penetrate and change your procedures to match your clients/brokers needs. This will aid in building confidence.

Service To attract more business the Russian companies should

strive to provide levels of service that at worst equals and at best exceeds that of their international competitors.

This includes response times to offers of business, alterations, accounting issues, claims negotiations and settlements.

Limit your bureaucratic practices. Provide clear information about your own company in a

timely fashion.

On relatively straightforward business offers your competitors in general look to respond within 36 hours try to match or better this.

Service - continued As regards claims settlements both London and the

international markets continually aim to speed up claim payments as a competitive tool, particularly where the claims are in respect of straight-forward aviation, property or marine losses. Many markets seek to settle clear losses including aviation and marine total losses within 7 to 14 days. To compete you should seek to match that performance.

Many small claims are settled in London within 7 days and in the case of Lloyds often with only the leaders and the bureau’s agreement. Some companies even have automatic acceptance limits built into their systems. To attract business you should consider ways of matching this service.

Service - continued

Clear and accurate communications in English are an expected service by the clients. Acknowledge all correspondence by return, it may not seem important to you but it is to the client.

Providing a competitive level of service will without doubt assist in encouraging business to Russia but it must be real and visible.

Good service is a costly endeavour but a rewarding investment in the longer term.

Security International Security Ratings are a very important issue

for most buyers of coverage for major individual risks and reinsurance. In many instances acceptable levels of security rating are more important than price. Many buyers may give ground on price but seldom on the levels of security rating which is corporately acceptable and often essential because of the potential impact on their own ratings.

Ratings from a local agency are seldom acceptable internationally.

To attract business more companies should consider starting the process of being rated by one of the major rating agencies.

Security - continued

A major issue for Russian companies is the sovereign rating of Russia itself which can limit any rating that a company may obtain. There is no easy answer to this except perhaps to consider creating an active, well funded overseas operation.

Solvency II and equivalence will raise further issues which could adversely affect the flow of business to Russia and the international willingness to accept Russian security both from the insurance and banking communities.

Security – continued – Solvency II Potential capital raising and consolidation.

De-risking of asset portfolios and business mix.

Demand for reinsurance capacity likely to grow, especially for more capital intensive lines.

Capital benefit constrained by reinsurer credit quality.

Solvency II equivalence is important. – Bermuda, Switzerland & Japan recommended for first wave– US noticeable by its absence in first wave recommendation.

Source: Fitch RatingsSource: Fitch Ratings

Security – continued – Solvency II Under Solvency II, the allowance for reinsurance will be

constrained by the counterparty credit quality and the risk-mitigating effects of the reinsurance purchased. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) will be recommending a principle-based approach to determine whether a reinsurance contract can be taken into account in a cedant’s calculation of capital requirements:

The contract must involve risk being transferred between the cedant and the counterparty.

The transaction must have a greater economic effect than pure legal or accounting form.

Any risk-mitigation technique employed must be legally enforceable in all relevant jurisdictions.

Double-counting is not permitted and risk must be reduced, not increased.

Source: Fitch RatingsSource: Fitch Ratings

Security - continued The extent of risk mitigation will be determined by the

credit quality of the counterparty, such that reinsurers that are not Solvency II compliant, have a local solvency ratio of below 100%, or have a credit rating below BBB will not be recognised

Better quality business will generally go the companies with the strongest international security ratings and this tendency is only liable to increase.

What will be left for the Russian market is those companies and areas which give little regard to these ratings and these are liable to diminish over time.

Business available to Russia will generally only be that which is price sensitive.

Solution – start the process of obtaining an acceptable rating.

Expertise To attract more business the market needs to demonstrate

that it is developing expertise in all levels of its activities.

This means a thorough knowledge of the business you seek to write and the ability to rate it or assess the rate or terms offered.

Clients prefer insurers/reinsurers who understand their accounts and business types and who can offer advice.

With expertise comes the ability to lead business and this in itself will generate more opportunities.

To continually expand your knowledge base and abilities should be an ongoing objective of all companies.

Expertise - continued

Expertise extends from the knowledge of the business in terms of type and form to the ability to underwrite the business and deal effectively and efficiently with the claims that will arise.

Expertise may be gained by entering into co-operation agreements or partnerships with international operators.

Expertise grows with experience and education but that can only be built over years not weeks.

The Competition!!! The following slides gives some information about the

competitors the Russian market must face in their search for international business.

From these can easily be seen the size and to some extent the appetite of these companies for business.

Whilst this reflects the Reinsurance market the Insurance market is equally large and hungry for business.

With this amount of available capacity you can only speculate as to why some business actually comes to Russia?

It is terribly hard for you to compete effectively against these and other markets.

The Competition - continued

The Competition - continued

The Competition - continued

The Competition - continued

The Competition - continued

.

Content Title

Content Title

Ranking Name Reinsurance Premiums

Written Gross Net

Shareholder Funds

1 Swiss Re $29,212 $24,296 $19,367

2 Munich Re $28,820 $27,199 $29,959

3 Berkshire Hathaway Re $12,827 $12,123 $109,267

4 Hannover Re $11,446 $10,196 $4,695

5 Lloyd's $9,114 $6,702 $19,098

6 SCOR $8,185 $7,500 $4,815

7 RGA Reins Co $5,839 $5,349 $2,617

8 Transatlantic Re $4,423 $4,108 $3,198

9 Partner Re $4,028 $3,989 $4,199

10 London Reins Group $3,696 $3,144 $783

The Competition - continued

.

Content Title

Content Title

Ranking Name Reinsurance Premiums

Written Gross Net

Shareholder Funds

11 Everest Re $3,678 $3,505 $4,960

12 XL Capital $2,951 $2,403 $6,115

13 Korean Re $2,946 $2,055 $425

14 Mapfre $2,507 $1,683 $1,047

15 Odyssey Re $2,295 $2,031 $2,827

16 ACE $2,248 $2,112 $14,446

17 Aegon $2,222 $1,928 $19,394

18 RenaissanceRe $1,736 $1,354 $3,033

19 Toa Re $1,633 $1,496 $1,123

20 AXIS $1,548 $1,533 $4,461

The Competition - continued

.

Content Title

Content Title

Ranking Name Reinsurance Premiums

Written Gross Net

Shareholder Funds

21 QBE $1,430 $1,280 $7,762

22 Paris Re $1,403 $1,197 $2,172

23 Validus $1,362 $1,238 $1,939

24 Arch $1,202 $1,148 $3,433

25 White Mountains $1,076 $931 $2,899

26 Platinum $1,067 $1,038 $1,809

27 Aspen $1,005 $977 $2,779

28 Amlin $895 $773 $1,760

29 American Ag $840 $368 $505

30 Endurance $825 $808 $2,207

Suggestions and alternative solutions Seek as often as possible to actively promote Russia and

your companies in the international arena with both clients and brokers.

Seek government and regulators understanding, co-operation and assistance in this promotion.

Continually seek to improve your service and response levels, particularly in the handling of claims. This is one of the best way of demonstrating that you are a secure and reliable market.

Actively consider getting a rating from one of the major international rating agencies.

Suggestions and alternative solutions- continued

Once you have a rating seek ways of improving it, this is an ongoing process.

Consider the potential implications of Solvency II on your business and be proactive in responding.

Consider increases of available capital possibly linked with increasing your net retentions.

Consider the possibility of joint ventures and co-operation agreements geared to increasing you knowledge and expertise.

Target Russian interests abroad as a real source of business.

Suggestions and alternative solutions- continued

Consider establishing offshore operations and branches as a potential access to both international and local business and also ratings.

Recruit overseas experts on limited contracts to benefit from their experience.

Create active development and training plans within your company and promote personal development and learning.

Spend time learning about and assessing you competition.

Suggestions and alternative solutions- continued

Remember the brokers who are your main source of business and as with your clients build confidence levels.

Enjoy the business and you will grow with it!!!

One last and perhaps extreme suggestion. To compete against the size and strength of the international market consider establishing one very large company owned between yourselves to deal with international business. Capitalised at a level (say USD 5 billion) which cannot be ignored by the markets and managed by the best in your market. Perhaps Grigori Fidelman’s idea of a few years ago had some merits!!!

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It is kind of fun do the impossible

Presented by Charles CattCEO

Challenge Group Inc.

charles_catt@challenge-gi.comwww.challenge-gi.com