XPRIMM: What is the overview of the Turkish insurance industry in 2013 and in the first half of 2014?
Kemal CUHACI: There are several characteristics which have been long going in the Turkish insurance industry. Unlike most developed industries, the life sector accounts for nearly 15% of the total premium production mostly due to the Private Pension Scheme which has been offering attractive pension plans and tax incentives to the people. Additionally, there are some other deep-rooted reasons which prevent life insurance to develop satisfactorily.

Another characteristic of the industry is the heavy concentration in premium production. 75% of the premiums in the non-life sector are generated by top ten insurance companies, whereas the remaining non-life companies produce the remaining 25%. This is a significant indicator of the mergers and acquisition in the market in the medium term. Moreover, the vast majority of the companies in the top ten are owned by the foreign insurance group. In the overall market, more than 70% of the paid-up capital belongs to the foreigners. This demonstrates the market is an attractive business environment in which the foreigners can operate with a reasonable profit margin.

The motor segment is the main driver of the market and 45% of the non-life premium comes from this line of business. This has caused serious problems for the market during the last decade. Insufficient premium increases and the high loss ratio in the motor segment have been affecting the profitability of the overall market as well. Therefore, the industry needs to shift its premium composition in favor of property insurance, in accordance with the economic development in the country.

In the first half of 2014, premiums have not shown an adequate increase due to some economic and financial measures taken in the country and, presumably, this will be the case in the year-end results. Motor insurance, for instance, has decreased by 2% in the first half due to a regulation in respect of bank loans and consumer credits and the overall premium in the non-life branches increased by 9%, which is the inflation rate realized so far. Taking into consideration the 22% growth rate the end of 2013, it can easily be argued that the 9% increase is not an adequate figure level for the industry to create profitability.

XPRIMM: Currently, more than 70% of the paid-up capital in the market is retained by the foreign companies. Is the Turkish insurance industry going to be attractive for the foreign investors in the future?
K.C.: The foreign capital has grown in the market in parallel with the economic development of the last decade. As the economic activities flourish in the country, insurable stock grows considerably in value along with the consumers' expenditures and these positive factors influence the insurance activities and potential in the same direction. In addition, unlike western and developed insurance industries, the Turkish insurance industry, unfortunately, is not in a position to gain advantage over the high insurance penetration. Finally, the insurance markets in most developed countries are saturated which means that there is no room remaining for them to develop at a desirable level. These huge and global insurance groups are searching for premium growth and profitability in the emerging and developing economies. The Turkish industry, by taking into account the factors said above, is still attractive for the foreign investors and will be the same in the decade to come.

XPRIMM: How would you describe the reinsurance strategy of the companies on the Turkish market?
K.C.: The reinsurance structures of the companies in the market, with the exception of 5, are based on proportional surplus treaties written on bouquet basis and the retention level of the market is not as high as it is desired on the property businesses. On the other hand, retention in the motor proportional treaties is nearly 100%, as the companies are facing difficulties to find reinsurance coverage due to unfavorable results. The risks which are accumulated are protected by Motor excess of loss treaties.

As it has been mentioned above, insurance companies should embrace a policy in order to allow them to shift their premium composition in favor of property business and keep high retention level in order to reduce reinsurance dependency which they heavily rely on. This will presumably increase their profitability, as the loss ratio in the property business is much lower compared to the one in the motor business.

Catastrophe protection, which means protection against the earthquake peril, is established by cat excess of loss cover. The most important issue for the market in respect of Fire and Engineering accumulated risks is the cat protection which will be dealt with in the following question.

XPRIMM: Turkey has a high exposure to cat risks especially earthquake. From this perspective, how do you comment on the available coverage for earthquake risk?
K.C.: Turkish companies, while determining the limit of their Catastrophe Excess of Loss treaties take Zone 1 exposure which is Istanbul accumulation. Total capacity of the market by Cat Excess of Loss agreements is EUR 4 billion and the market pays EUR 91 million in return for this coverage. In addition to this, the market is having nearly EUR 4.3 billion earthquake cover by the proportional surplus treaties which provide protection against E/Q peril. Overall, including both proportional and non-proportional, the market is currently having an E/Q cover which amounts to EUR 8.3 billion. In our view, earthquake protection to this extent would be enough for the market.

Reinsurance security is another important factor for the companies which they rely on. This is a universal rule not only for Turkish companies, but for every company in the world as well. Again, in our view, there is no problem in the non-proportional cat agreements security. On the proportional side, some small and medium sized companies (not too many) should pay more attention while placing their proportional treaties. They may face shortage not because of the range of cover, but because of inadequate security.

XPRIMM: How much do the risks accepted from foreign cedants weighs in MILLI Re's portfolio and which is your main geographical area of business?
K.C.: MILLI Re has actively engaged in accepting business from emerging markets including the Middle East, Asia, Northern and Continental Africa, CIS, Latin America and Eastern Europe starting from 2006 to create a geographical diversification in the portfolio, having been able to increase the volume of overseas business from 2.5% in 2006 to 24% at the end of 2013. International business is underwritten by three main teams. Head Office Marketing Team is specialized in markets including Middle East, Asia, Northern and Continental Africa, CIS and Eastern Europe generating 32% of the premium, Singapore Branch is responsible for Asia Pacific markets producing 17% and Head Office Retrocession Team is in charge of selected business from Continental Europe and Lloyd's which accounts for 35% of the international book. 7% of international premium comes from MILLI Re's involvement in the Federation of Afro-Asian Insurers and Reinsurers (FAIR) Non-Life Reinsurance Pool and finally Northern Cyprus business with 9%.

XPRIMM: What are your company's strategic objectives for the near future?
K.C.: MILLI Re, as already known, is the only local reinsurance company operating in the Turkish market. We have 25% market share in the non-motor proportional treaties and 10% in the cat excess of loss treaties. On the other hand, MILLI Re is leading 17 proportional treaties out of 23 to which it is participating in. As we have mentioned before, the Turkish market is an internationally capitalized market in which the main foreign owned companies operate. Briefly, we can say this is a significant position which we hold for now in terms of market share and leadership. Our main strategic goal is to retain our position in the local market.

As for the international portfolio, it is aimed to maintain our position by continuing to keep our relations, increasing the number of our partner and creating diversification in the portfolio. A stabile profitability is certainly an important goal for us both in local and international businesses.