Analysis of the Turkish General Insurance Market

(1)

2010

By Alexander D. JARVIS

Blog: www.alexanderjarvis.com

Twitter: ADJBlog

(2)

AGENDA

1. Competitive Comparison

2. General Insurance Industry Overview Of Turkey

3. General Insurance Underwriting Analysis

4. Overview Of Underwriting Ratios In Turkey

5. Developing General Insurance Underwriting Competence

(3)

NOTES

1. Presentation is focused on general insurance

• Defined as all insurance excluding life and pension. Excludes GI generated in non-life companies

2. Data set

• As of the end of 2009 there are 57 companies operating in the market. Out of 56 insurance companies, 33 of them are licensed in non-life insurance, 9 in life insurance and 14 in pension/life business. There is only one licensed reinsurance company in the domestic market. In addition, there are four non-life and one life insurance companies licensed but currently not in operation for variety of reasons.

3. The report covers data for general insurance companies as follows: 25 explicitly and 13 grouped into “Other” Arranged in two groups by 5 year trailing average net earned premiums (“NEP”)

• Group one is largest 13 companies

• Group two is next largest 12 and Other (Grouped under “Remainder”)

4. Data aggregation/cleansing

• All companies have been aggregated on a trailing basis for acquisitions to provide consistency over time (i.e. Acquirer includes target data in prior years)

• Government data set are not 100% accurate and errors have been corrected with best estimates, as found

5. NEP is used throughout presentation meaning Expense Operating Ratio is calculated on a financial rather than solvency basis (which would use Net Written Premiums)

• Calculation: NWP- Change in Prov. for Unearned Premium - Change in Prov. for Unexpired Risks

Group 1 Ave. Earned

Premium Group 2

Ave. Earned

Premium Remainder

Ave. Earned Premium

1 AXA 832.25 14 Ankara 99.46 1 Euro 7.59

2 Anadolu 758.86 15 Zurich 79.92 2 Bati (Liquidated ‘09) 6.46

3 Allianz 488.83 16 Chartis 79.27 3 Cardif 2.26

4 Groupama 429.62 17 HDI 68.16 4 Atradius 0.37

5 Yapi Kredi 405.60 18 Birlik 67.71 5 Demir 0.31

6 Ergo 390.73 19 Isik 61.65 6 Turk Nippon 0.12

7 Aksigorta 378.35 20 Liberty 49.44 7 Rumeli (*) 0.08

8 Gunes 292.44 21 Hur 34.51 8 Other 0.01

9 Mapfre Genel 198.89 22 Generali 29.09 9 Magdeburger (*) 0.00

10 Eureko 176.44 23 Dubai Group 13.77 10 Merkez (*) 0.00

11 FIBA 166.26 24 SBN 13.20 11 Inter (*) 0.00

12 Aviva 158.60 25 Coface 11.51 12 Neova 0.00

13 Ray 136.40 26 Remainder 16.90 13 Ace 0.00

Total 16.90

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data.

(4)

EXECUTIVE SUMMARY

• Whilst without difficulties at both a political and economic level, and underdeveloped compared to the banking system, Turkey has experienced phenomenal growth in the general insurance market, buoyed by a young and growing population, EU ascendancy and GDP growth

• GWP have outpaced the growth of almost every other nation, although of late this growth has stalled

• Fierce competition from foreign entrants has aided the market development (FDI was key) but has

meant that seldom few companies have made underwriting results in the preceding 5 years

• Few domestic companies continue to go it alone

• Given growth prospects in home countries, it is unlikely that competition driven by foreigners will abate in the short term

• The legal framework around insurance is creating opportunities, but also encouraging competition

• Competition has further intensified in TPL vehicle insurance following the introduction of ‘free’ tariffs (Pricing flexibility) in 2007

• Efforts to control acquisition expenses of insurers, such as the amounts yielded under bancassurance agreements, have not been effective

• Distribution channels unique in Europe, strongly polarised to agencies, with the highest bancassurance rate but with amongst the lowest levels of brokers and direct

• Direct and online sales are in their infancy, but given that the model has been tried and tested abroad, it should engage the market at an accelerated rate when the channel is focused upon • There are niches across the industry given its nascent status; low penetration, premium per

capita, less take-up by women, underdeveloped branches such as ‘support’, distribution networks to access etc.

• Compulsory insurance is a growth area in third-party, earthquake protection and commercial liability • Penetration is the lowest in Europe and the government is seeking to increase holding thereof

• All in all, the Turkish market is highly attractive for its growth prospects, but the real question for insurers is how to make it a profitable one

• The answer lies, arguably, in gaining competitive advantage in underwriting, particularly in selection and competitive, effective pricing over the long-term

(5)

(6)

HISTORY

• Insurance in Turkey dates back to 1870’s. During the Ottoman Empire, insurance was

mainly run by foreign, international agencies

• In 1900, 81 foreign insurance companies operating in Turkey came together under the umbrella of the first professional organisation “Insurers Syndicate of Turkey”

• After the proclamation of the Republic in Turkey in 1923, Turkiye Is Bankasi was established in 1924. Then in 1925, the commencement of Anadolu Sigorta A.S, the insurance group of Turkiye Is Bankasi, followed

• Liberalization of the regulations governing the insurance sector commenced in the 1980s, in parallel with legal reform of other financial sectors (Primarily the banking and securities) and gathered momentum in the early 2000s

• The late 2000s saw the regulatory framework develop at an acceleration rate, driven by aspirations to join the EU and promises to the IMF

• Today, there are 57 insurance and reinsurance companies in total in Turkey, most of which are privately owned and 33 (operating actively) which are non-life

• These companies have to be a member of the “The Association of the Insurance and Reinsurance Companies of Turkey,” the present incarnation of the 1900 organisation • The General Directorate of Insurance the Prime Ministry Undersecretariat of the Treasury

regulates the insurance system of the country

• Since 1988, companies have had to either operating in the life or non-life sector • The penetration of foreign insurers, given few barriers to entry and a government

encouraging inward FDI is high

(7)

SEGREGATION OF LIFE AND NON LIFE (1 OF 2)

• Required to do one or the other (life vs. non life)

• Since 1998, insurance companies have been obliged to act either in the life or non-life insurance branches

• Even though non-life insurance companies cannot issue new policy in life branch they are allowed to keep their existing portfolio garnered prior to the regulation

• As of the end of 2009 there were 4 non-life insurance companies which have life portfolio as well

• These companies are Aksigorta AS, Generali Sigorta AS, Hür Sigorta AS and Merkez Sigorta AS.

• Merkez Sigorta AS is currently inactive in all branches

• In the current system, life insurance companies can also operate in health and casualty branches as well

• However, if life insurance company also operate in the pension system, it can only work in casualty and not health

• Pension companies can not operate in health and other non-life branches except casualty branch

• The division between the life and non-life has necessitated the structuring of separate operating entities, largely distinguishable by the common use of suffix's

• Sigorta for general insurers • Hayat for life

• Emeklilik for life and pension

(8)

SEGREGATION OF LIFE AND NON LIFE (2 OF 2)

• Non-life dominates the insurance market and continues to do so

• According to CES, on a premium basis, non-life share has actually increased from 82.1% in 1999 to 86.6% in 2008

• Indeed, in 2008 Turkey had the third highest proportion of non-life to life

• It is similar in structure to other developing European countries such as Romania, Hungary, Bulgaria, Latvia, Lithuania, Estonia and Iceland

Breakdown of European Insurance Premiums By Country (2008)

Source: Analysis of CEA Statistics N°40: European Insurance in Figures, Data 1999-2008 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

(9)

COMPANIES

• In 2009 there were 37 non-life insurers, 10 life insurers, 14 life / pension companies and 1 reinsurance company

• Türkiye İş Bankası (İşbank) founded Milli Reasürans T.A.Ş. (“Milli Re”) to operate the formerly

compulsory reinsurance system in 1929 and under the present system covers cession for 30% of the market with foreign players accounting for the rest

• According to CES, Turkey has consistently had the 19th _{most number of insurers in Europe}

• 4 of 37 non-life insurance companies and 1 of 10 life insurance companies were not active in 2009 • As a result, 57 of 62 total companies actively operate in the market

• Inactive companies are Inter Sigorta AS, Magdeburger Sigorta AS, Merkez Sigorta AS, Rumeli Sigorta AS and Rumeli Hayat Sigorta AS

• Due to the stated reasons of: “Authority of Selling New Contracts Has Been Cancelled” or “Stopped Selling New Contract Voluntarily”

• As will be discussed, the number of foreign companies in the market has markedly increased

29 24 ₂₁ 18 ₁₆ 14 14 7 9 11 ₁₄ ₁₉ ₂₂ ₂₃ 0 5 10 15 20 25 30 35 40 2003 2004 2005 2006 2007 2008 2009 Domestic Foreign

Non-Life Companies Growth Since 2003 (Number)

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: TSRB state 2009 non-life companies as 36 - presumably characterisation of operating companies or timing of corporate actions

(10)

ENTRANTS AND CORPORATE ACTIVITY

Year Company Note

2009 Neova Sigorta A Licence

2009 Ziraat Sigorta AS Licence 2008 Dubai Group Sigorta AS Licence 2008 Ace European Group Ltd Branch

2008 Türk Nippon Sigorta AS Generate premiums again 2008 Zurich Sigorta As Acquires Teb

2008 Cardif Sigorta AS Licence

2008 SBN Sigorta AS Acquires Tikaret 2007 Mapfre Sigorta AS Acquires Genel Sigorta 2007 Eureko Sigorta AS Acquires Garanti Sigorta 2007 Atradius Sigorta AS Licence

2007 Coface Sigorta AS Licence

2006 Ergo (Munich Re) Acquires Avrupa Holding 2006 Liberty Sigorta As Acquires Seker Sigorta 2005 HDI Sigorta AS Acquires Ihlas

Year Activity

2009 Bati liquidated

2009 Güven Sigorta AS merged to Groupama Sigorta AS 2009 Basak Groupama became Goupama

2009 Ergoisvicre changed name to ERGO 2009 AIG rebranded to Chartis

2008 AXA Oyek amalgamated into AXA (Partner buyout) 2008 Koc Allianz became Allianz (Partner buyout) 2008 Turkiye Genel became Mapfre Genel

2008 Zurich acquired life business of TEB (Sigorta) 2008 SBN acquired Tikaret

2008 Harel acquired Turk Nipon

2008 Toprak became Euro. Likely linked to asset requisition by gov. 2007 Eureko acquires name Garanti through 80/20% ownership JV 2006 Basak became Basak Groupama in 2006

2006 Finans becomes part of Fiba in 2006

2006 ERGO acquires majority of shares of Turkish insurer Isvicre 2006 Liberty acquires Sekera in 2006

2005 HDI acquired Ihlas in 2005

Entrants

Corporate Activity

• As illustrated on the preceding page, there have been an increasing number of new players in recent years – from 7 in 2003 to 23 in 2009

• Naturally, there has been a degree of consolidation, seeing foreign players buy out local partners (With consequent name changes) and assets being merged

• In 2008, Allianz and AXA bought out the remaining shares of their partners Koc and Oyek

• A substantial force was created in Groupama

in 2009 when both Başak Sigorta and Güven Sigorta were brought into the fold

(11)

OVERVIEW OF BRANCHES

Branches Number of Companies

Health(*) 36 Casualty(**) 54 Land Vehicles 29 Railway Vehicles 30 Air Vehicles 30 Sea Vehicles 30 Transport 30 Fire/Natural Disaster 30 General Damages 30

Land Vehicles Liability 29

Air Vehicles Liability 29

Sea Vehicles Liability 30

Public Liability 30 Credit 15 Fidelity Guarantee 30 Financial Loss 31 Legal Protection 23 Support 5

(*) 7 of are life companies

(**) 23 of are life or pension companies

• 18 branches

• Before the new Insurance Law no: 5684

came into effect in June 2007

(Replacing Insurance Supervision Law No. 7397) there were 10 non-life

branches

• According to current regulations, non-life insurance companies can operate in some or all 18 non-life branches

• See slide “Segregation of life and non life”

• Life insurance companies could operate some or all 7 life branches

• Most companies act in all sectors

• Health and casualty numbers are high due to life companies

• Insurers generated premium in 17 of the 18 non-life branches

• There has not been premium production

in the Support branch as of yet

Involvement per Non-Life Branch

(12)

CHANGE IN COMPANIES PER BRANCH

0 10 20 30 40 50 60 Credit Legal Protection Agriculture Motor Vehicle TPL Accident Fire Marine Engineering Health Personal Accident 2009 2008 2007 2006 2005 2006 2007 2008 2009 0% 2% 9% 2% 0% -15% 14% -13% 0% -16% 15% -3% 0% -16% 15% -3% 0% -16% 15% -3% 0% -16% 15% -7% 0% 0% 4% 4% 7% 38% 5% -4% 0% 20% 0% 11% 133% 57% 18% -38%

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

• Indicating greater competition per branch, the aggregate number of companies per branch has increased from 261 to 272, with a nadir in 2007, having fallen 4%

• This increased 11% in 2008 and fell 4% again in 2009

• Accident (Casualty) is competitive due to life and pension competition

• Smaller segments of agriculture and legal protection have grown since 2006

• Credit has experienced the greatest percentage in and outflow of companies

• 5 companies exited in 2009, although some of the more recent players are two of the world leaders

240 245 250 255 260 265 270 275 280 285 290 2005 2006 2007 2008 2009 Number

(13)

DETAILED OVERVIEW OF PRODUCT LINES

2008 2009 % Total

000 TL Gross Premium Direct Premium Gross Premium Direct Premium GP

Growth 2008 2009 Non-Life Total 10,204,054 9,995,307 10,614,147 10,371,213 4% 87% 85% Health 1,305,015 1,266,962 1,390,174 1,320,202 7% 11% 11% Travel Health 21,118 21,106 25,009 24,994 18% 0% 0% Casualty 505,364 502,671 540,754 535,867 7% 4% 4% Land Vehicles 2,850,269 2,838,698 2,662,573 2,652,218 -7% 24% 21% Railway Vehicles 0 0 153 153 _0% _0% Air Vehicles 31,019 30,968 57,327 57,166 85% 0% 0% Sea Vehicles 100,415 99,183 112,590 110,438 12% 1% 1% Transport 312,920 305,195 261,394 254,395 -16% 3% 2%

Fire and Natural Disaster 1,827,796 1,784,112 1,925,466 1,877,438 5% 16% 15%

General Damages (Engineering) 806,960 774,531 934,662 900,813 16% 7% 8%

Land Veh. Liab. (Compulsory) 1,723,053 1,715,151 1,938,566 1,927,234 13% 15% 16% Land Vehicles Liability (Other) 339,233 291,457 319,654 277,580 -6% 3% 3%

Air Vehicles Liability 31,610 31,302 47,104 46,187 49% 0% 0%

Sea Vehicles Liability 266 266 375 302 41% 0% 0%

Public Liability 233,386 226,190 251,946 246,103 8% 2% 2% Credit 40,946 34,558 27,712 26,625 -32% 0% 0% Fidelity Guarantee 464 464 16,642 14,225 3487% 0% 0% Financial Loss 41,808 40,080 65,353 62,580 56% 0% 1% Legal Protection 32,413 32,413 36,693 36,693 13% 0% 0% Life Total 1,575,828 1,564,374 1,822,030 1,821,764 16% 13% 15% Total 11,779,882 11,559,681 12,436,177 12,192,977

Premium Production per Branches

• The share of life business in total volume has been increasing as the growth rate in non-life business slowed down

• Life insurance accounted for nearly 15% of total premiums in 2009 compared to 85% for non-life insurance

• The following table shows the composition of direct and gross premium per branch for the last two years and gross premiums %

(14)

DETAILED OVERVIEW OF PRODUCT LINES

Branch Details

Branch Name _{Generating Premium}No.of Company No.of Written _Policies Direct Premium _{(000 TL)} _{Direct Premium %}Share in Total

Health 36 1,090,739 1,345,181 13.15 Casualty 50 5,920,558 530,241 5.18 Land Vehicles 28 3,704,523 2,613,227 25.54 Railway Vehicles 2 6 153 0.00 Air Vehicles 17 269 57,166 0.56 Sea Vehicles 27 12,418 110,379 1.08 Transport 29 1,200,135 251,432 2.46

Fire and Natural Disaster 29 3,036,715 1,545,231 15.10

General Damages 29 2,045,868 771,720 7.54

Land Veh, Liab, (Compulsory) 28 10,767,687 1,887,097 18.44

Land Vehicles Liab, (Other) 28 864,205 228,173 2.23

Air Vehicles Liability 16 273 46,187 0.45

Sea Vehicles Liability 3 85 302 0.00

Public Liability 29 281,481 245,322 2,40 Credit 10 21,334 26,625 0.26 Fidelity Guarantee 12 61,047 14,225 0.14 Financial Loss 19 50,881 62,580 0.61 Legal Protection 20 506,433 36,693 0.36 Support 0 0 0 0.00 Subtotal 1 29,564,657 9,771,935 95.51 Compulsory Earthquake 28 3,451,613 317,893 3.11 Subsidized Agriculture 22 213,051 98,777 0.97 Green Card 10 52,135 43,201 0.42 Subtotal 2 3,716,799 459,871 4.49 General Total 33,281,456 10,231,806 100.00

• Largest five branches account for ~80% of premiums and policies but the premiums per

contract are relatively small. Commercial vehicle insurance contracts are generally large

(15)

OVERVIEW OF COMPETITION BY PRODUCT LINE

• Competition in branches can be split into core areas and periphery, smaller branches according to total GWP

• Core areas are fire/disaster, general (Liability less so), health and land vehicles cumulatively accounting for 88.6% of the total market

• Greatest concentration here, with larger companies dominating

• Smaller companies occasionally are more focused in specialty areas and have gained large holdings

• Car insurance is the largest sector in terms of premiums, with health and casualty being the next, albeit smaller, largest contributors

• Each of health, land vehicles, land vehicles liability and fire and natural disasters branches generated more than 10% of total premium production in 2009

• Parallel to their share in premium production, health, land vehicles, land vehicles liability and fire and natural disasters branches have each share of over 10% in total claim

payments in 2009

• Auto insurance constituted approximately 60% of total claim payments of non-life branches in 2009

• Land vehicles, land vehicles liability, health/sickness and fire and natural disasters

branches account for approximately 78% of total premium and 69% of total policies issued in non-life branches

(16)

STRENGTH OF BUSINESS PER PRODUCT LINE (1 OF 2)

% Accident _VehiclesAir Air Vehicles

Liab.

Credit Financial _Loss

Fire and Natural Disasters General Damages General Liab. Health Land Vehicles Land Vehicles Liab. Legal Protectio n

Other _VehiclesSea Transport

AXA Anadolu Allianz Groupama Yapi Kredi Ergo Aksigorta Gunes Mapfre Genel Eureko FIBA Aviva Ray

Group 1 – Total GWP per Branch % (Read across)

• The table below illustrates the contribution of GWP per branch for Group 1

• Land vehicles, general and fire and natural disaster are the largest contributors, on average accounting for approximately 79% across the branches

• Allianz, Yapi Kredi and to some extent Analdolu and Aksigorta have large exposure to health

• Eureko has the most differentiated exposure, with the highest exposure to accident (2nd _{across all}

companies) and general liability. Exposure to land vehicle liability is the lowest of group 1 and 3rd

lowest across all companies. This is notable as Eureko has consistently made the highest aggregated underwriting result

2.34 0.08 0.00 na 0.00 23.24 7.28 2.71 0.78 33.96 26.44 0.46 0.00 0.61 2.10 3.58 0.48 0.46 0.01 0.40 18.28 8.00 2.81 12.31 27.18 21.00 0.39 na 2.90 2.19 6.65 0.12 0.17 0.89 1.39 18.94 6.27 2.43 28.24 18.37 11.22 0.42 na 2.00 2.88 1.87 0.00 0.43 na 0.08 19.97 10.55 0.82 11.76 30.52 20.56 0.42 na 1.21 1.81 2.17 0.22 0.07 0.01 na 14.94 7.14 1.64 46.81 16.40 8.05 0.13 na 0.84 1.59 4.32 0.01 0.43 na 0.22 14.76 3.87 1.67 5.75 30.03 34.35 0.33 0.06 0.26 3.93 2.27 0.50 0.32 na 0.97 17.35 10.14 1.70 13.77 30.97 18.87 0.53 0.19 0.35 2.06 1.62 2.22 3.11 0.01 0.31 18.08 11.91 1.56 7.98 25.70 23.16 0.50 0.24 1.90 1.71 2.71 0.19 0.07 na 0.56 18.88 11.56 2.63 8.85 28.76 21.67 na na na 4.12 12.84 3.57 0.04 0.17 0.76 23.26 18.11 4.57 5.12 19.54 7.48 0.12 na 1.22 3.20 3.00 0.27 na 1.09 0.29 18.37 14.62 0.80 1.91 27.02 28.54 0.71 0.13 0.94 2.29 3.99 na na na 1.04 25.66 10.81 1.82 na 17.74 35.02 0.46 na 0.34 3.12 2.32 2.42 2.90 na 0.19 19.76 12.09 3.35 0.53 28.37 22.34 0.40 0.13 1.66 3.54 Core area Periphery Periphery

(17)

STRENGTH OF BUSINESS PER PRODUCT LINE (2 OF 2)

Liab.

Ankara Zurich Chartis HDI Birlik Isik Liberty Hur Generali Dubai Group SBN Coface

Group 2 – Total GWP per Branch % (Read across)

4.51 na na na na 14.11 10.11 0.84 1.28 31.06 35.97 0.30 na 0.52 1.31 10.47 0.11 -0.02 -0.40 2.60 28.22 18.29 6.10 4.92 19.95 3.83 0.40 0.01 0.18 5.36 32.02 na 0.18 na 7.92 14.36 2.55 17.49 3.43 3.11 1.13 na 6.56 0.00 11.25 2.21 na na na na 10.20 2.53 2.52 0.35 33.93 46.62 0.31 na 0.04 1.30 5.04 na na na na 39.98 13.01 0.76 1.40 23.03 15.73 na 0.00 0.02 1.01 6.70 0.11 0.19 na 0.01 23.98 7.06 2.11 0.80 19.75 36.74 0.07 0.94 0.06 1.49 2.93 na na na 0.00 8.85 4.14 0.72 0.17 55.55 27.02 na na 0.06 0.57 0.63 na na na 0.03 6.81 1.37 0.13 0.07 5.75 84.99 na 0.01 0.00 0.20 1.93 0.09 0.28 na 0.08 28.81 6.18 2.03 0.51 35.31 19.09 0.64 0.09 0.61 4.35 2.49 na na na 0.01 8.99 1.71 0.67 0.66 43.01 40.51 0.76 0.05 0.35 0.78 12.13 0.09 na na na 8.30 3.64 0.84 4.28 16.64 53.80 na na 0.03 0.25 na na na 100.00 na na na na na na na na na na na

• The table below illustrates the contribution of GWP per branch for Group 2

• Similar to group 1, group 2 has high exposure to land vehicle branches, however as can be seen with the heat map, exposure is much more disparate

• Group 2 has 60% of the exposure in general damage and 14% of health (presumably there are advantages of scale here)

• Accident contribution to total GWP is much higher • Group 2 have more specialist providers

• Chartis has atypical exposure to accident, general liability and transport and incidentally made the 4th_{most underwriting results when aggregated over 5 years}

(18)

SHARE OF TOTAL MARKET PER PRODUCT LINE (1 OF 2)

Liab.

Group 1 – Market Share per Company per Branch (% of Total Market)

• The table below illustrates market share for each branch, per company as a % of total GWP • Group 1 accounts for approximately 86% of market share (note: total G1&2 equals 99.13%

as remainder excluded)

• The core area or fire/disaster, general, health and land vehicles cumulatively account for 77.4% of the total market (88.6% including group 2)

• Land vehicles dominates with 40.5% (47.4% total)

• The heat map demonstrates how market share, particularly in the core area, trails off by size

0.30 0.01 0.00 na 0.00 2.95 0.92 0.34 0.10 4.31 3.35 0.06 0.00 0.08 0.27 0.44 0.06 0.06 0.00 0.05 2.26 0.99 0.35 1.52 3.36 2.59 0.05 na 0.36 0.27 0.61 0.01 0.02 0.08 0.13 1.75 0.58 0.23 2.61 1.70 1.04 0.04 na 0.18 0.27 0.11 0.00 0.03 na 0.00 1.17 0.62 0.05 0.69 1.79 1.21 0.02 na 0.07 0.11 0.13 0.01 0.00 0.00 na 0.90 0.43 0.10 2.83 0.99 0.49 0.01 na 0.05 0.10 0.29 0.00 0.03 na 0.01 0.99 0.26 0.11 0.39 2.02 2.31 0.02 0.00 0.02 0.26 0.19 0.04 0.03 na 0.08 1.47 0.86 0.14 1.16 2.62 1.60 0.04 0.02 0.03 0.17 0.12 0.16 0.22 0.00 0.02 1.31 0.86 0.11 0.58 1.86 1.67 0.04 0.02 0.14 0.12 0.10 0.01 0.00 na 0.02 0.67 0.41 0.09 0.32 1.03 0.77 na na na 0.15 0.69 0.19 0.00 0.01 0.04 1.25 0.97 0.24 0.27 1.05 0.40 0.01 na 0.07 0.17 0.09 0.01 na 0.03 0.01 0.56 0.44 0.02 0.06 0.82 0.87 0.02 0.00 0.03 0.07 0.11 na na na 0.03 0.70 0.30 0.05 na 0.48 0.96 0.01 na 0.01 0.09 0.06 0.06 0.07 na 0.00 0.50 0.30 0.08 0.01 0.72 0.56 0.01 0.00 0.04 0.09

(19)

SHARE OF TOTAL MARKET PER PRODUCT LINE (2 OF 2)

Liab.

Group 2 – Market Share per Company per Branch (% of Total Market)

• Group 2 exposure is similar to group 1 with the exception of health • Larger market shares are held in accident and transport

• No company here has a branch with more than 1% of total market share

• Group 2 accounts for approximately 13% of the total market on a total GWP basis

0.09 na na na na 0.27 0.20 0.02 0.02 0.61 0.70 0.01 na 0.01 0.03 0.22 0.00 0.00 -0.01 0.06 0.61 0.39 0.13 0.11 0.43 0.08 0.01 0.00 0.00 0.11 0.55 na 0.00 na 0.14 0.25 0.04 0.30 0.06 0.05 0.02 na 0.11 0.00 0.19 0.04 na na na na 0.18 0.04 0.04 0.01 0.59 0.81 0.01 na 0.00 0.02 0.06 na na na na 0.45 0.15 0.01 0.02 0.26 0.18 na 0.00 0.00 0.01 0.07 0.00 0.00 na 0.00 0.27 0.08 0.02 0.01 0.22 0.41 0.00 0.01 0.00 0.02 0.01 na na na 0.00 0.04 0.02 0.00 0.00 0.26 0.12 na na 0.00 0.00 0.00 na na na 0.00 0.04 0.01 0.00 0.00 0.03 0.45 na 0.00 0.00 0.00 0.02 0.00 0.00 na 0.00 0.24 0.05 0.02 0.00 0.30 0.16 0.01 0.00 0.01 0.04 0.02 na na na 0.00 0.07 0.01 0.01 0.00 0.32 0.31 0.01 0.00 0.00 0.01 0.10 0.00 na na na 0.07 0.03 0.01 0.04 0.14 0.45 na na 0.00 0.00 na na na 0.12 na na na na na na na na na na na

(20)

RELATIVE MARKET SHARE BY BRANCH (1 OF 2)

Liab.

Group 1 – Relative Market Share by Branch (Read Down)

• The largest companies generally hold 10% stakes across the board, with a few exceptions

in more specialist lines

• The Core branches show relative dominance by the larger players with other companies

lighting up the heat map around the periphery

• Certain lines have extremely high concentration- average top-5 concentration is 70%

• In health, the top 5 constitute 83% of the market • Air vehicle, credit and other are over 90%

• Top 10 average concentration is 91%

6.57 1.72 0.10 na 0.00 15.53 10.28 13.78 0.92 16.53 15.27 16.07 0.00 6.96 10.39 9.78 10.50 12.10 0.41 7.57 11.89 11.00 13.93 14.08 12.88 11.81 13.34 na 32.04 10.52 13.61 1.97 3.31 30.03 19.80 9.23 6.46 9.02 24.17 6.52 4.72 10.55 na 16.54 10.39 2.42 -0.01 5.40 na 0.70 6.17 6.89 1.92 6.38 6.87 5.49 6.84 na 6.33 4.14 2.89 2.30 0.86 0.12 na 4.75 4.80 3.97 26.17 3.80 2.21 2.21 na 4.53 3.75 6.42 0.12 6.23 na 2.28 5.22 2.89 4.50 3.57 7.73 10.49 6.09 2.46 1.55 10.29 4.24 7.48 5.84 na 12.64 7.72 9.54 5.76 10.77 10.04 7.26 12.19 9.42 2.65 6.77 2.59 28.10 48.07 0.30 3.43 6.88 9.57 4.52 5.33 7.12 7.61 10.00 10.22 12.25 4.80 2.14 1.17 0.52 na 3.07 3.55 4.59 3.76 2.92 3.93 3.52 na na na 5.72 15.21 33.57 0.43 3.39 6.24 6.56 10.80 9.81 2.54 4.02 1.82 1.75 na 5.86 6.68 2.01 1.46 na 12.03 1.35 2.94 4.94 0.97 0.54 3.15 3.95 5.94 2.40 2.55 2.71 2.41 na na na 4.36 3.69 3.29 2.00 na 1.86 4.35 3.44 na 0.83 3.31 1.29 10.72 15.62 na 0.76 2.62 3.39 3.39 0.12 2.75 2.56 2.78 1.96 3.73 3.47

(21)

RELATIVE MARKET SHARE BY BRANCH (2 OF 2)

Liab.

Group 2 – Relative Market Share by Branch (Read Down)

• The smaller lines have less levels of concentration, permitting larger market shares

• Across air vehicles, Gunes has considerable stakes, dominating the liability side

• Coface as a monoline is also the dominant player in credit, with under half of market share. Allianz is the second largest player with Fiba having a smaller stake

• In accident, Chartis, Allianz and Eureko lead

• The smaller players of the market muddle around the core of the market with sporadic shares in the periphery

1.94 na na na na 1.45 2.19 0.65 0.23 2.32 3.19 1.59 na 0.91 0.99 4.97 0.41 -0.10 -3.15 8.59 3.19 4.37 5.25 0.98 1.64 0.37 2.33 0.08 0.35 4.48 12.28 na 0.66 na 21.14 1.31 0.49 12.15 0.55 0.21 0.09 na 66.62 0.00 7.59 0.85 na na na na 0.94 0.49 1.76 0.06 2.27 3.69 1.49 na 0.06 0.88 1.26 na na na na 2.37 1.63 0.34 0.15 0.99 0.81 na 0.03 0.02 0.44 1.65 0.21 0.46 na 0.02 1.41 0.88 0.94 0.08 0.85 1.87 0.22 6.14 0.06 0.65 0.30 na na na 0.00 0.21 0.21 0.13 0.01 0.98 0.56 na na 0.02 0.10 0.07 na na na 0.03 0.19 0.08 0.03 0.00 0.12 2.03 na 0.03 0.00 0.04 0.36 0.13 0.51 na 0.11 1.28 0.58 0.69 0.04 1.14 0.73 1.47 0.42 0.46 1.43 0.41 na na na 0.01 0.36 0.14 0.20 0.05 1.24 1.39 1.57 0.21 0.24 0.23 2.27 0.13 na na na 0.37 0.34 0.28 0.33 0.54 2.07 na na 0.02 0.08 na na na 43.23 na na na na na na na na na na na

(22)

DISTRIBUTION - CHANNEL DETAIL

• Distribution is discussed in detail later in the presentation

• Land vehicle & liability (and most of other vehicle) and legal protection are almost exclusively distributed through agents constituting 77% of the premiums agents sell

• In direct, 68% of air vehicle is sold, with approximately half of rail/sea/air and 35% of credit

• These are invariably substantial contracts- air contracts average at TKL 191k • Brokers are particularly strong in financial loss, credit and public liability

• Banks sell the half of casualty agents don’t, lead fidelity guarantee with moderate shares in fire/general damage

• Agents, according to Nielsen, will retain their potency, with 43% of surveyed anticipating to purchase from there in the future. 23% will from banks and only 10% directly. 24% are undecided (Notably, 88% of

surveyed are unsure when they will buy insurance next too)

0% 20% 40% 60% 80% 100% Casualty Health Land Vehicles Railway Vehicles Air Vehicles Sea Vehicles Transport Fire General Damages Land Vehicles Liab. Air Vehicles Liability Sea Vehicles Liability Public Liability Credit Fidelity Guarantee Financial Loss Legal Protection Direct Agencies Banks Brokers Other 0 1,000,000 2,000,000 3,000,000 Casualty Health Land Vehicles Railway Vehicles Air Vehicles Sea Vehicles Transport Fire General Damages Land Vehicles Liab. Air Vehicles Liability Sea Vehicles Liability Public Liability Credit Fidelity Guarantee Financial Loss Legal Protection Direct Agencies Banks Brokers Other

Distribution Contribution by Branch

Premium Dist. Volume by Branch

(23)

DISTRIBUTION – BANCASSURANCE – GROUP 1

• Bancassurance is the highest in Europe

• AXA is the leader in bancassurance with 5 large agreements (10 in total)

• Aksigorta benefits from relationship with AK Bank, as does Anadolu with TIB

• HSBC have a great number of agreements

Axa Anado lu Allia nz Group ama Yapi K redi Ergo Aksig orta Gune s Mapf re G enel Eure ko Fiba Aviva Ray Tota l Akbank Tas 0 0 0 0 0 0 866 0 0 0 0 0 0 866

Aktif Yatirim Bankasi 1 1 5 0 0 0 0 1 0 0 0 0 0 8

Albaraka Turk Katilim Bankasi 0 1 100 0 0 0 0 102 0 0 0 100 0 303

Alternatifbank 0 47 0 0 0 0 0 0 0 0 0 0 46 93

Anadolu Bank 63 0 0 86 0 0 0 88 0 0 0 85 0 322

Arap Turk Bankasi 0 6 0 0 0 0 0 0 0 0 0 0 0 6

Asya Katilim Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Bank Pozitif Kredi Ve Kalkinma Bankasi 5 0 0 0 0 0 0 0 0 0 0 25 0 30

Birlesik Fon Bankasi 0 0 0 1 0 0 0 0 0 0 0 0 0 1

Citibank 0 1 0 0 0 0 0 0 0 0 0 0 0 1

Deniz Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 1 0 1

Denizbank 424 0 0 411 0 0 0 0 0 143 0 290 0 1,268 Eurobank Tekfen 0 0 0 0 0 0 0 0 0 38 0 0 0 38 Finansbank 458 0 0 0 0 0 0 0 0 0 436 0 0 894 Fortis Bank 293 0 0 0 0 0 0 0 0 0 1 0 276 570 Hsbc Bank 337 0 332 0 0 413 0 0 331 0 0 334 0 1,747 Iller Bankasi Ao 0 0 0 2 0 0 0 0 0 0 0 0 0 2 Ing Bank 324 0 354 0 0 0 0 0 0 0 1 0 0 679 Millennium Bank 19 0 0 0 0 0 0 0 0 0 0 0 0 19 Sekerbank Tas 0 0 0 0 0 0 0 0 0 0 0 0 0 0 T. Garanti Bankasi 0 0 0 0 0 0 0 0 0 661 0 0 0 661

T. Sinai Kalkinma Bankasi 0 1 0 0 0 0 0 0 0 0 0 0 0 1

T. Vakiflar Bankasi Ao 0 0 0 0 0 0 0 442 0 0 0 0 0 442

T.C. Ziraat Bankasi 0 0 0 1,195 0 0 0 0 0 0 0 0 0 1,195

Tasfiye Halindeki Emlakbank 0 0 0 1 0 0 0 0 0 0 0 0 0 1

Tekstil Bankasi 0 0 0 0 0 0 0 51 0 0 0 44 0 95

Turk Ekonomi Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Turkiye Finans Katilim Bankasi 0 0 0 0 0 0 0 0 0 180 0 0 0 180

Turkiye Halk Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Turkiye Is Bankasi 0 1,089 0 0 0 0 0 0 0 0 0 0 0 1,089

Turklandbank 25 0 0 0 0 0 0 27 0 0 0 0 0 52

Yapi Ve Kredi Bankasi 0 0 0 0 838 0 0 0 0 0 0 0 0 838

(24)

DISTRIBUTION – BANCASSURANCE – GROUP 2

• Group 2 do not benefit from bancassurance as the larger companies do, with only

domestic companies having meaningful relationships

Ank ara

Zurich Chart is

Hdi Birlik Isik Libe rty Hur Gene rali Duba i Group Sbn Cofac e Rem aind er Total Akbank Tas 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Aktif Yatirim Bankasi 0 0 3 0 0 0 0 0 0 0 0 0 0 3

Albaraka Turk Katilim Bankasi 0 0 0 0 0 100 0 0 0 0 0 0 0 100

Alternatifbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Anadolu Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Arap Turk Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Asya Katilim Bankasi 0 0 0 0 0 159 0 0 0 0 0 0 0 159

Bank Pozitif Kredi Ve Kalkinma Bankasi 0 0 10 0 0 0 0 0 0 0 0 0 0 10

Birlesik Fon Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 1 1

Citibank 0 0 38 0 0 0 0 0 0 0 0 0 0 38

Deniz Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Denizbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Eurobank Tekfen 0 0 0 0 0 0 0 0 42 0 0 0 0 42 Finansbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Fortis Bank 0 0 0 0 0 0 0 0 0 0 0 0 297 297 Hsbc Bank 0 0 335 0 0 0 0 0 0 0 0 1 0 336 Iller Bankasi Ao 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Ing Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Millennium Bank 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sekerbank Tas 0 0 0 0 0 0 249 0 0 0 250 0 0 499 T. Garanti Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

T. Sinai Kalkinma Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

T. Vakiflar Bankasi Ao 0 0 0 0 0 0 0 0 0 0 0 0 0 0

T.C. Ziraat Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Tasfiye Halindeki Emlakbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Tekstil Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Turk Ekonomi Bankasi 0 0 0 0 0 0 0 0 0 0 0 1 0 1

Turkiye Finans Katilim Bankasi 0 0 0 0 0 180 0 0 0 0 0 0 0 180

Turkiye Halk Bankasi 0 0 0 0 628 0 0 0 0 0 0 0 0 628

Turkiye Is Bankasi 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Turklandbank 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Yapi Ve Kredi Bankasi 0 0 0 0 0 0 0 0 0 0 0 1 0 1

(25)

DISTRIBUTION – AGENTS – AGGREGATED BY YEAR

0 200 400 600 800 1,000 1,200 1,400 1,600 0 5,000 10,000 15,000 20,000 25,000 2005 2006 2007 2008 2009 Ray Aviva FIBA Eureko Mapfre Genel Gunes Aksigorta Ergo Yapi Kredi Groupama Allianz Anadolu AXA Average 0 200 400 600 800 1,000 1,200 1,400 1,600 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 2005 2006 2007 2008 2009 Remainder Coface SBN Dubai Group Generali Hur Liberty Isik Birlik HDI Chartis Zurich Ankara Average

Group 1 - Aggregated by Year

Group 2 - Aggregated by Year

• Agents are integral for general insurance sales in Turkey and have grown at a 9% CAGR

• Groupama has benefitted substantially from its tie up with both Başak Sigorta and Güven Sigorta who have substantial agent networks

(26)

DISTRIBUTION – AGENTS 4 YEAR CAGR

• Growth for Group 2 has been on average similar to Group 1; a stark difference to a comparison of brokers

• Eureko’s growth has arisen from a low base

• Groupama’s outperformance has occurred through corporate action

Group 1 – CAGR (2005-09)

Group 2 - CAGR (2005-09)

-5% 0% 5% 10% 15% 20% 25% 30% 35% CAGR Average -5% 0% 5% 10% 15% 20% 25% 30% 35% CAGR Average Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data.

(27)

DISTRIBUTION – AGENTS - DISTRIBUTION BY COMPANY

(1 OF 2)

• It is interesting to note that some of the largest players such as AXA have grown Agents slower than the average

• Average CAGR for Group 1 is approximately 12%

• The effect of the Groupama tie-up illustrates its dominance in agency in the chart below • Group 1 CAGR is almost identical to that of the entire market (Few bps higher)

0% 5% 10% 15% 20% 25% 30% 35% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

2005 2006 2007 2008 2009 CAGR Ave CAGR Total CAGR

(28)

-5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% -100 0 100 200 300 400 500 600 700 800 900

DISTRIBUTION – AGENTS - DISTRIBUTION BY COMPANY

(2 OF 2)

• Average CAGR for Group 2 is approximately 11% against market of 12%

• The largest companies by agents are:

• Groupama (26.16%), AXA (7.16%), Gunes (6.82%), Ergo (6.31%), Anadolu (6.06%),

Aksigorta (5.91%), Allianz (5.35%) and HDI (3.45%)

Group 2 - Agent Distribution by Company

(29)

DISTRIBUTION – BROKERS - AGGREGATED BY YEAR

• The average share of brokers per group is 8%, though 66% of brokers are held by the top 12 companies (Group 1)

• The largest companies by brokers are:

• Anadolu (6.96%), Gunes (6.84%), Ergo (6.50%), Chartis (6.38%), Allianz (6.15%), Mapfre Genel (5.45%), Groupama (5.34%), Aviva (5.22%)

0 10 20 30 40 50 60 0 100 200 300 400 500 600 2005 2006 2007 2008 2009 Ray Aviva FIBA Eureko Mapfre Genel Gunes Aksigorta Ergo Yapi Kredi Groupama Allianz Anadolu AXA Average 0 10 20 30 40 50 60 0 100 200 300 400 500 600 2005 2006 2007 2008 2009 Remainder Coface SBN Dubai Group Generali Hur Liberty Isik Birlik HDI Chartis Zurich Ankara Average

Group 1 – Aggregated by Year

Group 2 - Aggregated by Year

(30)

DISTRIBUTION – BROKERS - 4 YEAR CAGR

• Growth for Group 2 has been on average been far greater than Group 1 largely due to a lower base for growth than the larger players

• In particular Chartis, HDI and Birlik

Group 1 – CAGR (2005-09)

Group 2 - CAGR (2005-09)

-20% -10% 0% 10% 20% 30% 40% 50% 60% 70% CAGR Average -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% CAGR Average

Note: CAGR shortened for SBN, Coface, Hur & Remainder as no data available Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

(31)

-10% -5% 0% 5% 10% 15% 20% 0 10 20 30 40 50 60

DISTRIBUTION – BROKERS - NUMBER (1 OF 2)

• It is interesting to note that some of the largest players such as AXA have grown brokers slower than the average

• Average CAGR for Group 1 is approximately 5%

• Anadolu has grown well since 2006, as have Ergo and Mapfre Genel

• Broker growth leapt in 2006, but growth has since stalled

• Yapi Kredi fell greatly in 2006

Group 1 – Number of Brokers Over 5 years

(32)

DISTRIBUTION – BROKERS - NUMBER (2 OF 2)

• Average CAGR for Group 2 is approximately 25% (Ex-remainder)

• Chartis has seen the largest nominal growth of Group 2, though the pace has been average

• HDI and Birlik have grown the fastest on CAGR, as have SBN and CoFace

• Generali, whilst one of the smaller insurers, has a notably large number of brokers

-20% 0% 20% 40% 60% 80% 100% 120% -20 0 20 40 60 80 100 120

Group 2 - Number of Brokers Over 5 years

(33)

STAFFING STRATEGY - BRAND BUILDING

Group 1 – Marketing Staff

Group 2 - Marketing Staff

Male Female Total % of _Total

Ankara 0 0 0 0.0% Zurich 15 56 71 6.8% Chartis 10 12 22 2.1% HDI 0 0 0 0.0% Birlik 2 10 12 1.1% Isik 25 1 26 2.5% Liberty 0 0 0 0.0% Hur 10 4 14 1.3% Generali 0 0 0 0.0% Dubai Group 0 0 0 0.0% SBN 0 0 0 0.0% Coface 1 3 4 0.4% Remainder 4 0 4 0.4% Total 455 593 1,048 100.0%

AXA 0 0 0 0.0% Anadolu 37 62 99 9.4% Allianz 0 0 0 0.0% Groupama 0 0 0 0.0% Yapi Kredi 122 210 332 31.7% Ergo 0 0 0 0.0% Aksigorta 0 0 0 0.0% Gunes 31 36 67 6.4% Mapfre Genel 28 22 50 4.8% Eureko 80 118 198 18.9% FIBA 37 10 47 4.5% Aviva 25 19 44 4.2% Ray 28 30 58 5.5% Total 455 593 1,048 100.0%

• General insurers employ over a thousand marketing personnel

• Many of the large companies do not have any directly employed marketing staff

• E.g. Axa, Allianz and Groupama

• Over half are employed by domestic companies

(34)

STAFFING STRATEGY - TOTAL

• General insurers employ approximately 7,600 personnel directly • The large companies largely employ proportionately to their size

• According to CES, Turkey employs the 14th _{most people staff in insurance (Thought their estimate}

is 16,007, more than double of SGM estimates) and that rate from 1999 to 2008 has been a CAGR of 5%; the 4th _highest

Group 1 – Total Staff

Group 2 – Total Staff

Ankara 109 109 218 2.8% Zurich 91 105 196 2.6% Chartis 66 96 162 2.1% HDI 116 80 196 2.6% Birlik 83 63 146 1.9% Isik 103 51 154 2.0% Liberty 97 88 185 2.4% Hur 69 57 126 1.6% Generali 53 64 117 1.5% Dubai Group 62 39 101 1.3% SBN 34 20 54 0.7% Coface 15 8 23 0.3% Remainder 134 108 242 3.2% Total 3,724 3,929 7,653 100.0%

AXA 280 290 570 7.4% Anadolu 378 342 720 9.4% Allianz 272 338 610 8.0% Groupama 254 220 474 6.2% Yapi Kredi 243 298 541 7.1% Ergo 182 309 491 6.4% Aksigorta 295 288 583 7.6% Gunes 233 294 527 6.9% Mapfre Genel 118 126 244 3.2% Eureko 137 191 328 4.3% FIBA 121 141 262 3.4% Aviva 80 104 184 2.4% Ray 99 100 199 2.6% Total 3,724 3,929 7,653 100.0%

(35)

(36)

TRENDS (1 OF 2)

Trend

Thoughts

Dynamic Of Development

• Turkey has experienced huge interest from foreign financial institutions for its macroeconomic growth potential (7% CAGR over preceding decade)

• Trust in the insurance sector is strong, sustaining growth throughout the financial crisis

Stable But Key

Macro/Industry Factors Undermine

• Overcapitalisation of insurers and high, if irregular, growth in GWP with fluctuating and marginal profit

• Premium volume falling in real terms

• Relatively high propensity to save, but scepticism of doing so through third parties and low penetration

“Size Of The Prize” • Most CEE countries are comparatively small on a global scale, though

Turkey is the 13th _{largest market in Europe (CES direct premium basis),}

thus directing corporate development strategy to succeeding here

Development Stage • Turkey is comparatively underdeveloped to Western Europe and

marketing and product manufacturing are geared to this

• Lowest European penetration rate (1.3% premium to DP vs. 7.58% in Europe) and the robust growth in insurance and pension sectors in recent years increased foreign investors’ attention to Turkish insurance market • Premiums per capita are lowest in Europe

• Related insurance employees offered training through organisations

• Turkey has a nascent insurance industry that requires a bespoke approach

• Given level of competition, profit vs. market share strategy must be carefully chosen over the short and long term

(37)

TRENDS (2 OF 2)

Trend

Thoughts

Regulation • Rapidly evolving regulatory framework around financial services and

insurance - weighted in favour of policyholders

Competition • Fierce competition has seen large scale acquisition/partnership. The

few remaining domestic players will be bought out eventually • In the fight for market share irrational exuberance is taking hold

(Distribution fees) affecting margins. A wave of consolidation is inevitable in the proceeding 3 years

Non- Life Still Greater Than Life In Turkey, But Slowly Changing

• Total non-life insurance premiums written exceeds the total life insurance premiums, with non-life business accounting for approximately 85% of total business

• Life and pensions is going to take a higher relative share given development in annuity market and pension scheme structures Majority Of Players In

The Market Are In Non-life

• As of the end of 2009 there are 57 companies operating in the market, 33 of which are non-life insurance

• There is only one licensed reinsurance company in the domestic market

Education And Preferences

• Awareness of insurance is low and perception of its value questionable

(38)

**PEST (*) – POLITICAL – REGULATION (1 OF 2)**

• Insurance Supervision Board, under the General Directorate of Insurance of the UT, established in 1963 supervises all insurance activities in Turkey

• Whilst compared to some countries, the issues are less acute, confidence in Turkey’s government

has been questionable, however the tide may be turning

• Referendum on September 12 to vote on significant changes to the 1982 constitution (long criticised for a bias towards military influence on politics, weak protection of personal freedom and articles that could hinder the process of accession into the EU)

• The anticipated accession of Turkey to the EU has engendered rapid regulatory change to ensure EU standards

• Including transition to IFRS and reserving standards

• Driven by Turkey’s obligations to the EU, and to fulfil one of its commitments to the IMF, Turkey passed Insurance Law No. 5684 on 14 June 2007 which is the principle law governing insurance

• Secondary legislation was largely completed in 2008 and in 2009 was generally implemented • The regulation provides a legislative basis in harmony with EU regulations and should provide the

foundation for continued growth

• Covers insurance companies, agencies, brokers, actuaries and consultants, reinsurers and the Association of Turkish Insurance and Reinsurance Companies

• Law is very pro- consumer, including requirement to explicitly state uncovered risks. Similarly in India, the regulator has not permitted free wording

• The law introduced a number of compulsory insurance types:

• TPL vehicle (personal, public transport), commercial (Dangerous materials, bottled gas), finance leased goods, transport of goods- aviation/ships, professional liability for brokers), earthquake (Turkish Catastrophe Insurance Pool “TCIP”- discussed on proceeding page) and workers comp (Only from the state but optional private may be provided)

(39)

PEST – POLITICAL – REGULATION (2 OF 2)

• And introduced a number of funds and centres:

• TCIP, Agricultural Insurance Pool, Turkish Motor Insurance Bureau, Guarantee Fund, Insurance Arbitration Centre

• See author’s summary of Turkish insurance law for more details on provisions

• Pricing control in general insurance

• Opening up of free tariffs (TPL vehicle in 2007) has intensified competition. This is viewed as a first step taken towards complete deregulation of the rates schedule

• But this does not mean free pricing, under the new system, the Treasury sets base prices but insurers are allowed to charge premiums within a band ranging between ‐ 5% and +10% of those

• India has undergone a similar process and the consequences were telling. De-tariffing was introduced in January 2007 and price changes in profitable lines were so dramatic and have impacted premium growth to the extent that the regulator intervened 8 months later in

September and capped maximum discounts at 52.5%

• Because of change in regulation in 2008 for Provisions for Unearned Premiums and

Outstanding Losses, technical provisions within short term liabilities has increased in recent years

• The amendment affected especially the amount of provisions for Unearned Premiums and Outstanding Losses, this has hit unearned premiums hardest

• There was an increase of 23% in technical provisions in 2008 compared to previous year • No limit in FDI per company and effectively no barriers to entry

• Foreign Direct Investment Law number 4875 states that it is free for foreign investors to

engage in FDI in the Republic of Turkey with no restriction on foreign ownership and no need to seek permission from the Undersecretariat of Treasury

(40)

PEST – POLITICAL - REGULATION

- TURKISH CATASTROPHE INSURANCE POOL (TCIP)

• Prior to the 1999 Marmara earthquake, Fire insurance policies used to cover the earthquake risk in Turkey

• The TCIP started operation in 2000, based on the California Earthquake Authority and New Zealand Earthquake and War Damage Commission.

• The aim of the TCIP is to:

• Transfer the national risk to world-wide risk sharing pools under the management of the international reinsurance

• Provide minimum amount standard insurance for residents living in different risk zones • Provide earthquake coverage of $30k per housing unit with a deductible amount of 2%

• Governance

• Leadership: Board of members, who represent government, academia and insurance companies

• Administrative power: General Directorate of Insurance the Prime Ministry Undersecretariat of the Treasury

• Pool Manager: Garanti Insurance (Since August 2005)

• Terms of TCIP

• Coverage: Earthquakes, fires due to an earthquake, explosions and landslides following an earthquake

• Contract duration: one-year

• Cover: Losses of residential buildings within the municipality borders

• It does not offer any coverage for the rural areas or for the building contents

• Tariffs: 15 which are calculated annually according to 5 earthquake risk zones and three types of buildings. The insured value of a property is decided by (cost per square meter * square metres * tariff)

(41)

PEST – ECONOMIC - COUNTRY RISK ANALYSIS

• Turkey has high levels of political and financial system risk. The vast majority of countries in the Middle East & Northern Africa region are either CRT-3 or CRT-4 (Best ranking)

• In 2009, the Turkish economy, like most of Europe, experienced a sharp decline in economic growth, contracting by more than 5%

• The cycle nadir for 2010 was forecasted with economic growth initially muted at 1% for 2010; in fact Q1 growth was 11.7% • Historically inflation has been a concern, being both high and

volatile

• In 2007, inflation hit a 30 year low of ~8%, but in 2008 was in the double digits again

• A combination of global economic stagflation, with restrained world commodity prices should slow inflation, unfortunately the

underlying demand drivers may not oblige

• The economy has experienced erratic growth over the preceding

years due to a fundamentally underdeveloped banking system, large current account deficits, and a lack of structural reforms

• In 2009, amazingly, the deficit decreased 67% to $13.9bn over 2008’s $42bn

• Turkey seeks accession to the EU and while talks have commenced

some strong opposition amongst current EU members suggests that accession will most likely not occur in the near term

• Issues such as the status of Kurds in Turkey and the political treatment of Cyprus have detrimentally impacted their prospects

Source: AM Best Country Risk Profile

(42)

PEST – ECONOMIC - SUMMARY

• Gross Domestic Savings and GDP

• GDP growth has historically been strong in Turkey, but structurally there are issues. The possibility of Turkey continuing with strong GDP expansion around 7-8%, if it retains current levels of savings of ~17% of GDP (26% in 1988), is low

• Turkey is services led (Which is a decent unemployment sponge) constituting over 60% of GDP with industry ~28% (Manufacturing 18%)

• FDI (inward)

• Economic prosperity has been directly tied to Turkey’s success in attracting foreign capital

• After surging in 2005 and peaking in 2007, FDI plummeted during the 2008-2009 global economic crisis in tandem with the global FDI trends

• According to most recent Undersecretariat of the Treasury data, the decline has continued into 2010, as total IFDI during January-May decreased by 34% over 2009

• Culturally there is ingrained suspicion (fears of exploitation and domination) of foreign corporations in Turkey, and given the still fragile economic/political stability, the resurgence of IFDI to 2007 levels is far from assured, though, likely to continue

• Employment

• Turkey’s chronically high unemployment rate dropped to 12% in April 2010, and has been one of the biggest issues in the economy, hitting 16.1% in February 2009

• Of late, the recuperation in industrial output and exports played a major role in increasing employment

• Inflation and interest rates

• During the financial crisis of 2001, the Lira experienced a radical devaluation, the rate of inflation exceeded 100% for a time. Since then, however, Turkey’s inflation has declined more than tenfold, but with the increase in FDI and decreasing risk factors has lead to a Lira overvaluation

• Interest rates are high for a number of reasons, including inflation, savings/investment gap etc. • Some analysts worry policymakers are driving up interest rates as part of a disinflation program. • According to the Central Bank of Turkey, the annual expected rate of inflation grew from 7.34% to

7.5% in September

(43)

PEST – ECONOMIC - COMPARISON

-6 -4 -2 0 2 4 6 8 10 12 2002 2003 2004 2005 2006 2007 2008 2009 USA Euro Area Japan Turkey

-5 0 5 10 15 20 25 30 35 2002 2003 2004 2005 2006 2007 2008 2009 USA Euro Area Japan Turkey

-10 -5 0 5 10 15 20 25 30 35 2002 2003 2004 2005 2006 2007 2008 2009 GDP End-Year CPI Inflation Rate Unemployment Rate Source: International Monetary Fund, World Economic Outlook Database, April 2010

CPI Inflation rate EoY %

Real GDP %

Overview of Turkey %

Unemployment Rate %

• Inflation decreased substantially in 2004 and has trended steadily at a premium to other countries, which has been supported by a resulting GDP growth premium, but since 2007, GDP has fallen with the market and is in fact less than the US in 2009

• The high unemployment rate is likely going to be an issue for social cohesion as Turkey looks to grow

0 2 4 6 8 10 12 14 16 2002 2003 2004 2005 2006 2007 2008 2009 USA Euro Area Japan Turkey

(44)

PEST – SOCIAL - SUMMARY

• In sum, insurance is a small and growing sector, but rising income levels, availability of financing and changes in lifestyles/ aspirations will drive consumer demand over the next few years,

increasing penetration for most consumer products

• Insurance coverage in Turkey is very low, although comprehension of insurance does not appear to

be the reason for this

• Predominant information sources are agents (37%) and friends (33%) according to Nielsen survey • In aggregate 27% of people learnt about insurance directly from insurers (Traditional media, TV and

insurers websites)

• Those that do not have insurance find their financial status (60%) to be the key element (Which given economic turbulence is ominous) or that social security will cover them (33%). The remainder

alternatively don’t see the point or think they will manage better themselves

• Future purchases however, will be orientated around private health, life and pension products, with accident, housing and earthquake smaller contributors, but with larger growth from the base level of prior purchases

• Key social factors are:

• Men are the largest insured group by sex

• 16-24 year olds are the least covered insurance group, with other groupings (25-34, 35-44 and 45-64) holding largely equal average holding

• Other than in certain branches such as household, accident and private pensions

• Education plays a key role in insurance with high school and higher recipients holding 86% of coverage

• Less educated people have highest coverage in personal accident and workplace insurance • Social economic status is a telling factor in insurance, with AB and C1 holding 84%

• Self employed and full time employed are the largest group by profession, particularly in workplace insurance

• Married people are the highest insured at an average 71% across branches

(45)

PEST – SOCIAL – INSURANCE AWARENESS

• Private pensions in total are the most known products, with comprehensive car insurance

being the strongest unaided line (See categorisation of ‘unaided’ and ‘Total’ below)

• Peculiarly TPL auto insurance is half as know as comprehensive, and despite being

mandatory for homes, only one in five people unaided were aware of earthquake insurance • The government is aware of the lack of take-up of mandatory insurance and is

endeavouring to increase this in the years to come

Insurance Awareness of Insurance (% N=3033)

Source: Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish 46 41.8 40.1 35.8 32.1 24 24 22.3 16.3 2.2 2.1 2.1 0.8 92.6 96.2 93.4 91.7 88 83.6 83 86.1 76.6 44 50.8 44.3 20.4 0 10 20 30 40 50 60 70 80 90 100 Car- Comprehensive Individual Retirement Life Private Health Housing Workplace Car- TPL Mandatory Earthquake Personal Accident Education Travel Agriculture Liability Unaided Total 1. Unaided • Without assistance surveyed were initially asked to indicate is they knew various insurance products 2. Total (Prompted) • Surveyed were finally provided an information card and asked whether they had heard of the insurance