T C I P (Turkish Catastrophe Insurance Pool)

T C I P (Turkish Catastrophe Insurance Pool) by Cahit Nomer (Chief Executive Officer)

What is T.C.I.P.? Public legal entity Compulsory Earthquake Insurance

Why T.C.I.P.? Geographical/ Historical Background • 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 are living in the 1st and 2nd earthquake zones.

Why T.C.I.P.? Geographical/ Historical Background Lack of Insurance Consciousness Burden on the General Budget

Alleviating financial burden of the state Providing cover for dwellings Spreading risk Contributing to reliable building construction Setting up funds Aims of the TCIP

Aims of the TCIP : • to provide insurance cover for the dwellings within the scope of the TCIP policy against the earthquake risk in return for an affordable premium. • to alleviate the financial strain shouldered by the State by relieving the government from the burden of replacing earthquake-damaged dwellings. • to secure the spread of the risk through the insurance/reinsurance systems. • to be able to set up funds against earthquake losses in the long term. • to make use of the insurance system as a means to contribute to reliable building construction.

Administrative Background • Need to find out methods of compensating direct costs of natural disasters outside the General Budget • Cooperation between the Treasury’s General Directorate of Insurance and the World Bank (loan facility) • Study of other successful models:. CEA (California Earthquake Authority) – USA. EQC (The Earthquake Commission) – New Zealand • Accelerating effect of the Marmara Earthquake (August 17th, 1999) • Introduction of the TCIP and the Compulsory Earthquake Insurance system on December 27th, 1999 by a decree-law.

Technical and Administrative Management The Milli Re (The local reinsurance co) Insurance Companies and their agents Marketing Channels Professional surveyors already active in the market Loss Adjustments Publicity & Awareness Campaigns A Private Advertising Company Main Principle of Organization : Outsourcing (rationale behind:to maximize efficiency with minimum operational costs)

Sale of the Policies TCIP Insurance Companies Agents Homeowners • 32 authorized insurance companies. • Acquisition Costs (Commission Rates) 12,5% (for risks located in İstanbul)17,5% (for risks situated outside İstanbul)

Audits Exemption Limitation for Expenditures Financial Aspects

Financial Aspects • Annual accounts, transactions and expenditures of the TCIP to be audited by the Undersecretariat of Treasury and an International Independent Auditing Firm. • TCIP and its income exempted from any tax, duty and charge. • Expenditures to be made out of the resources 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

Information Technology Aspects • A unique IT System allowing 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.

Option Fee to be paid to the reinsures to reserve their capacityIn case of attachment to be redeemable against M&D at adjustment In case of non-attachment non refundable TCIP Reinsurance Cover Characteristics For the initial year • Qtrly attachment of layers in accordance with the accumulation growth • R/I Premium adjustment based on average aggregate • Manager’s right to cancel the cover at the end of 1st 6 months taking into account the penetration & exposure experience • Placement with around 60 reinsurers & syndicates • Placement by a brokers’ consortium consisting of the world’s biggest 4 brokers • 2nd Year A bidding procedure among the reinsurance brokers

Development of the Reinsurance Programme • Identification of the aggregate sums insured for each accumulation zone (15 CRESTA zones) • Determination of the EML (Estimated Maximum Loss) for the main area (CRESTA zones 1 and 3) since a large number of total dwellings (25%) are exposed in this area to a significant earthquake threat • Purchase of an adequate cover to protect the EML potential in the mentioned area.

Buildings within the Scope of the Compulsory Earthquake Insurance • Independent units falling within the scope of Law No:634 regarding the Flat Ownership • Buildings constructed as dwellings on lands registered under private ownership • Independent units situated within these buildings and used as business house, office or for similar purposes • Dwellings constructed by the State or with credits provided by the state as a result of natural disasters

Buildings outside the Scope of the Compulsory Earthquake Insurance • Buildings belonging to Public institutions and establishments • Buildings constructed within the settlement areas of villages • Buildings entirely used for commercial and industrial purposes • Buildings constructed after 27.12.1999 without any construction licence

Risks Covered by the TCIP Policy All material damages caused directly by an earthquake (including fire, explosion and landslide following an earthquake) to the insured building.

Risks Excluded by the TCIP Policy • Indirect Losses (costs of debris removal, loss of profit, business interruption, deprivation of rent, alternative residence and office expenses, third party liabilities etc.) • All kinds of movables, goods and the like • All bodily damages including death • Claims for moral injuries

Calculation of the Policy Premium Three aspects of the unit are to be considered: 1) Type of Building a) Steel, Reinforced Concrete Carcass b) Amassed Stone and Brick c) Others (wooden, adobe etc.) 2) Earthquake Intensity Zone (5 different zones in Turkey) 3) Sum Insured

How to work out the Sum Insured? Sum Insured : No of sq meters x sq meter price of construction $175 for type (a) $125 for type (b) $ 65 for type (c) (but always limited to a maximum amount of $ 26.500) Where the value of the independent dwelling exceeds this maximum amount, the exceeding amount can be insured against the earthquake by the insurance companies on a voluntary basis on the condition that the Compulsory Earthquake Insurance Policy has already been taken out.

It is worth mentioning that, since the TCIP policy covers only the dwelling and only the earthquake risk, insurance companies can always issue policies with regard to the same dwelling to cover contents and other risks (such as fire and allied perils).

There is a tariff indicating 15 different rates determined for 5 intensity zones and 3 construction types.

Tariff Rates ( ‰) Earthquake Zones Type de constructionI.II.III.IV.V. A) Steel, Reinforced2.001.40 0.75 0.50 0.40 Concrete Carcass B) Amassed Stone and 3.50 2.50 1.30 0.50 0.40 Brick C) Others 5.00 3.20 1.60 0.70 0.50

TCIP Sources and Indemnification Capacity • Premiums received from the insureds • Reinsurance coverage purchased from the international R/I markets • World Bank Fund, which will be provided in the event of a loss

Legal arrangements regulating measures and sanctions are not yet in force In other words, the system for the time being is practically not compulsory. • 2) A full cooperation of the insurance companies selling policies could not be achieved since they want to show the compulsory earthquake insurance premium within their own premium production and sell the compulsory earthquake cover under their own policy together with the other risks (such as fire and allied perils) regarding the dwelling. Before concluding, We would like to share with you two main inconveniences encountered during the process of the system:

T C I P (Turkish Catastrophe Insurance Pool)