PRESENTATIONTO THE MEMBERS

OF THEPHILIPPINE INSURERS & REINSURERS ASSOCIATION

THE EARTHQUAKE PROTECTION INSURANCE COMPANY of the PHILIPPINES (EPIC)

MS. MADELEINE VARKAY, ASIAN DEVELOPMENT BANK (ADB)MR. DAVID KINLOCH, ADB CONSULTANT

MANILA, 22-23 January 2014

Objective of this Presentation

To address questions raised by PIRA members regarding the relationship between EPIC and the

other domestic insurance and reinsurance companies in the Philippines.

The Role of ADBADB is providing technical assistance in the areas of:Legal, financial, actuarial, valuation, catastrophe modelling, insurance & reinsurance

To the government of the Republic of the Philippines, especially through the Office of the Insurance Commissioner, and to PIRA and other interested parties

To facilitate the establishment of an earthquake catastrophe insurance entity.

ADB is an advisor but not a part of the decision making process.

Decision as to the Form of the EntityOn 22 July 2013, the Insurance Commissioner announced

the formation of an earthquake catastrophe insurance entity - as a single product direct underwriting insurer. This company is known as EPIC (The Earthquake Protection Company of thee Philippines.

Standing alongside the existing insurance market, underwriting only earthquake insurance coverage for middle class residential and SME property.

Legislation will be passed to make the purchase of earthquake insurance on ALL buildings compulsory

Primary Objectives of the Company To offset fiscal liability from the account of the

Philippines i.e. the government, the insurance and financial markets

and society (sambayanan) in the event of an earthquake catastrophe.

To provide the maximum amount of insurance protection, to the maximum number of people, at the minimum possible cost.

To settle claims quickly and consistently

WHY EARTHQUAKEPhilippines: Economic Exposure

The comparative cost of catastrophe

Yolanda / Haiyan – US$1.5 – 2.5 Billion. A 7.3 scale earthquake in Metro Manila – US$100 billion – property only.

Concerns Over Foreign Control (1)THE PRIMARY OBJECTIVE OF EPIC is to remove as much

of the financial burden of a major catastrophe away from the Philippines. This requires a significant amount of foreign equity capital, reinsurance capacity and alternative risk transfer facilities from foreign sources.

The size and nature of the risk assumed by EPIC and its high international profile will require:1.An international credit rating2.Significant (US $400 million + ) start-up capital3. Investors with international rating

EPIC will be a national company with international risk offset arrangements

Concerns Over Foreign Control (2)

Mitigating Factors EPIC will be incorporated in the Philippines Subject to Philippine law Capital denominated in Philippines Pesos Regulated by the Insurance Commissioner and the

Securities and Exchange Commission Subject to the requirements of Banco Sentral ng Pilipinas Insuring risks in the Philippines Issuing policies in Philippine Pesos Paying claims in Philippines Pesos As far as possible, managed and run by staff from the Philippines

Concerns Over Outwards Foreign Investment

EPIC will be subject to the investment guidelines of the Insurance Code and the regulations of the SEC and BsP.

The primary objective of the company is to remove as much of the financial burden as possible away from the Philippines.

Prudent risk offset arrangements require maximum risk diversification, preferably away from assets that could be affected by the insured peril.

Equity Opportunities for Domestic Investors

In order to preserve EPIC’s international rating, investors will need a similar, or better, rating.

This may preclude some domestic insurers who wish to hold equity in EPIC (but may not prevent their sister or parent companies from investing).

It should be possible to construct a separate class of shares to allow certain classes of investor to follow the fortunes of EPIC and reap any profits on a “no risk” (other than equity) basis.

EPIC is Going to Take Premium Away (1) There is a superficial argument that “the market is going to

lose premium” through the creation of EPIC. This does not stand up to serious discussion.

Only a small number of those currently are in EPIC’s target market - most of the potential market cannot avail of insurance cover.

LEI study indicates that 11% of the target market would buy cover if available. EPIC will be obliged to insure on a non-selective basis.

Some gross premium may be lost, but the capital tied up by proper reserving for these risks is being freed for other purposes.

RBC regulations are being tightened and enforced across ASEAN. Proper reserving will become increasingly

important to smaller companies.

EPIC is Going to Take Premium Away (2)

Transfer of business to EPIC will release insurance company capital for use in other, related, lines of business.

Opportunities for general other classes of business will be made available from the education, marketing and PR campaigns implemented by EPIC’s business development.

EPIC will foster new marketing opportunities for insurance companies.

EPIC will ensure the individual identity of markets. It will not disturb existing agency and other connections.

Legislation making insurance of ALL properties will provide added opportunities for business development.

Epic is Going to Take Premium Away (3)

EPIC owes a duty of care to the market:

EPIC will provide an over-riding commission structure to provide ”no risk” net income to other PIRA members

EPIC will develop a risk-based premium and work in collaboration with the market, to provide the maximum amount of insurance protection.

This will standardize rates for other classes of business and will benefit the market overall.

Local Opportunities For Reinsurance?Reinsurance can be placed within the local market, provided that the reinsurer has an appropriate international credit rating

However, in gauging their retention, local reinsurers should remember, the primary objective of EPIC is to take as much of the financial burden as possible away from the Philippines

Attachment levels achievable by local companies will be much lower than that of EPIC, therefore

Retrocession costs will be increased and profit levels will drop at the same time as risk is being assumed for net account.

EPIC may not be prepared to accept reinsurance rates with high commission levels

CATASTROPHE DISASTER RISK FINANCING

One well funded, properly organised company can manage Disaster Risk Financing more efficiently than a number of smaller units.

Claims control can be handled quickly, efficiently and consistently

Cash Management can be controlled more effectively.

ALL building owners shall be required

by LAW to be insuredagainst earthquake

Internationally rated local insurance companies and/or their parents invited to

participate as equity stakeholders

Local insurers may be recognised in policies / certificates of insurance

PRIVATE INSURANCE COMPANIES

Equity from Internationally Rated Local and International Private

Sector

ADB PARTICIPATION (PBL and other possible modality)

GFI Equity

EPIC BOARD OF DIRECTORS

Reinsurance Program

Compulsory Earthquake Insurance Policy

MARKET TARGETED: Residential and SME Risks

EQ InsuranceCompany of

the Philippines(EPIC)

$400million+ equity

EPIC Management Team

DISTRIBUTOR 100%

Management & Administration Locally managed under Board and Committee guidance Operating to the highest international standards of

transparency and accountability Small, specialized and dedicated management team “Lean and Mean” on costs and expenses Constantly innovating Strongly IT focused Direct Marketing Capability Educationally Aware User Friendly Claims Outsourced Disaster Risk Reduction Community Awareness Program

OVERALL BENEFITS TO PIRA MEMBERS

• Mandatory insurance of ALL property will benefit the industry.

EPIC Education programs will present more cross selling opportunities.

Over riding commissions will provide ‘no-risk’ net income.

Equity investment may provide further income. Standardized rates will increase premium income EPIC is NOT taking away premium. It will increase

overall revenue across all classes of business. EPIC will not be allowed to move into other business

lines.

THE OBJECTIVE

TO PROVIDE THE MAXIMUM INSURANCE COVERAGE

TO THE MAXIMUM NUMBER OF PEOPLE

AT THE MINIMUM COST

AND TO ENSURE THAT CLAIMS ARE PAID AS QUICKLY AND FAIRLY AS POSSIBLE

National Interest(EVEN) IF YOU LIVE ABOVE THE POVERTY

THRESHOLD, ONE SINGLE STROKE OF FATE

ONE ACCIDENT, CALAMITY OR CRISIS,CAN SEND YOU

FALLING THROUGH THE CRACKS