Analysis of The Turkish General Insurance Market

2010
By Alexander D. JARVIS
Blog: www.alexanderjarvis.com
Twitter: ADJBlog
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
6. Expansion Options To Gain Market Share

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
Ave. Earned Ave. Earned Ave. Earned
Group 1 Group 2 Remainder
Premium Premium 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.
(*) Licenced but Inactive Insurance Companies. Note: Other under Remainder is a provided grouping
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
1
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
• Competition is fierce, detrimentally impacting pricing ability and ergo profits
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
• An example of this is Aviva Sigorta and Aviva Emeklilik and similarly so for Allianz etc.
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)

100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Life Non-life Non-Life Average

Source: Analysis of CEA Statistics N°40: European Insurance in Figures, Data 1999-2008
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
Non-Life Companies Growth Since 2003 (Number)
40
35
7
30
9
11 19 23
25 14 22
20
15 29
24
10 21
18 16 14 14
5
0
2003 2004 2005 2006 2007 2008 2009
Domestic Foreign
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
ENTRANTS AND 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 Corporate Activity

remaining shares of their partners Koc and Year Activity
Oyek 2009 Bati liquidated
• A substantial force was created in Groupama 2009 Güven Sigorta AS merged to Groupama Sigorta AS
in 2009 when both Başak Sigorta and Güven 2009 Basak Groupama became Goupama
Sigorta were brought into the fold 2009 Ergoisvicre changed name to ERGO
2009 AIG rebranded to Chartis
Entrants
2008 AXA Oyek amalgamated into AXA (Partner buyout)
Year Company Note
2008 Koc Allianz became Allianz (Partner buyout)
2009 Neova Sigorta A Licence
2008 Turkiye Genel became Mapfre Genel
2009 Ziraat Sigorta AS Licence
2008 Dubai Group Sigorta AS Licence 2008 Zurich acquired life business of TEB (Sigorta)
2008 Ace European Group Ltd Branch 2008 SBN acquired Tikaret
2008 Türk Nippon Sigorta AS Generate premiums again
2008 Harel acquired Turk Nipon
2008 Zurich Sigorta As Acquires Teb
2008 Cardif Sigorta AS Licence 2008 Toprak became Euro. Likely linked to asset requisition by gov.
2008 SBN Sigorta AS Acquires Tikaret 2007 Eureko acquires name Garanti through 80/20% ownership JV
2007 Mapfre Sigorta AS Acquires Genel Sigorta 2006 Basak became Basak Groupama in 2006
2007 Eureko Sigorta AS Acquires Garanti Sigorta
2006 Finans becomes part of Fiba in 2006
2007 Atradius Sigorta AS Licence
2007 Coface Sigorta AS Licence 2006 ERGO acquires majority of shares of Turkish insurer Isvicre
2006 Ergo (Munich Re) Acquires Avrupa Holding 2006 Liberty acquires Sekera in 2006
2006 Liberty Sigorta As Acquires Seker Sigorta
2005 HDI acquired Ihlas in 2005
2005 HDI Sigorta AS Acquires Ihlas
OVERVIEW OF BRANCHES
• 18 branches
Involvement per Non-Life Branch
Branches Number of Companies
• Before the new Insurance Law no: 5684 Health(*) 36
came into effect in June 2007
Casualty(**) 54
(Replacing Insurance Supervision Law
No. 7397) there were 10 non-life Land Vehicles 29
branches Railway Vehicles 30
• According to current regulations, non-life Air Vehicles 30
insurance companies can operate in
Sea Vehicles 30
some or all 18 non-life branches
• See slide “Segregation of life and Transport 30
non life” Fire/Natural Disaster 30
• Life insurance companies could operate General Damages 30
some or all 7 life branches
Land Vehicles Liability 29
• Most companies act in all sectors
Air Vehicles Liability 29
• Health and casualty numbers are high
Sea Vehicles Liability 30
due to life companies
Public Liability 30
• Insurers generated premium in 17 of the 18
non-life branches Credit 15
Fidelity Guarantee 30
• There has not been premium production
in the Support branch as of yet Financial Loss 31
Legal Protection 23
Support 5
(*) 7 of are life companies
(**) 23 of are life or pension companies

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data
CHANGE IN COMPANIES PER BRANCH
• 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
Growth Companies per Branch Number (Aggregate)

2006 2007 2008 2009 290
0% 2% 9% 2% Personal Accident 285
0% -15% 14% -13% Health 280
0% -16% 15% -3% Engineering 275
0% -16% 15% -3% Marine 270
0% -16% 15% -3% Fire 265
0% -16% 15% -7% Accident 260
0% 0% 4% 4% Motor Vehicle TPL 255

7% 38% 5% -4% Agriculture 250
0% 20% 0% 11% Legal Protection 245
133% 57% 18% -38% Credit
240
0 10 20 30 40 50 60 2005 2006 2007 2008 2009
2009 2008 2007 2006 2005 Number

DETAILED OVERVIEW OF PRODUCT LINES
• 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 %
Premium Production per Branches

2008 2009 % Total
GP
000 TL Gross Premium Direct Premium Gross Premium Direct Premium 2008 2009
Growth
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

DETAILED OVERVIEW OF PRODUCT LINES
• 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
Branch Details
No.of Company No.of Written Direct Premium Share in Total
Branch Name
Generating Premium Policies (000 TL) Direct Premium %
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
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
STRENGTH OF BUSINESS PER PRODUCT LINE (1 OF 2)
• 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
Group 1 – Total GWP per Branch % (Read across)

Periphery Core area Periphery
Air Fire and Land Legal

Air Financial General General Land Sea
% Accident Vehicles Credit Natural Health Vehicles Protectio Other Transport
Vehicles Loss Damages Liab. Vehicles Vehicles
Liab. Disasters Liab. n
AXA 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
Anadolu 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
Allianz 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
Groupama 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
Yapi Kredi 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
Ergo 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
Aksigorta 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
Gunes 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
Mapfre Genel 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
Eureko 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
FIBA 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
Aviva 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
Ray 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
STRENGTH OF BUSINESS PER PRODUCT LINE (2 OF 2)
• 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
• Coface, a subsidiary of BNP, focuses exclusively on credit and is a new entrant
Group 2 – Total GWP per Branch % (Read across)

Ankara 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
Zurich 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
Chartis 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
HDI 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
Birlik 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
Isik 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
Liberty 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
Hur 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
Generali 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
Dubai Group 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
SBN 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
Coface na na na 100.00 na na na na na na na na na na na

SHARE OF TOTAL MARKET PER PRODUCT LINE (1 OF 2)
• 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
Group 1 – Market Share per Company per Branch (% of Total Market)

AXA 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
Anadolu 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
Allianz 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
Groupama 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
Yapi Kredi 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
Ergo 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
Aksigorta 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
Gunes 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
Eureko 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
FIBA 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
Ray 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
SHARE OF TOTAL MARKET PER PRODUCT LINE (2 OF 2)
• 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
Group 2 – Market Share per Company per Branch (% of Total Market)

Zurich 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
Chartis 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
HDI 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
Isik 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
Hur 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
Generali 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
SBN 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

RELATIVE MARKET SHARE BY BRANCH (1 OF 2)
• 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%
Group 1 – Relative Market Share by Branch (Read Down)

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

RELATIVE MARKET SHARE BY BRANCH (2 OF 2)
• 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
Group 2 – Relative Market Share by Branch (Read Down)

Zurich 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
Chartis 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
HDI 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
Isik 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
Hur 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
Generali 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
SBN 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

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)
Distribution Contribution by Branch Premium Dist. Volume by Branch

Legal Protection Legal Protection
Financial Loss Financial Loss
Fidelity Guarantee Fidelity Guarantee
Credit Credit
Public Liability Public Liability
Sea Vehicles Liability Sea Vehicles Liability
Air Vehicles Liability Direct Air Vehicles Liability Direct
Land Vehicles Liab. Agencies Land Vehicles Liab. Agencies
General Damages Banks General Damages
Banks
Fire Fire
Brokers Brokers
Transport Transport
Sea Vehicles Other Sea Vehicles Other
Air Vehicles Air Vehicles
Railway Vehicles Railway Vehicles
Land Vehicles Land Vehicles
Health Health
Casualty Casualty
0% 20% 40% 60% 80% 100% 0 1,000,000 2,000,000 3,000,000
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data and Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish
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
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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
Yatirim Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 1 0 1
DISTRIBUTION – BANCASSURANCE – GROUP 2
• Group 2 do not benefit from bancassurance as the larger companies do, with only
domestic companies having meaningful relationships
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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
Yatirim Finansal Kiralama 0 0 0 0 0 0 0 0 0 0 0 0 0 0

DISTRIBUTION – AGENTS – 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
Group 1 - Aggregated by Year Group 2 - Aggregated by Year

25,000 1,600 16,000 1,600
1,400 Ray 14,000 1,400 Remainder

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

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)

35% 35%
30% 30%
25% 25%
20% 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
CAGR Average CAGR Average

Note: CAGR unavailable for Dubai Group and Coface as new entrants. Coface added as 0% to allow SBN to show up graphically
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)
Group 1 – Agent Distribution by Company

7,000 35%
6,000 30%
5,000 25%
4,000 20%
3,000 15%
2,000 10%
1,000 5%
0 0%
2005 2006 2007 2008 2009 CAGR Ave CAGR Total CAGR

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

900 45%
800 40%
700 35%
600 30%
500 25%
400 20%
300 15%
200 10%
100 5%
0 0%
-100 -5%
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Gaps in CAGR as no data available
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%)
Group 1 – Aggregated by Year Group 2 - Aggregated by Year

600 60 600 60
Ray Remainder
500 50 500 50
Aviva Coface
FIBA SBN
400 40 Eureko 400 40 Dubai Group

Mapfre Genel Generali
Gunes Hur
300 30 Aksigorta 300 30 Liberty
Ergo Isik
Yapi Kredi Birlik
200 20 Groupama 200 20 HDI
Allianz Chartis
Anadolu Zurich
100 10 AXA 100 10 Ankara
Average Average
0 0 0 0
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
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)

70% 70%
60% 60%
50% 50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
-10% -10%
-20% -20%
CAGR Average CAGR Average
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: CAGR shortened for SBN, Coface, Hur & Remainder as no data available
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

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

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
Group 2 - Number of Brokers Over 5 years

120 120%
100 100%
80 80%
60 60%
40 40%
20 20%
0 0%
-20 -20%
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: Gaps in CAGR as no data available
STAFFING STRATEGY - BRAND BUILDING
• 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
• Yapi Kredi has the largest marketing force followed by Eureko – together accounting for over half the total
Group 1 – Marketing Staff Group 2 - Marketing Staff

% of % of
Male Female Total Male Female Total
Total Total
AXA 0 0 0 0.0% Ankara 0 0 0 0.0%
Anadolu 37 62 99 9.4% Zurich 15 56 71 6.8%
Allianz 0 0 0 0.0% Chartis 10 12 22 2.1%
Groupama 0 0 0 0.0% HDI 0 0 0 0.0%
Yapi Kredi 122 210 332 31.7% Birlik 2 10 12 1.1%
Ergo 0 0 0 0.0% Isik 25 1 26 2.5%
Aksigorta 0 0 0 0.0% Liberty 0 0 0 0.0%
Gunes 31 36 67 6.4% Hur 10 4 14 1.3%
Mapfre Genel 28 22 50 4.8% Generali 0 0 0 0.0%
Eureko 80 118 198 18.9% Dubai Group 0 0 0 0.0%
FIBA 37 10 47 4.5% SBN 0 0 0 0.0%
Aviva 25 19 44 4.2% Coface 1 3 4 0.4%
Ray 28 30 58 5.5% Remainder 4 0 4 0.4%
Total 455 593 1,048 100.0% Total 455 593 1,048 100.0%

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

% of % of
Male Female Total Male Female Total
Total Total
AXA 280 290 570 7.4% Ankara 109 109 218 2.8%
Anadolu 378 342 720 9.4% Zurich 91 105 196 2.6%
Allianz 272 338 610 8.0% Chartis 66 96 162 2.1%
Groupama 254 220 474 6.2% HDI 116 80 196 2.6%
Yapi Kredi 243 298 541 7.1% Birlik 83 63 146 1.9%
Ergo 182 309 491 6.4% Isik 103 51 154 2.0%
Aksigorta 295 288 583 7.6% Liberty 97 88 185 2.4%
Gunes 233 294 527 6.9% Hur 69 57 126 1.6%
Mapfre Genel 118 126 244 3.2% Generali 53 64 117 1.5%
Eureko 137 191 328 4.3% Dubai Group 62 39 101 1.3%
FIBA 121 141 262 3.4% SBN 34 20 54 0.7%
Aviva 80 104 184 2.4% Coface 15 8 23 0.3%
Ray 99 100 199 2.6% Remainder 134 108 242 3.2%
Total 3,724 3,929 7,653 100.0% Total 3,724 3,929 7,653 100.0%

2
TRENDS (1 OF 2)
• 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
Trend Thoughts
Dynamic Of • Turkey has experienced huge interest from foreign financial institutions
Development 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 • Overcapitalisation of insurers and high, if irregular, growth in GWP with
Macro/Industry Factors fluctuating and marginal profit
Undermine • 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
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 • Total non-life insurance premiums written exceeds the total life
Than Life In Turkey, insurance premiums, with non-life business accounting for
But Slowly Changing 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 • As of the end of 2009 there are 57 companies operating in the market,
The Market Are In Non- 33 of which are non-life insurance
life • There is only one licensed reinsurance company in the domestic
market
Education And • Awareness of insurance is low and perception of its value
Preferences questionable
• Savings mentality of “cash in the mattress” still important to consider
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)
(*) PEST is an acronym for a macro based analysis - Political, Economic, Social and Technological
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
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)
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 AM Best Risk Position
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

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
• The expected current account deficit (CAD) for 2010 is $33.7bn and economic growth is 5.5%
PEST – ECONOMIC - COMPARISON
• 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
Real GDP % Unemployment Rate %

12 16
10 14
8
12
6
10
4
8
2
6
0
-2 4
-4 2
-6 0
2002 2003 2004 2005 2006 2007 2008 2009 2002 2003 2004 2005 2006 2007 2008 2009
USA Euro Area Japan Turkey USA Euro Area Japan Turkey
CPI Inflation rate EoY % Overview of Turkey %

35 35
30 30
25 25
20 20
15
15
10
10
5
5
0
0
-5
-5
2002 2003 2004 2005 2006 2007 2008 2009 -10
2002 2003 2004 2005 2006 2007 2008 2009
USA Euro Area Japan Turkey
GDP End-Year CPI Inflation Rate Unemployment Rate
Source: International Monetary Fund, World Economic Outlook Database, April 2010
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
Source: Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish
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) Survey Method

0 10 20 30 40 50 60 70 80 90 100 1. Unaided
Car- Comprehensive 46 • Without
92.6
Individual Retirement 41.8
96.2
assistance
Life 40.1 surveyed were
93.4 initially asked to
Private Health 35.8
91.7 indicate is they
Housing 32.1 knew various
88
Workplace 24
83.6
insurance
Car- TPL 24 products
83
Mandatory Earthquake 22.3
86.1 2. Total (Prompted)
Personal Accident 16.3
76.6 • Surveyed were
Education 2.2 finally provided
44
Travel 2.1 an information
50.8
2.1 card and asked
Agriculture 44.3 whether they
Liability 0.8
20.4 had heard of the
insurance
Unaided Total
PEST – SOCIAL – SEX
• Ownership of insurance is much higher in men than women (65/35%)
• This is most acute in workplace insurance (85%) and third party liability car insurance (75%)
• Given this trend, some companies have begun focusing on women with targeted
advertising
Men vs. Women Ownership of Insurance (% N=749)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total 65% 35%
Workplace 81% 19%
Car- TPL 75% 25%
Personal Accident 74% 26%
Car- Comprehensive 71% 29%
Life 70% 30%
Mandatory Earthquake 63% 37%
Housing 61% 39%
Individual Retirement 58% 42%
Special Health 58% 42%
Men Women
PEST – SOCIAL – AGE
• The 16-24 are the smallest holders of insurance, however health and life insurance are held by
21% and 27% respectively
• 25-34 year olds have the largest stake of individual retirement (private pension) insurance
• 35-44 year olds have ~30% holding share across the range of branches (Min/max: 29/39%) with a
39% stake in personal accident
• 45-64 year olds have large shares of compulsory earthquake and housing insurance which is
logical, at 40% and 41% respectively
Age Ownership of Insurance (% N=749)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total 15% 28% 28% 29%
Life 27% 30% 21% 22%
Private Health 21% 32% 26% 21%
Personal Accident 20% 23% 39% 19%
Mandatory Earthquake 11% 16% 33% 40%
Car- TPL 9% 24% 32% 35%
Housing 9% 17% 33% 41%
Car- Comprehensive 8% 26% 34% 32%
Workplace 8% 32% 28% 33%
Individual Retirement 7% 39% 34% 19%
16-24 25-34 35-44 45-64

PEST – SOCIAL – EDUCATION
• Approximately 45% of all insurance is held by university and master’s graduates, with 41%
being held by those with high school education – 86% in total
• Primary and ‘medium’ school recipients hold on average 14% of insurance implying a
direct correlation between education and coverage
• The highest coverage of 18% is in workplace insurance and 15% in personal accident
Education Ownership of Insurance (% N=749)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total 5% 9% 41% 45%
Workplace 9% 9% 44% 39%
Car- TPL 6% 8% 36% 50%
Housing 6% 6% 31% 57%
Car- Comprehensive 6% 5% 38% 51%
Mandatory Earthquake 5% 4% 39% 51%
Individual Retirement 4% 9% 40% 47%
Personal Accident 3% 12% 36% 49%
Private Health 2% 3% 35% 61%
Life 1% 5% 50% 45%
First Medium High School Uni and Msc
PEST – SOCIAL – SOCIO ECONOMIC STATUS
• AB group has the largest coverage with the exception of commercial insurance, and are
particularly strong in private health
• C1 have and average holding of ~40% with a 50% share of workplace insurance
• C2 individuals are underserved in disaster insurance (likely linked in part to property ownership),
but have their highest relative ranking in personal accident
• Average person income per year is TL 2,066 (*)
• Average income for AB is 1.5x C1 and 2.0x C2
SES Ownership of Insurance (% N=754) Average Income

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% SES Income TL
Total 45% 39% 16% AB 2,606
Private Health 62% 29% 10% C1 1,781

C2 1,324
Housing 55% 33% 12%
Individual Retirement 54% 37% 10%
Car- Comprehensive 51% 37% 13%
Mandatory Earthquake 51% 42% 7%
Personal Accident 48% 26% 25%
Car- TPL 47% 38% 14%
Life 43% 43% 15%
Workplace 35% 50% 15%
AB C1 C2
Note: (*) Average income excludes people who replied no answer and don’t know.
PEST – SOCIAL – PROFESSION
• Self employed are the largest group, dominating workplace insurance, car (comprehensive and TPL)
• Full time employees are the second largest group, particularly in private health and pensions
• Housewife insurance is linked to home, health and pension with retirees focusing home on earthquake
• Students are the second smallest group, but the third largest in personal accident
• Temporary unemployed are the smallest group by some margin, but interestingly, along with students,
have ~8% life insurance share
Professional Ownership of Insurance (% N=749)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total 14% 8% 3% 38% 32% 7%
Housing 20% 14% 1% 37% 25% 4%
Private Health 17% 6% 3% 22% 45% 7%
Individual Retirement 17% 2% 4% 35% 40% 2%
Mandatory Earthquake 15% 13% 0% 37% 29% 5%
Car- Comprehensive 12% 7% 2% 47% 26% 5%
Car- TPL 11% 9% 2% 45% 28% 6%
Workplace 5% 2%
0% 82% 9% 2%
Personal Accident 5% 4%1% 38% 38% 14%
Life 4%2% 8% 35% 42% 9%
Housewife Retired Temp. Unemployed Self Emplyeed Full Time Student
PEST – SOCIAL – MARITAL STATUS
• Married individuals constitute 71% of insureds and generally dominate across the
branches, particularly in house and car related insurance
• Single insureds have a larger share (35%-47%) in life, pension and health insurance but do
not have an equal share in any line
Marital Status Ownership of Insurance (% N=749)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Total 71% 30%
Housing 82% 19%
Mandatory Earthquake 80% 20%
Car- Comprehensive 79% 21%
Car- TPL 79% 21%
Workplace 74% 26%
Personal Accident 69% 31%
Individual Retirement 66% 34%
Private Health 61% 39%
Life 53% 47%
Married Single
PEST – TECHNOLOGICAL - SUMMARY
• System investment
• The level of investment in banking IT systems has not been matched in insurance
• Indeed, banking systems are complex but the requirements for insurers are equally so,
particularly in the age of heightened internal control requirements
• This is particularly the case for both domestic companies and foreign players operating in
partnership, where IT systems may not be adequate, requiring investment and development
• Automation of processes and CRM
• Off the shelf and bespoke software enables insurers to more rapidly process large volumes
of applicants and manage insureds
• Best practice abroad will increasingly be implemented in Turkey and foreign entrants have
the opportunity to move their partners up the tech-tree and increase efficiency (As above)
• Computing power
• Advances in computing have facilitated greater depth of data analysis underpinning
underwriting processes for companies desiring to develop a competitive advantage
• Direct and internet distribution
• The proliferation of the internet has laid the foundation for online insurance distribution,
however given the nascent nature of the industry, knowledge of insurance, per se, is under-
developed
• Once comprehension increases, online sites (including comparison ones) will proliferate.
• Direct, telephone marketing will grow concurrently
• Internet driven information era
• Ability to more rapidly access comparative information of insurers will engender even more
competitive pricing for consumers
5-FORCES (*) (1 0F 2)
Force Analysis Threat
Threat of • New entrants persist annually, with recent additions from Dubai, Coface etc.
new • There are minimal barriers to entry to the Turkish market
entrants • Insurance cannot be tied to other services in bancassurance for example (mortgage
insurance), there are emerging leading brands, but little loyalty, minimal switching
costs and unprohibitive legislation (Capital requirement is not too high)
• Whilst insurance is a scale business, there are enough large insurers globally who all
want a piece of Turkey. Requirements to obtain licences to operate are not impossible
to obtain (As they were in China for AMC initially)
• There are no discernable profitable niches insurers operates in that should fear new
entrants; it is across all branches; credit insurance with only 15 operators has been
generating underwriting losses for example. Having said that, no premiums have been
generated in the support branch
Power of • Defining suppliers as insurers and capital providers, none have much control over the
Suppliers market. There is already an excess of capital and plenty to be found to support growth
as needed
• The market of insurers is highly fragmented with little concentration
• Outsourcing is generally low in Turkey at present although third parties such as IT
providers are utilised. There is little power here
• In terms of human capital there is limited supply but little anecdotal evidence to assert
there is a battle for talent as of yet (underwriters being poached)
• There is only one reinsurer licenced in Turkey with 30% of the market, but global
cession is permitted
• The residual market is dealt with entirely by the Undersecretariat funded by insurers
• Smaller incumbents are aware they lack the firepower so whilst their relative power is
limited it will not be for long as they receive endless proposals from foreign insurers
• Structurally there is little ability to create “power”; many suppliers and substitutes,
low switching costs in GI, penetration is low other than in compulsory insurance and
no intermediaries to consumers to speak of
(*) 5-forces is an industry level analysis with 4 factors impacting the resultant degree of industry-competitive rivalry
5-FORCES (2 0F 2)
Force Analysis Threat
Power of • Personal lines do not pose a threat to the insurance industry
Buyers • Given the nature of the industry, commercial lines do not have excessive pricing control. As
a commoditised product there is little latitude in tariffs, and insurers are aware of maintaining
their LOR (thought there are invariably insurers that will sacrifice growth for profit). There are
limited large commercial line customers to be fought after to gain the “millions in premiums”
• As the insurance market matures, supported by information availability through the internet,
price and service can be easily compared. This taken together with high price elasticity
increase bargaining power of customers
• In terms of distribution, there are multiple channels. Banks (bancassurance) are in the
driving seat, spoilt with choice. Insurers cannot directly control brokers and agents but
certainly can compete for them
Availability • There are innumerable substitutes (Or as of 2009, 37 GI insurers) in the market and the
of majority of which offer the same suite across the same branches
Substitutes • There are a few specialty insurers in the market in single lines, but empirically have not
demonstrated competitive advantage, the niches are small and furthermore there are not
barriers to entry
Degree of • In the face of a growing, large market, competition to become a leading player in Turkey is
Competitive incredibly fierce. With little ability to differentiate, and selling a commoditised product, the
general insurance market is difficult
Rivalry
• Rivalry is much higher in the non life market than the life one
• Majority of players are global heavyweights implying little differentiation. Due to penetration
competition is for new customers, rather than stealing existing ones from one another
• Success is a two phase notion. Initially, brand building is integral with best access to
distribution to drive GWP. Low cost structure, greater efficiency and better customer service
will beat out competitors eventually and aid in generating underwriting result across the
cycle. This is to be supported by strong investment generation capabilities. In the second
phase, applying hitherto generated underwriting knowledge to minimise the LOR and
effective cost control to minimise COR will support further market penetration to cement
market position
SWOT (*) - STRENGTHS/OPPORTUNITIES
• Intense competition arisen from deregulation is promulgating innovation; from
underwriting, marketing and insured servicing and rights
• Innovations in distribution and improvements in market penetration will follow resulting in
new channels, particularly in the direct and online space
• Aggressive insurer marketing budgets and government education programs will buoy
consumer awareness of the industry and expand the market
• A highly deregulated environment and increasingly liberated tariff control will allow market
forces set premiums according to their strategy and further differentiate themselves
• Liberalisation in the future away, from the state in certain branches, will create new
channels of insurance
• Allowing insurers to issue their own policy wordings and remove unlimited exposure
clauses will enable underwriters to tailor products to customers more easily
• Undersecretariat reporting requirements ensure significant market transparency
• Relatively stringent capitalisation requirements are key to licence renewal and ensures
that rogue companies will not undermine the market and strengthen scepticism of financial
companies and foreigners
• All insurance participants, including agents, brokers, actuaries and advisors are governed
by law and regulated ensuring a duty of care
(*) SWOT is an acronym for a company/industry level analysis – Strengths, weaknesses, opportunities and threats
SWOT - WEAKNESSES/THREATS
• Profitability likely to remain low as premiums rates will remain under pressure due to
intense competition, particularly in the main lines (Vehicle, general insurance and
mandatory insurance lines)
• Future of reinsurance questionable in a highly ceded market
• As the market becomes more deregulated, costs may rise as treaty reinsurers reduce
ceding commissions to compensate for the lower rates
• Reliance on transfers to new assets from investment performance to compensate for
marginal underwriting results subject insurers to the volatility of the financial markets
which are still recovering
• Overcapitalised market means that insurers are likely not generating an adequate return
on capital and may lead to volatility and shortening of hard/soft cycles
• Traditional distribution networks, particularly agents given their dominance, need to be
further educated and increasingly match future product offerings
• Natural catastrophes are an issue in Turkey particularly earthquakes, whilst there is the
TCIP, given the nature of insurance contracts, insurers have to be aware of possible
obligations
UNDERWRITING RESULTS GENERALLY COMPRESSED
Underwriting Result Investment Return
• Growing GWP but at lower tariffs due • A downturn in the equity markets
to excessive competitive pressure in continues in the light of the persistent
many insurance segments economic and investor confidence
• COR increased in 2005-10 due to crises
several major claims • Low interest rates continue to reduce
• Some other segments are also possibilities for attractive investments
experiencing increasing benefit • Write off on securities has arguably
payments (e.g. health) not yet been fully effected
• No sustainable progress made in
cutting administrative costs
Declining earnings
Increasingly weak from capital
underwriting result investments
The traditional offsetting

of underwriting result loss is
becoming increasingly difficult
VALUE CHAIN
• The areas of value chain for developing core competences to manage COR are presented below,
grouped into 3 specialisms
• Only the largest companies can competently cover the whole value chain
• This is the reason for the significant “sell outs” by domestic players
• Companies are polarised to some extent between sales and product focus, as can be seen by the use
of marketing staff
• Some companies such as AXA, Allianz and Groupama have no marketing staff whereas others such
as Anadolu do and so focus on a sales channel specialism to gain market share rather than
outsourcing it
• Many may just see the sales channel as a large cost centre
Disaggregated Value Chain for COR Analysis
Sales Mark- Cust.

Sales
Channel eting Support
EOR
Mgmt.
Prod. Asset
Product Brand
Dev. Mgmt.
LOR Platform/
Under Admin/
Mgmt. Transacti
on
write Claims
Source: Model fundamentally based on Roland Berger analysis

INTERNATIONAL INSURANCE COMPARISON - TOTAL
Total Insurance Growth, Penetration And Density By Region (2009)
Share of world Premiums in % of Premiums per
Premiums (USDm) Real growth
market (%) GDP capita (USD)
Turkey 8,400 9.09 0.21 1.44 115.7

America 1,349,495 -6.14 33.19 6.91 1,470.2
North America 1,238,586 -7.08 30.46 7.94 3,634.5
Latin America and Caribbean 110,910 5.75 2.73 2.82 192.2
Europe 1,610,620 1.83 39.61 7.58 1,861.5
Western Europe 1,525,953 2.61 37.53 8.46 2,922.4
Central and Eastern Europe 84,667 -10.86 2.08 2.75 262.7
Asia 989,451 2.78 24.33 6.08 243.1
Japan and newly industrialised Asian economies 699,012 -0.42 17.19 10.33 3,307.6
South and East Asia 261,887 12.14 6.44 3.43 74.0
Middle East and Central Asia 28,552 3.40 0.70 1.54 92.0
Africa 49,287 -11.13 1.21 3.26 48.8
Oceania 67,241 -9.57 1.65 6.24 1,862.9
World 4,066,095 -1.07 100.00 6.98 595.1
Industrialised countries 3,532,716 -1.78 86.88 8.61 3,404.9
Emerging markets 533,379 3.53 13.12 2.89 91.5
OECD 3,466,714 -2.04 85.26 8.20 2,808.4
G7 2,744,580 -2.41 67.50 8.71 3,670.8
Euroland 1,074,916 7.34 26.44 8.04 3,058.5
EU, 27 countries 1,481,834 2.15 36.44 8.42 2,774.6
NAFTA 1,255,938 -6.88 30.89 7.63 2,788.5
ASEAN 44,669 3.23 1.10 2.97 83.4
Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, data was backed out from stats from Undersecretariat of Treasury
Report 2009 and therefore there are errors from rounded data
INTERNATIONAL INSURANCE COMPARISON – NON-LIFE
Non-Life Insurance Growth, Penetration And Density By Region (2009)
Share of world Premiums in % of Premiums per
Premiums (USDm) Real growth
market (%) GDP capita (USD)
Turkey 7,100 5.97 0.41 1.22 97.80

America 769,869 -1.00 44.38 3.94 838.80
North America 702,584 -1.50 40.51 4.50 2,061.70
Latin America and Caribbean 67,285 4.30 3.88 1.71 116.60
Europe 657,105 -1.20 37.88 3.05 750.60
Western Europe 590,433 -0.50 34.04 3.22 1,111.30
Central and Eastern Europe 66,672 -7.50 3.84 2.16 206.90
Asia 257,184 5.60 14.83 1.57 62.80
Japan and newly industrialised Asian economies 160,946 2.20 9.28 2.35 753.80
South and East Asia 74,532 13.90 4.30 0.98 21.10
Middle East and Central Asia 21,706 4.70 1.25 1.17 70.00
Africa 16,723 0.40 0.96 1.10 16.60
Oceania 33,649 2.90 1.94 3.12 932.20
World 1,734,529 -0.10 100.00 2.98 253.90
Industrialised countries 1,485,759 -0.60 85.66 3.60 1,424.90
Emerging markets 248,770 2.90 14.34 1.35 42.70
OECD 1,491,240 -0.70 85.97 3.51 1,201.80
G7 1,170,656 -1.30 67.49 3.65 1,539.00
Euroland 446,144 0.40 25.72 3.40 1,293.50
EU, 27 countries 575,050 -0.70 33.15 3.20 1,054.50
NAFTA 712,249 -1.30 41.06 4.33 1,581.40
ASEAN 16,417 5.30 0.95 1.00 28.00
Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, data was backed out from with stats from Undersecretariat of Treasury
Report 2009 and therefore there are errors from rounded data
EU NON-LIFE INSURANCE PENETRATION COMPARISON
• It is worth examining penetration of non-life insurance in Turkey in greater detail
• Calculated as premiums to GDP
• Since 1999, Turkey has had the lowest penetration in all of Europe, though growth is the 4th highest
on a CAGR basis (4.3%)
• This serves to indicate the huge potential of the market
Non-Life Penetration and Growth (Sorted by 1999 Level)

10.0% 10.0%
8.0% 8.0%
6.0% 6.0%
4.0% 4.0%
2.0% 2.0%
0.0% 0.0%
-2.0% -2.0%
-4.0% -4.0%
-6.0% -6.0%
1999 2008 2008 Average 1999 Average CAGR (1999-2008)
EU NON-LIFE INSURANCE PREMIUM PER CAPITA
COMPARISON
• Premiums per capita are drastically low in Turkey too
• In 1999, Turkey had the 3rd lowest level and in 2008 now has the lowest
• Growth has been fairly high at 13.7% CAGR (off a very low base) but this has been at the 7th
fastest, implying it has not kept up with other developing markets
Average Non-life Premiums Per Capita (Sorted by 1999 Level)

€ per capita
1,800 30.0%
1,500 25.0%
1,200 20.0%
900 15.0%
600 10.0%
300 5.0%
0 0.0%
1999 2008 1999 Average 2008 Average CAGR (1999-2008)
Source: Analysis of CEA Statistics N°40: European Insurance in Figures, Data 1999-2008. Note axis has been capped for 2008 to aid visibility
INTERNATIONAL INSURANCE COMPARISON – GROWTH IN
NON-LIFE
• Explosive historic growth has slowed in adverse market conditions (with life growing faster)
though is line with other emerging markets
• South and East Asia have faired well, but are larger markets so have more latitude for growth
Non-life Premiums Growth Rates Versus Average Growth By Region

Annual
Growth Average
Graphical Overview
Rate 2009 Growth Rate
1999-2008 Growth rate 2009 Annual average growth rate 1999-2008
Turkey 2.7% 32.7%

World -0.1% 3.3%
Industrialised countries -0.6% 2.7%
North America -1.5% 2.6%
Western Europe -0.5% 3.5%
Continental Europe 0.1% 3.4%
Japan / newly industrialised Asian economies 2.2% 0.9%
Oceania 2.9% 2.2%
Emerging markets 2.9% 9.3%
South and East Asia 13.9% 12.0%
Latin America and the Caribbean 4.3% 6.3%
Central and Eastern Europe -7.5% 10.7%
Africa 0.4% 6.6%
Middle East and Central Asia 4.7% 10.2%
-10.0% 0.0% 10.0% 20.0% 30.0% 40.0%
Source: Swiss Re, Economic Research & Consulting, sigma No. 2/2009. For Turkey, stats were utilised from Undersecretariat of Treasury Report 2009, 2008
and 1999 and taken total non-life premiums including those generated by life and pension business. Ordinarily in this report these are omitted
GLOBAL PREMIUM COMPARISON
• Global insurance premium production in 2009 was $4.1tn with 4.77% decrease on 2008
• Non-life insurance premium was $1.7bn with a gross annual decrease of 3.16%
• Real negative growth rates were less than gross in lieu of the credit crisis
• Turkey is similar in developments to other emerging markets, however, in 2008 non-life insurance
premium decreased in Turkey
• The following graphs show a comparison of real growth rates in developed countries, emerging
markets and Turkey since 2005 and premium production for developed countries and emerging
markets
Real Growth Rates of Premium Premium and Allocation (2009)

% (USD bn) Non – Life % Sector % World
16.0%
Industrialised Markets 1,486 86%
14.0%
United States 647 44% 37%
12.0% Japan 107 7% 6%
10.0% United Kingdom 92 6% 5%
France 89 6% 5%
8.0%
Germany 127 9% 7%
6.0% Italy 54 4% 3%
4.0% Hong Kong 3 0% 0%
Emerging Markets 249 14%
2.0%
Latin America and Caribbean 67 27% 4%
0.0% Central and Eastern Europe 67 27% 4%
-2.0% South and East Asia 75 30% 4%
Middle East and Central Asia 22 9% 1%
-4.0%
Africa 17 7% 1%
2005 2006 2007 2008 2009
World 1,735
Turkey Industrial countries Emerging markets
Turkey 11 4% 1%
Source: Sigma Magazine, World Insurance in 2009, No: 2/2010 Note: Turkey % sector is emerging markets
NON-LIFE EU PREMIUM COMPARISON
• European direct premiums have grown at a CAGR of 5%
• Turkey has faired better growing at 12%
• Turkey’s share of direct premiums has grown at a CAGR of 7%, growing from a 0.68%
share to 1.28% in 2008 to place it as the 13th largest market on this basis
EU Direct Premiums and Turkey as a % of Europe

€m
450,000 1.40%
400,000
1.20%
350,000
1.00%
300,000
250,000 0.80%
200,000 0.60%
150,000
0.40%
100,000
0.20%
50,000
0 0.00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
EU Total Premiums Turkey % of Europe
GENERAL INSURANCE STATS
Direct Premiums (TL & %) Premium to Inflation (%)
140% 14,000 200%
120% 12,000 150%
100% 10,000 100%
80% 8,000 50%
60% 6,000 0%
40% 4,000
20% 2,000 Increase (%) Inflation (Wholesales)(1) (%)
0% 0
Premium Receivables (TL & %)
200% 4,000
Increase (%) Direct Premiums
150% 3,000
100% 2,000
Direct to Receivable Premiums 50% 1,000
100%
0% 0
90%
80%
70% Increase (%) Premium Receivables
60%
50%
40%
Participation (TL & %)
400% 4,000,000
30%
20% 300% 3,000,000
10% 200% 2,000,000
0%
100% 1,000,000
0% 0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Direct Premiums Premium Receivables
Increase (%) Participation
Source: Sigortacılık Genel Müdürlüğü, 2009 data Note: (1) Wholesale insurance = PPI (12 Months percentage increase in PPI) Source - TURKSTAT
GENERAL INSURANCE ASSET STRUCTURE
Asset Structure (%) Fixed Assets
100% 400% 1,600
90% 300% 1,200
80%
70% 200% 800
60%
100% 400
50%
40% 0% 0
30%
20% -100% -400
10% Increase (%) Fixed
0%
Securities Portfolio (TL & %)
200% 8,000
Equity Capital Assets Fixed Securities Portfolio
150% 6,000
100% 4,000
Equity Capital (TL & %)
50% 2,000
250% 8,000
0% 0
7,000
200%
6,000
Increase (%) Securities Portfolio
150% 5,000
4,000 Assets (TL & %)
100% 3,000 150% 25,000
2,000 20,000
50% 100%
1,000 15,000
0% 0 50% 10,000
5,000
0% 0
Increase (%) Equity Capital
Increase (%) Assets
Source: Sigortacılık Genel Müdürlüğü, 2009 data
PREMIUM VOLUME AND COVERAGE
• In 2009, total insurance premium in non life grew to TL 10.6bn with direct premium
production prior to cession at TL 10.4bn
• Total coverage in 2009 reached to TL 24.2bn (excluding health/sickness classes as most
have unlimited coverage)
• The delta between coverage and premiums can be explained by failing tariffs
• Whilst nominally positive, direct premiums have not been able to keep up with inflation,
decreasing in real terms in both 2008 and 2009
Total Gross Premium and Coverage Direct Premium & Real/Nom change
TKL m TKL m TKL m %
30 30 14 25%
25 25 12 20%
10
20 20 15%
Reduced
8
pricing
15 15 10%
6
10 10 5%
4
5 5 2 0%
0 0 0 -5%
2005 2006 2007 2008 2009 2005 2006 2007 2008 2009
Life Direct Premium (bn) Non-Life Direct Premium (bn)

Non-Life Premium Non-Life Coverage (*)
Nominal Change (%) Real Change (%)
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: (*) Whole coverage amount given for bodily injure in third party liability insurance has
been included in total since 2008. It has about 40% share in total coverage amount in those years.
PREMIUM VOLUME FALLING IN REAL TERMS
• Insurance is a financial sectors which is highly elastic to GDP with rapid and levered
impact to change and development in the economic environment
• When GDP grows, insurance premium growth exceeds that of GDP, but the fall in GDP
leads to a higher shrinkage in insurance market
• The situation was reversed only in 2008 when non-life premium production fell in real terms
despite the GDP growth
• The following graph show growth and decline in rates of direct premium volume in real and
nominal terms for the preceding ten years
Real and Nominal Growth Rates of Premium in Non-Life (*) Branches

%
100
80
60
40
20
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Real Growth Nominal Growth
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data Note: (*) Whole coverage amount given for bodily injure in third party liability insurance has
been included in total since 2008. It has about 40% share in total coverage amount in those years.
CYCLICALITY – PREMIUM GROWTH DOES NOT ALWAYS KEEP
UP WITH GDP
• The following graph shows direct premiums (Turkish insurance industry) vs. constant price
GDP growth and indicates that, during a soft cycle, premium growth can fall below GDP growth
• When this occurs it can indicate that price per unit of risk is declining since demand for
insurance tends to grow at, or slightly higher than, the overall economy
•This phenomena also leads claim cost growth to outpace premium growth ~50% of the time in
more mature markets
• Turkey is no exception to cyclicality with approximately four soft periods since 1982
• Interestingly two of these periods occurred during hard cycles in the USA
• However, whilst the US has averaged annual growth of ~6%, Turkey has averaged ~64%!
• GDP and premium growth are closely correlated with a r2 of 87%
Growth Rates of Premiums and GDP in Non-Life Branches

%
140% r²
USA up cycle
120% USA up cycle 87%
100%
80% Forecasted
60%
40% Softening
20% Softening Softening Softening
0%
Direct premium change Gross domestic product, current prices change

Source: International Monetary Fund, World Economic Outlook Database, April 2010, TSRB and Sigortacılık Genel Müdürlüğü
Note: Premium forecasts from 2010 to 2015 have been derived from IMF forecasts through linear regression
CYCLICALITY – INDUSTRY-WIDE SURPLUS GROWTH LEADS
TO LOWER PRICING
• While no two cycles are the same in amplitude and length, price declines inevitably follow
periods of surplus growth (and normally strong pricing)
• Surplus is a good measure of underwriting capacity and therefore supply
•Changes in surplus are the key driver of the insurance pricing cycle
•The cyclicality of ROE is not only driven by lower prices but by equity bases that grow rapidly
during a hard market
• The following graph shows the relationship between equity capital (proxy for surplus) and direct
premiums. Hard markets are evident following sharp increases in equity capital
• It is possible that we may be presently entering a hard market
• Soft cycles tend to end when underwriting losses deplete surplus and can be accelerated by
catastrophic events (such as a financial crisis, or more typically a natural one)
Surplus to Premium Growth (With GDP Comparison)

140% USA up cycle Erzincan Izmar flood USA up cycle 250%
earthquake
120% Marmara and
200%
Duzce earthquake
100%
80% 150%
60% 100%
40% Black Sea
Flood
50%
20%
Hard Market Hard Market Hard Market
0% 0%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Direct Premiums Gross domestic product, current prices change Equity Capital
MARKET CONCENTRATION (1 OF 2)
• Concentration by premium has largely remained constant (Whereas life has become more
fragmented)
• Interesting the concentration by shareholders equity increased in 2005 as foreign entrants
flooded in (but this obscured slightly by an inflation adjustment inured BoY 2005) and has
fallen in 2008
• One could assert that companies have recently become more evenly capitalised
Net Earned Premiums Premium Share by Branch in 2009

Top 5 Top 10
100%
Accident 57% 79%
90% Air Vehicles 90% 99%

Air Vehicles Liability 88% 99%
80% Credit 96% 100%
Financial Loss 70% 95%
70%
Fire and Natural Disasters 51% 78%
60% General Damages 51% 79%
General Liability 59% 83%
50% Health 82% 97%
Land Vehicles 54% 79%
40%
2005 2006 2007 2008 2009 Land Vehicles Liability 52% 75%
% of Top 5 % of Top 10 Legal Protection 62% 87%
% of Top 25 % of Top 5 Average Non Life Total 50% 78%

% of Top 10 Average % of Top 25 Average Sea Vehicles 74% 93%
Transport 49% 78%
Source: Sigortacılık Genel Müdürlüğü, 2009 data
MARKET CONCENTRATION (2 OF 2)
• As can be seen in the Market Share Of The Largest Non-life Insurance Groups
chart to the side, Total non-life
concentration is low in First 5 First 10 First 15
premiums (€m)
Turkey, the 13th largest Country 2008 2000 2008 2000 2008 2000 2008 2000
Turkey 5,352 2,480 47.4% 44.9% 73.7% 70.2% 85.9% 82.0%
and 9th fastest growing Greece 2,596 1,267 35.0% 46.8% 56.3% 62.6% 72.2% 72.6%
market in 2008 Spain 32,597 17,051 42.8% 27.8% 62.0% 43.2% 74.5% 55.9%
Germany 84,937 70,110 43.2% n.a. 63.8% n.a. 74.4% n.a.
• It is ranked the 25th Switzerland 15,015 10,175 46.8% 61.5% 66.7% 83.6% 79.3% 91.2%
United Kingdom 61,289 55,400 47.6% 35.7% 67.1% 42.9% 75.5% 48.5%
least concentrated of 29 Cyprus 401 186 48.1% 46.6% 69.9% 67.7% 82.6% 79.2%
countries for the top-5 France 60,826 41,082 54.8% 53.4% 74.1% 69.3% 86.4% 81.0%
Portugal 4,324 Premium Share by Branch in 2009
3,571 63.0% 73.4% 81.8% 77.7% 94.6% 87.2%
and 21st for the top-10 Ireland 3,334 2,964 64.0% 71.6% 92.8% 94.4% 98.5% 99.6%
Bulgaria 773 176 65.3% n.a. 83.5% n.a. 84.0% n.a.
• Concentration is more Belgium 9,927 7,121 67.7% 58.0% 85.8% 76.6% 92.7% 87.0%
similar to developed Denmark 6,271 3,947 68.0% 72.2% 85.6% 85.8% 91.9% 92.5%
Italy 37,454 27,874 69.4% 59.5% 86.2% 82.9% 91.7% 92.0%
countries such as the Poland 5,730 3,119 71.3% 80.6% 86.0% 90.2% 92.6% 95.8%
UK than developing Malta 93 85 74.1% 65.1% 19.9% 82.2% 5.8% 88.8%
Latvia 449 165 74.8% 59.1% 100.0% 89.9% 100.0% 99.5%
countries with which it Austria 8,852 6,290 74.9% 55.4% n.a. 76.7% n.a. 87.7%
has a similar Romania 1,936 n.a. 75.1% n.a. 92.5% n.a. 97.8% n.a.
distribution structure, Croatia 988 493 79.6% 83.7% 93.4% 93.9% 98.9% 98.2%
Hungary 1,706 794 79.9% 89.9% 92.5% 97.9% 97.6% 100.0%
such as Estonia which Czech Republic 3,310 1,343 80.6% 80.4% 92.8% 92.2% 94.8% 95.5%
has great concentration Sweden 6,983 4,749 83.5% 84.9% 93.0% 94.0% 98.1% 97.6%
Estonia 245 83 84.2% 90.0% 97.8% 100.0% 100.0% 100.0%
Luxembourg 705 n.a. 84.4% 83.2% 97.0% 95.7% 99.4% 99.3%
• Poland has similar size Slovakia 965 375 89.1% 85.6% 97.6% 95.1% 99.2% 98.8%
and growth potential Slovenia 1,377 756 90.2% 94.0% 99.8% 99.6% 100.0% 100.0%
and is far more Finland 3,252 2,346 91.5% 88.5% 99.4% 97.2% 100.0% 99.0%
Iceland 259 249 99.0% 99.4% 100.0% 100.0% 100.0% 100.0%
concentrated Liechtenstein 235 n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Lithuania 435 98 n.a. 71.1% n.a. 86.1% n.a. 93.4%
Netherlands 50,113 18,994 n.a. 40.4% n.a. 56.8% n.a. 65.5%
Source: CEA Statistics N°40: European Norway 4,742 4,495 n.a. n.a. n.a. n.a. n.a. n.a.
Insurance in Figures, Data 1999-2008 413,153 287,837 53.9% 49.9% 72.3% 64.6% 81.8% 73.2%
DOMESTIC COMPETITION
• Given the penetration of foreign players, it is evident that domestic players have been
unable to compete effectively alone
• Recognising the limited financial resources of Turkish companies, terms of business
partnership (Joint Venture) were introduced to the Turkish Legal System with the enactment
of the Communiqué numbered 2009/2
• The number of non-life companies has decreased from 56% of the market in 2006 to 35% in
2009
• Initially, domestic companies partnered with foreigners or set up joint ventures
• Over time, the partnerships were bought out (Koc and Olak in 2008) and new entrants
bought majority shares
• Presently there are few large domestic competitors going it alone
• Domestic companies have been historically operating in an underdeveloped and
unsophisticated market, rarely venturing out of their national borders
• Foreign competitors are invariably global MNCs with considerable experience and capital
resources
• Without the barriers to entry and legal requirements of some international economies,
domestic players have been unable to compete; rather than be competed out of the market,
they have partnered or sold
• In the future, those untied domestics will eventually be bought out
FOREIGN COMPETITION – OVERVIEW
• Multinational insurers are keenly interested in emerging insurance because their home markets
are saturated, while emerging countries have low insurance penetrations and high growth rates
• The charts below show the increasing dominance of foreign players in non-life on the left and in
life, pension and reinsurance on the right
• Typically foreign insurers take only a small share of an individual country’s market
• In Taiwan for example, foreign companies took only a 3 per cent share seven years after opening
• In Korea, their share was 1 per cent after 20 years
• In China, a large and complex markets like India, private insurers have not made much headway.
In Turkey, success has been more rapid largely because of regulation differences
• Unlike in India where foreign entrants must partner with domestic players and hold minority
stakes, insured have looser reigns
• Minority shareholders rights are assured through Turkish Commercial Code No. 6762
Non-Life Number of Companies Life, Pension & Reinsurance

40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0
2006 2007 2008 2009 2006 2007 2008 2009
Foreign Domestic Foreign Domestic

FOREIGN COMPETITION – SATURATION OF MATURE
MARKETS
• As discussed, the lack of growth opportunities in domestic markets is driving MNC insurers further
afield to gain exposure to growth
• The total Turkish insurance sector was 36th in global premiums of 88 countries with a 0.21% share in
2009
• According to premium per capita, Turkey was 65th place in 2008 with $106.2 PPC; a 6th of the world
benchmark
• It reached to $113 in 2009
• The attractiveness of Turkey is evident by the multiple of premium/GDP in the chart below
• Turkey is on average, 5.25x smaller than all the groupings
• Even compared to other emerging markets, is less than half
Premium Per Capita (USD) and GDP (%)

Turkey Turkey World Europe Industrial Emerging Markets
$ US and % 2009 2008 2008 2008 2008 2008
Pr.Per Capita 113.0 106.2 633.9 2,043.9 3,655.4 89.4
Life 16.9 17.8 369.7 1,244.1 2,142.6 47.4
Non Life 96.1 88.4 264.2 799.8 1,481.0 42.0
Premium/GDP 1.3% 1.2% 7.1% 7.5% 8.8% 2.7%
Multiple of P/GDP to Turkey 5.70 x 6.02 x 7.10 x 2.19 x
Source: Sigma Magazine, World Insurance in 2009, No: 2/2010

FOREIGN COMPANY STRUCTURE OVERVIEW
• Majority of companies have controlling stakes
Group 1 – Foreign Holding Structure
Company Controlling Capital Dominant's Foreign Premium Market Share
Name Shareholder Country (TL m) Share (%) Share (%) (TL bn) (%)
AXA Axa Holding France 310 73% 73% 1,277 10.4%

Allianz Allianz Se Germany 200 84% 94% 931 7.6%
Groupama Groupama Int. France 134 64% 99% 590 4.8%
Yapi Kredi Ykb As Turkey 80 53% 27% 608 5.0%
Ergo Emeklilik Ergo Holding As Germany 60 100% 100% 23 0.2%
Gunes Vakifbank Tao Turkey 150 34% 30% 727 5.9%
Mapfre Genel Mapfre Int. Sa Spain 350 90% 81% 361 2.9%
Eureko Eureko Bv Holland 60 80% 84% 539 4.4%
Aviva Aviva Int. Hold. England 75 99% 99% 275 2.2%
Ray Tbih Fin. Group N.V. Austria 97 84% 84% 254 2.1%
Group 2 – Foreign Holding Structure

Company Controlling Capital Dominant's Foreign Premium Market Share
Country
Name Shareholder (TL m) Share (%) Share (%) (TL bn) (%)
Zurich Zurich Ins. Co. Switzerland 72 100% 100% 216 1.8%
Chartis Aig Memsa Hold. ABD 44 100% 100% 174 1.4%
HDI HDI Int. Hold. Ag Germany 84 100% 100% 175 1.4%
Liberty Liberty Seguros USA 183 51% 99% 46 0.4%
Generali Generali Turkey Hold. ITALYA 26 100% 100% 85 0.7%
Dubai Group Dubai Ins. Group L.L.C. Dubai 65 98% 98% 76 0.6%
Coface Coface France 18 100% 100% 12 0.1%
FOREIGN COMPETITION – OWNERSHIP STRUCTURES
• There were only 17 foreign shared insurance companies in Turkey in 2000, this number
increased to 24 in 2006, 32 in 2007, 41 in 2008 and 43 in 2009 (Total)
• As of 2009, 24 of 37 non-life insurance companies and 19 of 24 life and pension companies
were foreign owned directly or indirectly
• Share of foreign partners is above 50% in 35 of these companies with 8 holding minority
stakes
• The change from minority to majority shareholdings over time illustrates growing
confidence in the Turkish market- minority shares may illustrate a “dipping of toes”
moving to larger shares and or standalone ambitions
Number of Companies with Foreign Partners

Foreign Partner's Share
No.of Company with Foreign
Year No.of Company
Partners
100% 90%-100% 51%-90% 20%-50% < 20%
2000 62 17 2 2 2 5 6
2001 59 16 2 4 2 4 4
2002 58 15 2 4 2 3 4
2003 57 11 2 3 1 3 2
2004 58 16 2 3 2 4 5
2005 55 20 2 5 2 6 5
2006 55 24 5 4 6 8 1
2007 61 32 7 5 10 9 1
2008 62 41 16 11 7 6 1
2009 62 43 18 12 5 7 1

FOREIGN COMPETITION – CAPITAL COMPARISON
• As a result of increase of foreign investment in Turkish insurance market, the share of
foreign owned companies exceeded 50% in total capital and total premium in 2008
• See point of reversal
• From 2006, the share began to substantially change
• See point of inflexion
• At the end of 2009, share of foreign investment reached to 55% in total paid-in capital while
there was no big change in share for premium volume
• The following table presents foreign companies share in total capital and total premium
Premium and Paid-in Capital Comparison

100%
90% Reversal
80%
70%
60%
50% Inflexion
40%
30%
20%
10%
0%
2003 2004 2005 2006 2007 2008 2009
Foreign Paid-in Capital (%) Foreign Premium Volume (%) Domestic Paid-in Capital (%) Domestic Premium Volume (%)

FOREIGN COMPETITION – CHANGE IN OWNERSHIP
• Examining ownership (Across all insurance lines- due to data availability) across a longer
horizon (1991-2009) it is pertinent to note that ownership was largely stagnant from 1992 to
2003
• From this point there was a gentle reversal in ownership ratio which began to accelerate
from 2003
• In 2005 real interest took hold seeing a point of inflexion in which foreign capital flooded in
• The following table presents foreign companies share in total capital and total premium
Domestic and Foreign Ownership Across All Insurance Lines

100%
90% Reversal
80%
70%
60%
50% Inflexion
40%
30%
20%
10%
0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Foreign Paid-in Capital (%) Foreign Premium Volume (%) Domestic Paid-in Capital (%) Domestic Premium Volume (%)

FOREIGN COMPETITION – NATIONAL INTEREST
• The French have always have an interest in Turkey, this is illustrated by a ~16% market share
• Germany follow with a 9.2% stake
• England is largely represented by Aviva
• Entrants favour majority stakes but yield ownership to obtain better partnerships
Companies Owned or Shared by Foreigners by Country

Average Average
Country Capital (TL m) Dominant Foreign Premiums (TL m) Market Share
Share Share
Austria 97.0 84.3% 84.3% 253.8 2.1%
BAE 40.0 53.0% 100.0% 0.3 0.0%
Belgium 51.1 100.0% 100.0% 23.7 0.2%
Bulgaria 1.0 86.8% 90.8% 0.0 0.0%
Dubai 65.0 98.5% 98.5% 75.8 0.6%
England 89.7 99.3% 99.3% 278.6 2.3%
France 476.0 84.3% 92.8% 1,923.9 15.7%
Germany 346.0 91.0% 97.4% 1,129.3 9.2%
Holland 145.3 93.3% 94.7% 550.2 4.5%
Israel 28.7 95.8% 96.1% 4.2 0.0%
Spain 350.0 90.0% 81.0% 361.2 2.9%
Turkey 230.0 43.7% 28.6% 1,335.1 10.9%
USA 226.5 75.5% 99.5% 220.8 1.8%
Total 2,146.4 84.3% 89.5% 6,156.8 50.1%

CAPITAL OVERVIEW
Shareholders Equity Paid in Capital Split
TKL ‘000 TKL ‘000
12,000 45% 4,000 90%
Reinsurance Co.
40% 80%
3,500
10,000 35%
Life and Pension 3,000 70%
30% Co.
8,000 60%
25% 2,500 Domestic
20% Non Life Co. 50%
6,000 2,000 Foreign
15% 40%
1,500 Foreign %
10% Non Life Co.
4,000 30%
Growth % Domestic %
5% 1,000 20%
2,000 0% Life and Pension
Co. Growth % 500 10%
-5%
0 -10% 0 0%
Reinsurance Co.
2006 2007 2008 2009 2006 2007 2008 2009
Growth %
Paid in Capital by Insurance Type Foreign Chare in Capital

TKL ‘000
6,000 30% Reinsurance Co. 120% 120%
5,000 25%
100% 100% Life and Pension
Life and Pension
20% Co.
4,000 Co.
80% 80%
15% Non Life Co. Non Life Co.
3,000 60% 60%
10%
Non Life Co. Non Life Co.
2,000 40% 40% Growth %
5% Growth %
1,000 0% Life and Pension 20% 20% Life and Pension

Co. Growth % Co. Growth %
0 -5% 0% 0%
Reinsurance Co.
2006 2007 2008 2009 2006 2007 2008 2009
Growth %
CAPITAL – GROWTH OF PREMIUMS AND CAPITAL
• Capital coming in faster than premiums
• Premium to Shareholders’ Equity ratio is 150% on average. Premium to Shareholders’
Equity ratio shows a declining trend as the growth in capital is much larger than the growth
in total premium
• ROE fell to 3.6% in 20009 from 15.2% and ROA fell to 1.7% from 5.9%
• As can be seen in the rebased chart below, growth in equity capital in insurance (Proxy for
policyholder surplus- GI is over 85% of premiums), capital is growing higher than
premiums
Equity Capital and Premiums Rebased to 1980 (Base year 100)

TKL
600,000,000
500,000,000
Accelerated
400,000,000 growth
300,000,000
200,000,000
100,000,000
Direct Premiums Equity Capital

DISTRIBUTION - CHANNEL OVERVIEW (1 OF 4)
• Turkey’s distribution structure is one of the most unique in Europe, polarised with amongst the highest
levels of bancassurance and agents and the lowest of direct and brokers
• Private insurance agencies generates approximately 70% of total premium in non-life branches and this
level has remained constant in the preceding few years, but has overall come down somewhat
• Banking agencies follow private agencies with a share of 13%. This has increased 19% from 11% in 2006
to 2008
• Peculiarly, given bancassurance is not very well developed in non-life and constituted less than 10% in all
EU countries, the highest market share is held in Turkey, with Portugal, the UK, France, the Netherlands and
Spain following
• The penetration of bancassurance is similar to that of Brazil, with Malaysia and Mexico having similarly high
level
• Brokers distribute 11% of premiums and increased 19% over the same period from 9%
• The share of direct premium generated by insurance companies is approximately 6% and has fallen
significantly (38%) from 9.7% in 2006 to 6% in 2009
Distribution by Channel
1%
11% 6%
13% Direct
Agencies
Banks
Brokers
Other
70%
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data and Sigorta Tutum ve Davranış Araştırması, Nielsen 2008. Translated by author from Turkish
DISTRIBUTION – EU COMPARISON (2 OF 4)
• In Europe, non-life policies are distributed through traditional intermediaries (Agents and brokers) apart
from Switzerland, the Netherlands, Croatia and Nordic countries where direct sales predominate
• Agents held more than a 50% share in six countries (Italy, Poland, Portugal, Slovenia, Germany and
Turkey) and more than 30% in 11 of the 25 countries
• Turkey has the second highest level of agents across Europe
• Italy has a greater level, this is similar in Spain, although the data is unavailable
• The structure is similar to that of Germany and Portugal
• The most notable deficiency is in direct sales where the EU average is 29% vs. Turkey’s 7%
• Brokers remain of much less import than agents in the majority of European countries, though there are
expectations where they do dominate in countries such as Belgium, Ireland and the UK, where they
accounted for more than 50% of non-life premiums
Non-Life Insurance Distribution Channels (2008)

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Direct sales Agents Brokers Bancassurance Other

DISTRIBUTION – CONSIDERATIONS (3 OF 4)
• Costs to distributors and reinsurers have remained largely constant
• Life insurance commissions however are seen to be out of control, with one anecdote stating life
commissions to bank branches are at 50%
• Attempts to limit competition with a “no more than 20% above the average” limit resulted in a
circular formula which the Undersecretariat has admitted to and is seeking to ameliorate
• A Roland Berger “Global Survey” found in traditional markets insurers focus on product (42%)
but in emerging CEE sales channels are the main focus (60% vs. 29% in mature)
• This makes sense, as with low levels of penetration, the focus is more on getting people insured
than the specifics of the contract as in more mature countries with limited differentiation
• Marketing and branding is hugely important at
present to establish market leading positions ‘Where Insurance is Bought?’
• At present the market is highly fragmented,
though there are leaders emerging, the
0.2% Bank Branch
battle has yet to be won 8%
2%
• Nielsen found 69% of people found brand 22%
8% Agents
reliability was the key element in buying
insurance Direct
• Nielsen research supports Sigortacılık Genel
Müdürlüğü data, finding too that agents are Broker
the dominant sales channel, followed by the
banks Internet
• The internet and direct channels constitute Don't know- company

only 10% of surveyed sales 59% provides
DISTRIBUTION – DRIVERS OF CHANGE (4 OF 4)
• The current distribution structure with agents dominating (70% vs. ~30% for mature
countries or 40% in Europe in general) is unlikely to remain and has already come down
from ~80% in the past 5 years, a trend mirrored in India which also was agent dominated
• The drivers for this will be as follows:
• As the market becomes more informed, complex products will be demanded, largely in the
commercial space, such as for block coverage which will particularly favour brokers
• As is precedented in Europe (particularly on the continent), bancassurance will gain traction
amongst consumers, though this will likely favour life more, related mortgage products and
household insurance may do well
• Diversification by insurers through a multichannel strategy that will erode agent and broker
predominance
• Direct and internet will be longer term plays, though offerings have been launched in the
past year or so
• Given the infantile nature of the market insurers will be treading lightly, as by being too
aggressive they may undermine their existing efforts
• Agents may feel threatened and lose confidence in their current tie
• Given many companies have seen large annual changes in both directions oft heir agent
network this is not something to be taken lightly
• The assertion that agency dominance will diminish must be tempered as Italy, a mature
market has persisted with extraordinarily high levels of agent sales, therefore we cannot
assume Turkey will change over time
INSURANCE EMPLOYEES
• Insurance and individual pension sectors employed more than 60,000 people in 2009
• The 62 insurance companies employed 15,602 people
• There are 15,579 intermediaries in Turkey as of 2009 year end
• The number of brokers licenced is 72, of which 57 are non-life
• There are 908 real and 431 legal entities loss adjusters (And 1,154 agricultural loss adjusters)
• There are 36 actuaries working the Turkish Insurance market
• Insurers are now legally obligated to employ actuaries in non-life
• Below are the preceding four years of insurance, agencies, brokers, loss adjusters and total
employees
Staff and Growth

35,000 20%
# of Broker
30,000 15%
# of Loss Adjuster
25,000 10%
# of Insurance Agency
20,000 5%
# of Personnal in Insurance Co
15,000 0%
Personnal in Insurance Co
10,000 -5% Growth %
Insurance Agency Growth %
5,000 -10%
Loss Adjuster Growth %

0 -15%
2006 2007 2008 2009
INSURANCE EMPLOYEES
Insurance Industry Staff Loss Adjustors (Note right axis)

16,500 12% 970 2%
16,000 10% 960 1%
15,500 950 0%
8%
15,000 940 -1%
6% 930 -2%
14,500
4% 920 -3%
14,000
2% 910 -4%
13,500 900 -5%
13,000 0%
890 -6%
12,500 -2% 880 -7%
12,000 -4% 870 -8%
2006 2007 2008 2009 2006 2007 2008 2009
# of Personnal in Insurance Co
# of Loss Adjuster # of Loss Adjuster Growth %
# of Personnal in Insurance Co Growth %
Agents (Note right axis) Brokers (Note right axis)

16,500 15% 80 16%
70 14%
16,000 10% 12%
60
15,500 10%
5%
50 8%
15,000
0% 40 6%
14,500 4%
30
-5% 2%
14,000 20
0%
13,500 -10% 10 -2%
13,000 -15% 0 -4%
2006 2007 2008 2009 2006 2007 2008 2009
# of Insurance Agency # of Insurance Agency Growth % # of Broker # of Broker Growth %

3
UNDERWRITING RATIOS GROWTH
• Growth in EOR has been fairly low at 0.5% on average
• However this is misleading, exceptionally sized figures were removed
• The average is in fact 10.0%, with the best 5 averaging (7.2)% (vs. uncleansed (7.0)%)
• LOR growth has been the biggest impact on underwriting ratios with an average annual increase of 3.2%
across the industry, with some notable large losses amongst smaller companies
• Similarly without data cleansing the average is 5.0% with the best 5 averaging (2.4)% (vs. uncleansed (2.2)%)
• COR average is therefore heavily impacted by LOR growth
Average Growth in Underwriting Ratios (2006 – 2009)

15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
LOR EOR COR LOR Average EOR Average COR Average

LOR – PER COMPANY
• Majority of Group 1 suffers an average LOR with some outliers in 2008/9 and Eureko, Fiba and Aviva
outperforming
• Group 2 is far more disparate with some experiencing extreme losses and Chartis performing
exceedingly well (given its focus, implying there are not necessarily advantages of branch
diversification)
Group 1 – LOR Over 5 Years by Company

100%
80%
60%
40%
20%
AXA Anadolu Allianz Groupama Yapi Kredi Ergo Aksigorta Gunes Mapfre Eureko FIBA Aviva Ray
Genel
2005 2006 2007 2008 2009 Average Group Average
Group 2 – LOR Over 5 Years by Company

100%
80%
60%
40%
20%
Ankara Zurich Chartis HDI Birlik Isik Liberty Hur Generali Dubai SBN Coface
Group

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100% and Remainder removed for comparability
LOR – PER COMPANY AGGREGATED
• The charts below to show the aggregated LOR ratios over 5 years
• The green average line above and below the blue group average line shows under and over performance
• Group 1 acts broadly in line with Group 2 again being more volatile
Group 1 – Aggregated LOR Over 5 Years by Company

500% 250%
450%
400% 200%
350% 2009
300% 150% 2008
250%
200% 100% 2007
150% 2006
100% 50%
2005
50%
0% 0% Average
Group Average
Group 2 – Aggregated LOR Over 5 Years by Company

500% 250%
450%
400% 200% 2009
350% 2008
300% 150%
250% 2007
200% 100% 2006
150% 2005
100% 50%
50% Average
0% 0% Group Average
Group
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Remainder removed for comparability
EOR – PER COMPANY
• EORs are much more varied than LORs, and the better performing LOR companies do not have
the lowest EORs (Higher costs in active underwriting selection?)
Group 1 – EOR Over 5 Years by Company

100%
80%
60%
40%
20%
0%
Genel
Group 2 – EOR Over 5 Years by Company

100%
80%
60%
40%
20%
0%
Group
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100%
EOR – PER COMPANY AGGREGATED
• Similar to LORs, Group 2 EOR is varied and Group 1 performance is generally homogenous
• Group 2 average EOR is far greater than group 1 implying advantages to scale
Group 1 – Aggregated EOR Over 5 Years by Company
500% 100%
400% 80%
2009
300% 60% 2008
200% 40% 2007

2006
100% 20%
2005
0% 0% Average
Group Average
Group 2 – Aggregated EOR Over 5 Years by Company

500% 100%
400% 80% 2009

2008
300% 60%
2007
200% 40% 2006
2005
100% 20%
Average
0% 0% Group Average
Group
COR – PER COMPANY
• The charts below show the annual COR
• The grey average line over the top of the red box illustrates the vast majority of companies
operate in excess of a 100% COR
Group 1 – COR Over 5 Years by Company
150%
140%
130%
120%
110%
100%
90%
80%
Genel
2005 2006 2007 2008 2009 Average
Group 2 –COR Over 5 Years by Company

150%
140%
130%
120%
110%
100%
90%
80%
Group
2005 2006 2007 2008 2009 Average
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Group 2 LOR maxed out at 100%
COR – PER COMPANY AGGREGATED
• Group 1 performs better than Group 2
Group 1 – Aggregated COR Over 5 Years by Company
600% 120%
500% 100%
400% 80% 2009

300% 60% 2008
200% 40% 2007

2006
100% 20%
2005
0% 0%
Average
Group 2 – Aggregated COR Over 5 Years by Company

700% 140%
600% 120%
500% 100% 2009
400% 80% 2008

2007
300% 60%
2006
200% 40%
2005
100% 20%
Average
0% 0%
Group
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: Remainder removed for comparability, Dubai is a new entrant
COR – UNDERWRITING RESULT ANALYSIS
• Performance is largely consistent viewed on an annual basis
Group 1 – Yearly Underwriting Result
20%
10%
0%
-10%
-20%
-30%
-40%
Genel
2005 2006 2007 2008 2009 Average
Group 2 – Yearly Underwriting Result

20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
Group
2005 2006 2007 2008 2009 Average
COR – UNDERWRITING RESULT ANALYSIS AGGREGATED
• Below we can see the aggregated underwriting results
Group 1 – Aggregated Underwriting Result
80% 15%
60%
10%
40%
5% 2009
20%
0% 0% 2008
-20% 2007
-5%
-40% 2006
-10%
-60%
2005
-80% -15%
Average
Group 2 – Aggregated Underwriting Result

40% 10%
20% 5%
0% 0%
2009
-20% -5%
2008
-40% -10%
-60% -15% 2007
-80% -20% 2006
-100% -25% 2005
-120% -30% Average
-140% -35%
Group
4
OVERVIEW
• General insurers generate profit by paying out less in losses (LOR) and expenses (EOR)
than they generate in premium revenue and investment income
• Revenue is generated up front from premiums through selling an insurance policy and
providing coverage over the next ~12 months, depending on structure
• Other than premium revenue, insurers generate income through interest, dividends and
capital gains on the float
• General Insurers should be analysed excluding investment operations for the following
reasons:
• Whilst underwriting and investment divisions of an insurer should interact (For no other
reason to avoid ALM) the functions operate independently
• Insurers mostly invest in highly rated, sovereign fixed income held to maturity
• Investors focus on underwriting activities as they are investing in that ability not their
investment competence (with the exception of Berkshire Hathaway), furthermore they can
(or believe to be the case) invest more efficiently themselves which is the same reason they
like excess capital to be returned
• Real competitive advantage generally comes from excelling in COR related activities
• This section will analyse the 3 components which make up underwriting result as will be
delineated on the proceeding page
COMPONENTS OF GI INCOME STATEMENT AND KEY RATIOS
• This section will analyse underwriting result through inductive method reasoning focusing on 3
areas. In doing so we will be able to understand how to compete effectively
1. Revenue (Premiums)
2. Expenses (EOR)
3. Losses (LOR)
• Investment return is however integral to insurance profitability, so shall be touched on in revenue
Components Of GI Income Statement And Key Ratios

Component Source Key Ratio Calculation
Revenue 1 Premium NA NA
̶
Losses and Loss ratio Incurred loss and LAE
2 Loss Adjustment Expenses (LOR)
+
Net premiums earned
Expenses
+
Underwriting expenses Expense ratio Underwriting expenses
3 (Acquisition cost, overhead etc.) (EOR) Net premiums earned (*)
Total Expenses ˭
Above Costs ˭
Combined operating ratio
(COR)
LOR + EOR
Net premiums earned
˭
Underwriting result COR Difference 1 - COR
+ Investment income ratio Net investment income

Returns on float Investment income
(IIR) Net premiums earned
˭
Net income Operating ratio COR + IIR
(*) Alternatively one may used ‘net premiums written’ which is frequently the case
MANAGING REVENUE – OVERVIEW (1 OF 2)
• The key to underwriting is to successfully charge premiums commensurate with the risk
being taken on, while remaining competitive in the market place
• This is obviously difficult with significant competition in Turkey at present, with likely focus
being market share than profit
• It is dangerous to manage a business with a sole focus top line growth (market share)
• In the early phases of development, the focus of consumers is not so much on product
manufacturing, per se
• Structuring product to maximise penetration and cash flow (for reinvestment in these capital
constrained times) is important, however structuring expertise will be more important in the
future
• In the pursuit of capturing the high growth in the industry it is pertinent to note that
insurers are finding their feet in managing “adverse selection.” Insurers want to grow GWP
but doing so runs the risk of accepting higher-risk clients
• Higher premiums to do not necessarily equate to higher profits irrespective of potentially of
investment income from the float which in a low interest environment is ominous
• As insurance is fundamentally a commoditised product it is difficult to differentiate oneself
from competition
• Financial strength rating is important to an extent, but only to a threshold (AA for casualty
and A for property)
• However by doing so one may attract more premiums. Examples are:
• Customer service: Chubb
• Low cost provider/easy to deal with: GEICO
MANAGING REVENUE – OVERVIEW (2 OF 2)
• Pricing is the key manageable driver of revenue, but it is difficult to get right
• Insurers must price policies in advance of providing protection, with only an educated
guess as to the actual loss and LAE components of costs until policies have expired,
losses have been reported (short vs. long tail), and all claims have been paid
• Insurers underwriting practices centre on (and are discussed in this presentation):
• Selection decision to optimise spread of risk of insured and avoid adverse selection
(Discussed in “Components of Losses – obstacles to managing Insurance exposure”);
• Offering policy coverage terms and conditions attractive enough to lure customers, but
restrictive enough to facilitate sound actuarial analysis (Discussed in slide “Components of
Losses – pricing characteristics”)
• Pricing coverage to be market competitive while generating revenue to cover losses and
expenses and ideally earn a RoC over the hurdle rate
• It is evident that top line strategies impact each aspect of the business, but if price has not
be squared off, perfect selection and lean operations will not be sufficient
MANAGING REVENUE - MARKETING P’S
• An interesting manner of analysing company margins (i.e. revenue) and market power is
through applying the 4P’s of marketing
Trend Question Analysis

Product • Does it fit with market positioning and market • Low cost vs. full service. Being ‘Stuck in the
segmentation? middle’ is never positive regardless of industry
• Is it tangibly differentiated? and the consultant
• Are market trends in the right direction? • What is important to customers at this phase
of Turkey’s development?
• Capital allocation to branches and countries?
• Do you want to win in Turkey?
Placement • Do brokers/agents/banks favour the product? • Competition for shelf space is fierce- what can
• Are prospects properly identified and served? you do to get it and at the right margin?
• How are you securing shelf space? • Being a part of the market leader is a highly
attractive selling point. Success breeds
success
• Find the gaps in the market
Promotion • Is the target customer aware of the product? • With so many competing brands, being the
• Is there any reward for loyalty? one people remember is key. Despite
comparison sites this is still an imperfect
market
Price • What is the pricing strategy? • Insurers are going for market share, but
• Market capture or underwriting result? should you be playing the long game to avoid
• Is there perceived value in the brand? being consolidated rather than the one
consolidating?
MANAGING REVENUE - PRICING ABILITY
• Fundamentally the issue with market profitability for insurers is the lack of pricing ability
• To some extent pricing is restricted, but with the introduction of free tariffs in TPL vehicles
in 2007, insurers have, at least some structural pricing flexibility
• Opportunity to segment within insurance types, pricing products according to defined criteria
• Fragmented market
• Combined shares of the top 10 companies in land vehicles branch is 79% all competing to
gain market share
• Barriers to entry low and prize is large
• In the 2006-2008 period 13 foreign companies entered the Turkish insurance market
• Looking ahead for 2010, incumbents estimate that these entries into the Turkish market will
continue
• Total non life companies increased from 32 to 37 from 2006-2009 with foreign insurers
increasing from 14 to 24 over the same period implying significant acquisitions
• Growth in premiums but not in profit
• For the past 2 years, premiums have been less than inflation, with GWP contracting
• However in 2009 volume rose by 14.5% implying rates and thus profits have contracted
• Paid (64 to 69%) and incurred (55 to 61%) losses have been increasing over past 5 years
• Paid to incurred losses have moved between 86 and 94%, likely due recently to more
conservative reserving practices
• These have not increased beyond 100% en masse
MANAGING REVENUE - ISSUE IS LOW TARIFFS
• Fundamental issue of why there are so few cases of underwriting results in Turkey is that
prices are too low and companies are paying the price
• When technical results is analysed, structurally there are improvements
• The retention ratio has gone up
• There has not been any substantial difference in the rate of agency commission
• Commission from reinsurance activities has been decreasing too
• The premium growth rate has decreased and the loss and expense ratios have been
increasing
Technical Ratio (NB: See note)

2007 2008 2009
Premium Growth Rate 15.39% 6.30% 3.91%
Premium Retention Rate (*) 70.12% 74.59% 75.49%
Claims Payment Ratio 66.04% 60.63% 61.12%
Reinsurance Commission Rate 19.83% 18.34% 16.59%
Intermediary Comm. Rate 15.35% 14.56% 15.52%
Loss / Premium Ratio (**) 64.93% 75.30% 79.87%
Expenses / Premium Ratio 21.98% 16.50% 23.77%
(Loss + Expenses)/Premium R.(**) 86.92% 91.80% 103.63%
Technical Profitability Ratio 2.58% 4.38% 1.16%

NB Note: There figures are taken directly from government statistics. Analysis indicates that they are slightly wrong. They are presented as is for the purpose
of comparability (One error will work its way through so to speak).
(*) Calculated as considering for only proportional treaties. (**)Calculated for life companies as life branch excluded
MANAGING REVENUE – THE LONG GAME
• In order to maintain margins, premium growth must keep up with claim cost inflation
• The insurance industry has not generally been good at this
• In order to keep up with the rate of inflation at minimum, premiums should grow at the same rate of
nominal GDP (Proxy gauge for growth of insured values base)
• In reality, premiums should grow faster as inflation segments insurers are exposed to tend to outpace
overall inflation rate. Where this does not happen price per unit of risk falls
• Economics posits if overall growth is less than unit demand growth, then price is falling
• Turkey, because of its growth, has empirically performed better than markets such as the US in this
respect, with premium growth being lower than GDP 15% vs. 55% in the US
• The chart below shows the spread between premium and GDP growth
• In mature markets ,if industry demand grows at 3-5% and capacity grows at 6% then the industry is
inevitably in a constant state of supply/demand imbalance making it hard for premium growth to keep
up with claims growth
• Given heightened competition of late it would be a fair assumption that the ability for insurers to overcome
claims growth in the future will be diminished (See the trend line)
Premium Spread to GDP – Below GDP Growth in Soft Cycles

50%
40%
30%
20%
10%
0%
-10%
-20%
Spread Linear (Spread)

Note: Spread forecasts from 2010 to 2015 have been derived from IMF forecasts through linear regression
AGGREGATED EARNED PREMIUMS (NET) – GROUP 1
• The top 5 companies dominate the market
• AXA is giving Anadolu a run for their money despite being the long term dominant incumbent
Group 1 - Net Earned Premiums by Company

TKL ‘m TKL ‘m
6,000 1,200
Ray
Aviva
5,000 1,000
FIBA
Eureko
Mapfre Genel
4,000 800
Gunes
Aksigorta
Ergo
3,000 600
Yapi Kredi
Groupama
Allianz
2,000 400 Anadolu
AXA
Average
1,000 200 Top 5 Ave
Top 10 Ave
Top 25 Ave
0 0
2005 2006 2007 2008 2009 Average

AGGREGATED EARNED PREMIUMS (NET) – GROUP 2
• The Top 5/10/25 lines illustrate how scale in premiums rapidly trails off and companies become
equally sized
Group 2 - Net Earned Premiums by Company

TKL ‘m TKL ‘m
800 800
Remainder
700 700
Coface
SBN
600 600 Dubai Group
Generali
500 500 Hur

Liberty
Isik
400 400
Birlik
HDI
300 300 Chartis
Zurich
Ankara
200 200
Average
Top 5 Ave
100 100
Top 10 Ave
Top 25 Ave
0 0
2005 2006 2007 2008 2009 Average

ANNUAL EARNED PREMIUMS (NET) BY COMPANY
Group 1 – Annual Net Earned Premium Per Company

TKL ‘m
1,000
900
800
700
600 2005
500
400 2006
300 2007
200
2008
100
0 2009
Average
Group 2 – Annual Net Earned Premium Per Company

TKL ‘m
1,000
900
800
2005
700
600 2006
500 2007
400 2008
300
2009
200
100
0

COMPANIES THAT HAVE MADE AN UNDERWRITING RESULT
• The most profitable companies are Eureko, Fiba, Mapfre Genel and Chartis
• 7 others have made profit, but only Aviva has done so twice
• Dubai is neutral but as a new entrant should be ignored
Company / Year Spread of Underwriting Results (And losses)
20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Eureko FIBA Mapfre Chartis Dubai Aviva Gunes Yapi Kredi Hur Birlik Allianz Ergo
Genel Group
2005 2006 2007 2008 2009 Average
Aggregated Result Profits (And losses)

60% 12%
50% 10%
40% 8%
30% 6% 2009
20% 4% 2008
10% 2% 2007
0% 0%
2006
-10% -2%
-20% -4% 2005
-30% -6% Average
-40% -8%
Eureko FIBA Mapfre Chartis Dubai Aviva Gunes Yapi Hur Birlik Allianz Ergo
Genel Group Kredi
ANALYSIS OF BEST UNDERWRITERS BY BRANCH
• Eureko, Fiba, Mapfre Genel and Chartis are the most successful underwriters in the Turkish market
• Aviva and Yapi Kredi have had more success than the remainder of competitors
• Interestingly, AXA and Anadolu the major forces in the market, have not made an underwriting result in
the last 5 years
• Whilst there may be benefits of scale for attracting premiums, and in theory benefits of the law of large
numbers/pooling, it evidently does not correlate to underwriting result and managing adverse selection
• Most successful companies are underweight in vehicle segments other than specialist ones and are
strong in accident and general liability
% Allocation of Business per Branch

Fire / Land
Air Air Fin. Nat. Gen. Gen. Land Veh. Legal Sea
Acc. Veh. Liab. Cred. Loss Dis. Dam. Liab. Health Veh. Liab. Prot. Other Veh. Trans.
Eureko 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
FIBA 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
Chartis 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
Company average 12.64 1.34 0.09 0.63 2.38 18.72 11.71 6.37 4.83 19.61 14.71 0.42 3.35 0.72 5.22
Market Average 5.45 0.65 0.58 12.72 0.89 18.50 8.46 2.61 7.03 25.90 26.84 0.41 0.65 0.70 2.60
Multiple of MA 2.32 x 2.05 x 0.16 x 0.05 x 2.68 x 1.01 x 1.38 x 2.44 x 0.69 x 0.76 x 0.55 x 1.02 x 5.17 x 1.03 x 2.01 x
Mapfre Genel 0.50 x 0.29 x 0.12 x na 0.63 x 1.02 x 1.37 x 1.01 x 1.26 x 1.11 x 0.81 x na na na 1.59 x
Eureko 2.36 x 5.45 x 0.06 x 0.01 x 0.85 x 1.26 x 2.14 x 1.75 x 0.73 x 0.75 x 0.28 x 0.29 x na 1.75 x 1.23 x
FIBA 0.55 x 0.42 x na 0.09 x 0.33 x 0.99 x 1.73 x 0.31 x 0.27 x 1.04 x 1.06 x 1.74 x 0.21 x 1.34 x 0.88 x
Chartis 5.88 x na 0.31 x na 8.93 x 0.78 x 0.30 x 6.69 x 0.49 x 0.12 x 0.04 x na 10.14 x 0.00 x 4.33 x
Company average 2.32 x 2.05 x 0.16 x 0.05 x 2.68 x 1.01 x 1.38 x 2.44 x 0.69 x 0.76 x 0.55 x 1.02 x 5.17 x 1.03 x 2.01 x

INVESTMENT RETURN – GROUP 1
• This paper has purposefully detracted from investment return on float toward underwriting performance,
but to do so entirely would only tell part of an insurer’s story
• Financial performance, namely profit must include investment performance in its evaluation
• This is viewed by dividing net investment return (Post investment expense) earned on the investment portfolio
by the premiums earned, thereby illustrating investment efficiency and consequently, success
• Deducting this from the combined ratio gives the insures underlying operating ratio – the standard measure
for assessing overall financial performance
• Investment income provides invaluable buffer to cover losses and expenses and similarly, taken together, a
ratio less than 100 indicates underlying profitability
• As can be seen below the larger companies generate larger investment returns in nominal terms, but this is
simply a function of creating profit from a larger asset base
• To see returns on a relative basis, performance % should be looked at
• Having said that the largest 4 companies have outperformed their peers, though it is not statistically
meaningful given small players such as Isik and Eureko have faired well too
Group 1 – 5-Year Annual Investment Return and Performance
TKL '000
180,000 16%
160,000 14%
140,000 12%
120,000
10%
100,000
8%
80,000
6%
60,000
40,000 4%
20,000 2%
0 0%
2005 2006 2007 2008 2009 Average Investment Performance

INVESTMENT RETURN – GROUP 2
• Average investment return, excluding SBN and remainder outliers, has been 8.8% over the
preceding five years and almost identical for the two groups, implying little economies of
scale in investment capabilities
• Investment profits have somewhat conspicuously faired well over the past five years,
steadily increasing, during an epoch which featured considerable economic turbulence
• This may partly be a function of the asset base growing
• Companies which have not shown investment performance in asset management, such as
Generali, logically show consequent underperformance in profits
Group 2 – 5-Year Annual Investment Return and Performance

TKL '000
25,000 25%
20,000 20%
15,000 15%
10,000 10%
5,000 5%
0 0%
-5,000 -5%
Ankara Zurich Chartis HDI Birlik Isik Liberty Hur Generali Dubai SBN Coface Remain Average
Group
2005 2006 2007 2008 2009 Average Average Investment Performance (2nd axis)
Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data. Note: High returns are due to Other Technical Income being included which for smaller
companies can create anomalies. Second axis scale has been brought down for visibility purposes. SBN figures has due to Ticaret Sigorta inclusion which
had Other Income approximately the same size as investment income by way of example
UNDERWRITING PROFIT/LOSS COMPOSITION – GROUP 1
• The chart below illustrates the composition of 5-year average underwriting result.
underwriting profit and investment return
• Investment return transfer from non-tech account and other technical income (Net)
• As discussed, few companies generate underwriting result, but as can be seen, almost
every company generates underwriting profit which is sustained through investment
returns
Group 1 - Composition of Average 5-year Underwriting Profit/Loss

TKL '000
125,000
100,000
75,000
50,000
25,000
-25,000
-50,000
Underwriting Result Underwriting Profit Investment Return

UNDERWRITING PROFIT/LOSS COMPOSITION– GROUP 2
• Investment return amongst the smaller companies has averaged 15% against 9%
• Despite this, both underwriting profit and result are more pronounced
• The smaller companies are invariably new entrants such as Coface and Dubai Group
Group 2 - Composition of Average 5-year Underwriting Profit/Loss

TKL '000
15,000
10,000
5,000
-5,000
-10,000
-15,000
-20,000
-25,000
Group
Underwriting Result Underwriting Profit Investment Return

UNDERWRITING PROFIT – GROUP 1
• The chart below illustrates annual underwriting profit for the preceding five years
• Companies that generate profit or losses consistently do so
• 2006 and 2009 were the worst years for underwriting profit
Group 1 – 5-Year Annual Underwriting Profit

TKL '000
120,000
100,000
80,000
60,000
40,000
20,000
0
-20,000
-40,000
-60,000
-80,000
Genel
2005 2006 2007 2008 2009 Average

UNDERWRITING PROFIT – GROUP 2
• Group 2 have consistently made smaller profits than the larger companies in the market
• Liberty and Ankara have made particularly large annual losses, as did Dubai in its first year
Group 2 – 5-Year Annual Underwriting Profit

TKL '000
20,000
10,000
-10,000
-20,000
-30,000
-40,000
-50,000
-60,000
Group
2005 2006 2007 2008 2009 Average

COMPONENTS OF EXPENSES
• Similar to any business, operating efficiency is important, but in general insurance there
are some differences
• Operating efficiency is calculated by dividing operating expenses excluding losses and
related expenses into total premiums, such that the cost of underwriting operations relate
to the premium revenue generated from those operations
• The components are as follows:
• Policy/customer acquisition costs
• General and administration costs
• Policy acquisitions costs are relatively large for a general insurer (Though smaller in a
sense to life business). Costs paid to distributors under an indirect sales model,
particularly in a growing and competitive environment can cut deep into profits. Whilst
high incentives may need to be initially offered to capture networks to gain market
penetration, they are inherently unsustainable
• Insurers therefore need to understand what is important to their network of bancassurers,
agents and brokers and focus on the areas such as brand or education and the like, that are
valued and can come at a lower cost
• General and admin costs are the same to any business and managers need to be aware of
the usual productivity and related cost metrics
• As mentioned, this can be done in two ways, from statutory accounts, net premiums
written is the denominator and under financial accounts such as IFRS or GAAP, net
premiums earned are used (Solvency vs. going concern conventions)
MANAGING EOR
• The huge spend being put into branding at present will likely collapse in approximately 5 years
time, shifting to a sales orientation (See value chain slide)
• Short term focus is on brand establishment and this is an unavoidable capital investment
• There is generally limited opportunity to outsource non-core aspects of the value chain given
insurers’ strategic goals, composite structure and importance of marketing and sales at present
• Sales is effectively outsourced given the distribution structure of the market (franchise)
• Potential economies of scale could be garnered through offering admin/backoffice outsourcing to
domestic and even foreign insurers should the capability be present already
• Marketing and branding is key
• Claims management as a typical core back office activity is difficult to outsource
• Underwriting and risk management is central to an insurer (which makes differentiation possible)
and directly linked to LOR
5-Year Average EOR

80%
70%
60%
50%
40%
30%
20%
Average Linear (Average)

MANAGING EOR – BRAND INVESTMENT WARRANTED
• Nielsen research provided interesting insight into the motivation to purchase insurance
• Brand reliability is overwhelmingly key
• Providing sound product structuring and payment terms are more important than variety
• Additionally, expense of educating and providing information resources to the distribution network,
particularly agents is a worthwhile expense
• Insurers are evidently doing a decent job at customer servicing, as surprisingly, 81% are extremely happy
with insurers and only 2% decidedly unhappy
• Those unhappy with insurers are due to reimbursements not meeting expectation and officials being ignorant
or uninterested in the customer (poor service), ether at the insurers or from an agent
• 56% of complaints pertain to auto insurance ( which given prevalence is expected)
• Of cancelled insurance contracts, majority pertained to private pension, life and health insurance, with most
doing so due to financial situation, rather than increased premium payments and dissatisfaction with agents
(the two next top reasons)
• To buy insurance again, most need their financial situation to improve (49%), premiums to be improved or
more attention to complaints to be given. 26% wont take up insurance again
Elements of Brand
0% 10% 20% 30% 40% 50% 60% 70%
Variety Of Products Offered
Content Of The Bond
Appropiate Payment Terms
Advised Of The Company
Prevalence Of Agents
Recognition Of The Agents
Advice Provided
Don't Know/Someone Else Organised
Variety Of Products Offered
Received A Visit
Received Special Promotion
Other Than
COMPONENTS OF LOSSES
• Fundamental to an insurers underwriting operations is how much they are paying out in
claims and LAE for euro taken in
• This is best analysed by dividing total losses into premiums earned (LOR, which
throughout this presentation is calculated on a calendar-year loss basis)
• There are two main components of losses
• Incurred losses
• Indicate insurers risk selection and pricing ability; this is the bread and butter of insurance
• To be able to write business effectively there are a number of characteristics which are
integral, and two obstacles to be avoided which are discussed in the proceeding pages
• Effective pricing implies insurers are able to write profitable business, but in Turkey there
are constraints on free pricing
• Loss Adjustment Expenses
• Indicates claims-handling efficiency. Invariably, insurers with low EORs will also be effective
in keeping down LAE. LAE is exogenous to the factors in managing losses, per se
• Claims handling is a key factor in client servicing and in Turkey, insurers are legally bound
to pay out claims without delay (Art 32.3)
• It is important to note that across insurers, different levels of premiums are underwritten
across different branches; the branches have inherently different short and long tail
characteristics
• Writers of general household insurance (Range 40-60% generally) should, ceteris paribus,
have lower LOR than long tailed writers such as health insurance (Range of 60-110%) given
their lower reliance on investment income – longer tail businesses have more time to
generate investment income
LOSSES – IDEAL CONDITIONS FOR MANAGING INSURANCE
EXPOSURE
• For insurers to have the possibility of writing profitable business the following five factors to
varying degrees are required
Characteristic Analysis
Large number of • Simple matter of scale, thereby benefitting from the principles of pooling and the law of
similar exposure large numbers
• Particularly applicable in branches such as vehicle that are less prone to catastrophic
units
(specific) loss and where millions of similar independent exposures are insured. They
have more stable loss ratios than lines with fewer exposures
Accidental • Insurers are at a disadvantage if the insured in some way controls whether the loss occurs
• To mitigate the likelihood of this, insurers must be vigilant in policy terms and ensure loss
adjustors are thorough/sufficient staff employed and potentially could instigate stricter
policies of more suspicious claims that may consequently make more use of the IAS but
would be balanced with faster claims payment to enhance the brand (“easy to deal with”)
Definite and • Avoid more specialist branches and write standard policies
measurable • By operating in branches with characteristic 1, insurers are able to accumulate experience
in the area of measurement. Furthermore, one can be more restrictive in the types of
policies written. Where there is appetite for more specialist policies (e.g. satellite
launches) cession can be effectively applied
Not catastrophic • Losses are hard to manage when multiple insureds are exposed to a single peril or event
such as earthquakes. It is difficult to apply either pooling or law of large numbers to
calculate appropriate rates since all homes in the landfall zone are exposed to loss
• Elements of this risk are identified and removed from standard contracts in the case of
earthquakes in Turkey through the TCIP related legislation
Economically • Common sense dictates that underwriting should ensure that the price per unit of risk will
feasible to ensure generate a sufficient ROC and undue risk is not being taken on (e.g. writing CDS on CMOs
etc.)
Source: Characteristics from ‘Property and liability insurance principles – 2nd edition, Smith Treishman, Wiening, Johnson
LOSSES – OBSTACLES TO MANAGING INSURANCE
EXPOSURE
• Even when the preceding ideal conditions are adhered to and managed, insurers must
overcome two obstacles in order to build a profitable book of business: adverse selection
and moral hazard
• This is necessarily difficult to control
Characteristic Analysis
Adverse Selection • People who have the greatest probability of loss are logically the ones most likely to
seek insurance from insurers. insurers are most at risk of being adversely selected
against when attempting to gain share by lowering price
• At present, competition is fiercely high and prices, as a matter of course, are coming
down
• Insureds who are poor risks are in all likelihood, more able to purchase insurance at
attractive rates and terms though they have greater probabilities of loss than others
• Given low penetration of insurance, this issue not yet a large one
• Chasing top line growth rather than the bottom line is a mind-set that needs to take
hold and have underwriting processes adhered to. There is a precarious balance of
priorities
Moral Hazard • Dishonest tendencies in the character of the insured increase the probability of loss
occurring
• It is difficult to identify and assert dishonourable tendencies in groups en mass.
• What can be done to mitigate this however, is tiered pricing, but as we have
discussed pricing is not yet free
• There is little evidence that fraud is overtly high In Turkey as outlined in the
proceeding page
Source: Characteristics from ‘Property and liability insurance principles – 2nd edition, Smith Treishman, Wiening, Johnson
LOSSES – MORAL HAZARD (FRAUD)?
• There is not much evidence that fraud is high, or at least is being detected
• In 2009 there were 561 complaints referred to the relatively new IAC – a fraction of the
number of policies underwritten
• Under Insurance Law 5684, in order to settle the disputes arising between the policy holder
beneficiary of an insurance contract and the insurer, an Insurance Arbitration Commission
(IAC) was formed within the Association whereto complaints are directed
• Breaking these down
• 55% of non payment complaints go to arbitration
• Complaints are mainly general in nature: 74% relate to auto insurance and 10% to fire
• The vast majority are small, less than TKL 5,000
• This is not a perfect indicator of fraud, but merely a useful proxy given available
information
Instances of Arbitration
Settled by Referred to
No.of Apply Other (*)
Rapporteur Arbitrator
Refusal to pay 476 49 261 166
Complaint as to inadequate payment offer by insurer 85 12 52 21
Total 561 61 313 187

(*) Rejected because of not completing the procedure, withdrawn by insured or in searching step
LOSSES – TIERED PRICING (1 OF 2)
“In professional baseball it still matters less how much money you have than how well you spend it.”
- Moneyball, Michael Lewis (*)
• Tiered pricing is similar to the economic concept of price discrimination (All three degrees) and
similarly involves market segmentation, though the principal motivation is risk categorised pricing,
though the tariffs will as a matter of course be discriminatory to some extent
•In this context, tiered pricing entails putting applicants into defined boxes from which a risk-priced,
market competitive tariff will be charged
• The manner by which the boxes are defined and prices levied is key
• Computing technology has facilitated the possibilities for refined segmented pricing methodology
• Progressive, as the pioneer, reaped super-normal growth and profit (From 1994 to 2003, Progressive’s
revenues grew at a 17% CAGR and its COR averaged 93.7%) when its tiered model was still a
competitive advantage as it was more able to price risk (**)
• But as a policy pricing tool that segments customers and prices policies offered based on
statistically reliable quantitative characteristics, it is only as good as the data at its disposal
• There are a number of cases where contentious data points have been used to tier insured
• Education/Occupation – GEICO criticised
• Credit rating – Generally attacked by consumer advocacy groups
(*) Moneyball is about baseball analysts who deconstructed the game, viewed it quantitatively, and then put it back together in a better way
(**) In baseball, the Oakland A’s Billy Beane analysed statistics and figures that others ignored, found value in “cheap” players who were overlooked by
others, and produced a superior won-lost record on a shoestring budget. The A’s won-lost record is not the result of chance. It’s the result of a strategy
that takes advantage of data and statistics
Source: McKinsey and InsurQuote, 2004, Presentation to Auto insurance Report National Conference
LOSSES – TIERED PRICING (2 OF 2)
• Insurers should determine which factors in Turkey are most predictive when determining risk
profile
• Research found that for a sample risk, Nationwide generated one price, while Progressive—the
company with the most sophisticated pricing—generated 131 different price points
• Progressive’s multiple prices were the result of a more expansive list of questions asked at the
time of application and a more aggressive analysis of the relationships between rating
characteristics
• The greater the granularity of the underpinning data, the more tiered the pricing can be, ergo,
insurers are able to compete more favourably, assured that the price per risk is underpinned by
empirical analysis
• Aid positive brand building through avoiding mis-priced business; overcharging good risks and
under-pricing bad ones
• Research showed Progressive did not deviate meaningfully from the market average, while less
successful companies frequently went above or below
• Progressive’s higher profits are likely driven in part by less sophisticated competitors tending to
make mistakes when reducing prices in an effort to chase growth or maintain market share
• They pay the price later through higher claim costs
• In non-standard auto, prices were below industry average, but more dispersed than competitors
indicating ability to identify risk and segment customers
• In sum, effectively tiering applicants within legal constraints leads to higher profitability and
long term growth in Turkey
Source: McKinsey and InsurQuote, 2004, Presentation to Auto insurance Report National Conference
LOSSES – PRICING CHARACTERISTICS (1 OF 2)
• InsurQuote and McKinsey research identified four key pricing characteristics to successful
underwriting: granularity, dispersion, interactions, and variables
Note Action
• Granularity is the number of pricing “cells” an insurer • Greater granularity increases a
generates based on the data it gathers to underwrite a risk company’s ability to adjust and
adapt pricing as it learns more
• Age, would be four cells if drivers are placed in broad ranges
about the relative importance of
such as 16-25, 26-40, 41-60, and 61 and up. But age would be
variables and their relationships to
Granularity
seventy cells if each year from 16 to 85 is considered

each other
individually, assuming it can be calculated that each year
has a distinct risk characteristic • The existence of a large number of
cells does not conclude to
• If the correlation between age and credit is such that credit
sophisticated pricing but rather
is more important for middle-aged drivers than young or old
indicates the potential
drivers, that would result in more cells than if credit is given
effectiveness of a pricing model
the same weight for all age groups
• Enhance the granularity of data
• To lead price sophistication, insurers cannot merely • Corporate culture is essential to
identify new interactions among established rating factors, it make this effective; encourage
must also identify new variables assumptions to be tested and new
New variables
ideas to be introduced and actually

• Education and occupation are examples of leading edge executed
• By making sense of data new correlations can be found • Reward innovation for both
such as whether repair costs are greater than theft success and “smart failures”
replacement costs, or if applicants ask for increased bodily
injury limits above the standard ( “physical damage
symbols”) implies they have a higher propensity for risk
taking behaviour and should be priced accordingly
LOSSES – PRICING CHARACTERISTICS (2 OF 2)
Note Action
• Each variable has a certain importance. The interaction • This is more about human
of variables, creates an exponential increase in cognition than computer power
Interaction among
granularity
• Encourage staff to make sense of
• Age, credit scores, and territory become more what they are presented
variables
important when taken together. It pertains to making

sense out of the data, the relative risk of one insured
vs. another
• For example, Land Rovers being farm vehicles rurally
and status symbols in Chelsea, and more likely to be
stolen there than in the suburbs
• Dispersion is the range of premium that an insurance • A company may have high
company generates from its cells. A company may have granularity, but if dispersion is low
high granularity, but if its dispersion is low, it isn’t accurate prices aren’t reflected in
bringing more accurate prices to the marketplace. the marketplace
• E.g. Company with low dispersion range: €400 to €600. • Insurers should establish prices
Dispersion
More analytically sophisticated company has range of that are high enough to encourage
€250-to- €750 for the same risks the highest-risk drivers to move (or
stay with a competitor), thereby
• Price sophisticated companies are constantly changing
punishing competitors that lack the
as they learn from mistakes and identify hypothesis’ to
pricing sophistication
test. The least sophisticated companies are static and
fail to respond to the market and competitors • Do not rely too much on pricing
model and continually test new
• Also, less sophisticated insurance companies retain
assumptions
more under-priced customers and so their loss ratio
rises
LOSSES - MANAGING LOR
• Underwriting is the heart of insurance core competence, sine qua non to insurance in
Turkey
• While the importance of distribution, brand, expenses, claims handling, and distribution
network/relationships shouldn’t be minimized, there‘s no substitute for having the most
accurate price for a risk, or class of risk, particularly if it is market competitive
• Underwriting and pricing decisions must be made in light of the structures of the varying
branches, bearing in mind competition, but not doing so where the price per risk is
unacceptably high for the perceived advantages of market share
• A principle generally asserted here to manage LOR is to stick close to the shore and avoid
difficult risks (Which would not meet the ideal criteria mentioned previously)
• However, there are many companies that specialise in in writing difficult risks and they
receive higher premiums for underwriting them accordingly
• Note, the experience to enable them to do so has been garnered over a number of years.
• Insurers could conceivably position themselves to be a specialist writer in such business in
a few years time should it endeavour to garner the requisite knowledge
• Progressive had highest growth rates In non-standard auto
• If insurers are to compete on price, then to do so profitably they must have a competitive
advantage in tiered pricing
MANAGING COR
• The Combined Operating Ratio or COR is simply the sum of the losses and expenses incurred
• It brings together a measure of an insurer’s underwriting COGS efficiency and operational
efficiency to provide a gauge of overall underwriting performance- under 100% implying results
• Ergo, as a function of LOR and EOR, insurers are faced with a number of balancing questions:
• Is it better to write a policy for a preferred-risk driver for a €500 premium, or a high-risk driver for
€2,000?
• Should insurers spend more to reduce its loss ratio or less to reduce its expense ratio?
• What mix of insured and branches is most profitable and worth insurers allocating capital to?
• Will a high commission (and excess of competitions already ‘high’ commissions) induce an
agent, broker or bank to “produce” more profitable business, or could insurers bypass them, try
establish a direct line and offer a lower premium with the money that’s been saved on EOR?
• Each of these questions lends itself to quantitative analysis
• A leading, or at least market EOR is eminently achievable and there are consultants who can
help businesses achieve this. Naturally each business will have its own set of issues. Be they
legacy ones of bringing an acquiree up to international best practice, or due to an ill structured
indirect sales structure
• The leaders in the market will be those who are able to hold their LOR down and in turn
generate larger underwriting results, being the principal negative on the way to the bottom line
• A combination of factors are required, and not just systems and software
• Fundamentally a culture of success which will challenge norms and pursue better way of doing
things and pricing risk, with management that is supportive and rewarding
• To conclude, leading businesses will run a tight ship and lead the market in its underwriting
practices. Top line growth will be managed over the long term
5
OVERVIEW (1 OF 2)
• As we have seen, underwriting result is attained by managing top line growth, operating the
business effectively (minimising EOR) and instigating accurate and competitive pricing and
selection techniques
• That is indeed easier said than done, and insurers, en masse, not having generated much
underwriting result and employing many staff more erudite than the author are testament to that fact
• Incumbents therefore need to undergo a process of reflection and ask question of themselves
• The aforementioned are a series of random thoughts to commence the process:
• Distribution
• Looking at the early attempts of Apple (A very different industry) to grow in Japan where they initially
went with a local partner with no existing consumer-tech business - are you selling through the right
people and is your existing partner the right one?
• Given the competition for distribution channels, are you targeting the right ones and are there new
ones to attract more and attractive applicants? :
• The opportunity to be the leader under the direct model or innovate new channels such as promoting housing
related insurance through, say estate agents?
• Can you do things better and different than has been done before? Little things can make a big
difference, so can you create differentiation – services, such as user tools that have mass attraction?
• Create invaluable tools insured would use daily/weekly to induce barriers to switching, so even if competitor
cheaper, you don’t want to live without the tools. Integrate technology with other financial groups such as
banks for must need services
• iPhone app for renewing insurance AND checking you bank balance
• Partner with Mint (online service) for Turkish market?
• American Airlines created competitive advantage through an agent ticketing system called SABRE
• What is a killer app for agents given dominance of agents in Turkey?
• Network effect: do certain lines market better and drive ancillary purchase in ‘core’ products?
• Go about achieving success in a different way
OVERVIEW (2 OF 2)
• Product
• How can products in each branch be structured with ancillary benefits to create differentiation
given in this stage of the market vanilla products are in demand?
• Greater allowance for transfer of developed benefits from an insurer to reduce switching costs
• Given the market is relatively unsophisticated, could a large education spend, partnered with the
Undersecretariat, concurrently with a complex product offering position the company as market
leader of terms of knowledge?
• Brand
• What are options for brand differentiation, and can value be made segregating the market,
dividing brand into ‘premium’ and ‘value’?
• Differentiate service. ‘Platinum card’ package – create prestige
EOR
• EOR is simply the costs of operating the business. Every Euro paid in underwriting expense is a
Euro that doesn't flow to the insurer's bottom line
• Success therefore amounts to leveraging scale economies
• To attract customers, insurers have to advertise: what is the most cost efficient means of doing so?.
High brand equity imbues a leverage factor
• Paid commissions to distribution channels; banks, agents and brokers: Does head on competition on
price pay in the long and short term, or are there other drivers?
• GEICO has achieved long-term success by cutting out the middle-man as Dell did, but will this negatively
affect existing relationships?
• Pay employees a salary: what and how many staff are required for any given level of contracts?
• Are you flexible to scale up and down to market changes and are staff delivering?
• Pay taxes and other operational expenses: is the business structured correctly?
• Understanding the answers to these questions comes from experience and increased trade, by
insourcing (offering outsourcing) there is potential to gain:
• Economies of scale
• Know how synergies
• Capacity use optimisation
• However this option is uncertain given
• Perspective of loss of competitive advantage (For large insurers everything is core)
• Trust amongst insurers (Will the “partner” undermine them)
• Threat of having a strategic dependency
• And generally collaboration amongst insurers is quasi-novel in the industry, though Zurich offers
claims management and Allianz offers underwriting and claims management for example
• In the current market, most insurers have consolidated and developed IT infrastructure and may
now be placed to insource and leverage their scalable platforms
LOR
• LOR is the art of mitigating risk at pricing per unit and discipline
• Given intense competition, appreciation of the underwriting cycle, balancing GWP land
grab (greed) vs. profitable business long-term growth is a fine balance, but one the would
well be worth thinking through
• Discipline when ‘all others lose their head’ in the hard cycle
• Focus should be in developing superior skill in calculating accurate prices
• In doing so they will be able to outperform their competitors by a wide margin over the
horizon
• Insurers that chase market share and fail to develop skill will find themselves faced with
adverse selection, an inability to grow profitably or remain the same size profitably, and a
poor ability to shrink their way to better profitability when phase 2 of the market comes
• Reinsurance as a tool to write more business and get more experience
• Turkish GI is heavily reinsured which impacts profitability structures
• Some companies appear to be innovating in this area
• Higher cession proportion would allow insurers to write greater volume of business and
mitigate inevitable claims
• Is there a balance?
• Questions
• Reinsurers with the highest credit rating benefit from having sight of more business and
understand the market better as a result. How can insurers do this?
• Can’t own brokers/agencies to get increased volume (See law summary)
• How can you get more data from customers?
6
OVERVIEW
• When an insurance company with a quality brand offers lower prices, it now has a better
chance of gaining new business than in the past, but this can only be sustained if the lower
prices are the result of more accurate pricing skills, meaning the VNB is profitable
• Ultimately, more accurate pricing is more important that a quality brand
• Insurers can grow rapidly and produce an excellent loss ratio even though its brand is only
modestly useful
• Over time, companies with most accurate pricing may end up with the best brands
• There are a number of tactics and strategies for insurers to undertake to expand market share,
around gaining distribution channels, preparing itself to participate in the inevitable wave of
consolidation arising from phase 1 and its conceivable “mispricing cycle”
• However they inevitably involve playing the same game as competitors, which will likely be an
expensive one
• The best course of action is twofold:
• A combination of moderation in direct expansion by offering favourable distribution terms and
engaging in expensive acquisitions
• A zealous focus on creating a competitive advantage in the underwriting systems, as over time
this will lead to profitable business being written, which self-perpetuates and self-funds
expansion
• Acquisitions are not on a financial basis the best course of entering the market, or expanding
market share, as valuations have risen exponentially, and in essence, ‘there are no good deals
left’
• The sell side realises long-term potential and the multiple reflects that, the buy-side still likely
smarting with capital constraints retains the bargain hunting mentality
• Investment banking advise emphasises the need for ‘deep pockets’
PARTNERSHIPS
• Partnerships with as many touch-points amongst distribution channels are imperative to deal
with fierce competition
• Partnerships will play a significant role and incumbents are actively looking for them, such as
Aksigorta
• Press statement enunciating their desire for a leadership position and will sell no more than 50%
• However, distribution is being bought up in the bank channel by competitors such as BNP;
insurers must therefore seek to differentiate themselves and secure mutual agreements
• Whilst traditionally “loose” strategic partnerships may be preferred to tie up distribution, JVs
which also may have been viewed as unrealistic are necessary (and may hopefully serve as a
basis to creep up to 100% control)
• The main focus of the JV is to leverage the existing client base
• The market is now difficult to enter and more recent entrants are already being rumoured to be
takeover targets.
• New entrants with small war-chests will be required to align themselves, but given the paucity
of players, this is unlikely. Furthermore, those left have stated they will only do so if they are
assured a commanding position in the market
• Structurally, the market does not lend itself to immediate profitability; unemployment is high and
research has illustrated that insurance is neither seen as a necessity or even a good thing
underpinning the dubious status as the lowest penetrated market in Europe
• The ‘informal’ economy, according to some estimates, is in the region of 25% of GNP
• Employers still evade paying social security contributions for their employees, for example, by not
registering them or adjusting categories in their favour- such as smaller salaries and contract basing
• Having said that, the late development of the market has facilitated best-practice to some extent
• In comparison to another growth nation, Russia, the tax system is a marginally more favourable, the
regulatory environment is well-advanced, products transparent and consumers with more of a long-
term focus
CONSOLIDATION
• Given the level of competition in the market and empirical evidence that GI is inherently cyclical in
nature, consolidation at some point is inevitable
• Analysis of EOR provides prima facie evidence that there are benefits of scale
• The basis for consolidation is somewhat difficult in the short term, given:
• The majority of domestic players have been bought or have aligned themselves
• Macro trends for foreign entrants domestic markets are poor, pulling them to growth markets
• There are therefore little to no low hanging fruit to commence a wave of consolidation, and foreign
players will only exit if losses become unpalatable and/or some exogenous events happen, such as
corporate distress requiring divestments (UK banks)
• In the absence of deals, there have been many cases of foreigners buying out partners, such as in
2008 with Allianz and Koc and AXA with Oyak for $525 for the remaining 50%
• At present, foreign entrants are taking a long term perspective. Whilst penetration may be low and
market share fragmented, they will be content with small % holdings, expecting penetration to
increase and other benefits, such as compulsory insurance expanding in scope and take-up
thereof, thereby benefiting players that have been incumbent for a number of years
• Two of the largest players, AXA and Allianz have been in the Turkish market since 1998 and 1988
respectively, the longest of any other foreign player
• Likely consolidation will benefit those with the greatest resolve. Many entrants are dominant
globally and fall into the camp of wanting to rapidly gain market share, which impacts LOR, and to
get to ~15% will cost them, with no certainty that the investment will pay off
• Those remaining Turkish players may eventually be lured away from going it alone
• Yapi Kredi received overtures in August 2008, but a deal was not consummated
• The market will eventually consolidate to a handful of players, they will be those companies who
have established a great distribution network across channels, strong brand equity and are
inherently profitable
• A similar situation is envisaged in the pension market where only 4 players will be believed to be left
standing, at the end of the day

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Analysis of The Turkish General Insurance Market

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2010

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

6. Expansion Options To Gain Market Share

Breakdown of European Insurance Premiums By Country (2008)

Life Non-life Non-Life Average

• In 2008, Allianz and AXA bought out the Corporate Activity

(*) 7 of are life companies

(**) 23 of are life or pension companies

Growth Companies per Branch Number (Aggregate)

0% 2% 9% 2% Personal Accident 285

0% -15% 14% -13% Health 280

0% -16% 15% -3% Engineering 275

0% -16% 15% -3% Marine 270

0% -16% 15% -3% Fire 265

0% -16% 15% -7% Accident 260

0% 0% 4% 4% Motor Vehicle TPL 255

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Premium Production per Branches

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

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

Air Fire and Land Legal

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

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

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

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

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

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

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

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

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Distribution Contribution by Branch Premium Dist. Volume by Branch

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Group 1 - Aggregated by Year Group 2 - Aggregated by Year

1,400 Ray 14,000 1,400 Remainder

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Group 1 – CAGR (2005-09) Group 2 - CAGR (2005-09)

CAGR Average CAGR Average

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data.

Group 1 – Agent Distribution by Company

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Group 2 - Agent Distribution by Company

Group 1 – Aggregated by Year Group 2 - Aggregated by Year

400 40 Eureko 400 40 Dubai Group

Group 1 – CAGR (2005-09) Group 2 - CAGR (2005-09)

CAGR Average CAGR Average

Group 1 – Number of Brokers Over 5 years

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Group 2 - Number of Brokers Over 5 years

Group 1 – Marketing Staff Group 2 - Marketing Staff

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Group 1 – Total Staff Group 2 – Total Staff

Source: Analysis of Sigortacılık Genel Müdürlüğü, 2009 data

Development Stage • Turkey is comparatively underdeveloped to Western Europe and

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

Source: AM Best Country Risk Profile

Real GDP % Unemployment Rate %

CPI Inflation rate EoY % Overview of Turkey %

Insurance Awareness of Insurance (% N=3033) Survey Method

Men vs. Women Ownership of Insurance (% N=749)

Total 65% 35%