3rd Reunion Engineering Insurance Roundtable. June 6-7, 2013, Montreux, Switzerland

3rd Reunion Engineering Insurance Roundtable June 6-7, 2013, Montreux, Switzerland

Copyright 2013 Reunion AG, Zug, Switzerland. No part of this publication may be reproduced in any form without written permission by Reunion AG. Photo on the cover: Yuriy Smituk «The Russky Bridge under construction hit by fire, 2011, Vladivostok, Russia»

Content Introduction 2 Participants list 3 Chapter 1. Risk assessment of facilities under construction and erection for insurance purposes 11 Chapter 2. Requirements to the liability insurance of builders 28 Chapter 3. CAR/EAR Claims Settlement Practices in Russia 38 Chapter 4. Claims Handling in Russia 56 Chapter 5. Risk Management and Claims Handling 68 Chapter 6. Major claims experiences and possible improvements 86 Feedback 93 Analytics 94 Law extract 108

Ladies and Gentlemen, We are delighted to present the essential materials of the 3rd Reunion Engineering Insurance Roundtable, organised and hosted by Reunion AG in June 2013 in Montreux, Switzerland. This time we tried to avoid discussing the underwriting issues and made a focus on the subjects of risk management and claims handling in insurance and reinsurance of Engineering projects in Russia. While planning the roundtable discussions, we took into consideration our previous experience of running this event. The unique group of participants, who between them represented most of the main international reinsurers and the biggest players in the Russian insurance market including the national reinsurers, offered a very high level of experience and knowledge, especially in the field of construction and erection insurance. On the second day of the event participants took a break from the indoor discussion format and visited a unique construction site in Switzerland Nant de Drance Pumped Storage Hydropower Plant in high Alps. We would like to pay special thanks to Nationale Suisse for helping us to organize this visit. We would also like to thank all the participants who presented, which also prompted interesting discussions and debate on each of the six parts of our discussion event. As an insurance and reinsurance broker from Zug, Switzerland with subsidiary offices in Moscow, Russia and Kiev, Ukraine Reunion AG maintains a constant dialog with both Russian, CIS insurers and international reinsurers. We believe regular meetings between professionals in this sector will be useful for all parties. This roundtable is our small contribution to this process. We hope this publication will be interesting to you and we would appreciate any feedback. You can post your comments and proposals on our website www.reunion.ch. This publication may also be downloaded from our website. Best regards, Igor Prandetsky CEO Reunion AG 2

Participants list Vladimir Karyukin, First Deputy General Director, IJSC GEFEST, Moscow, Russia Manuel Bezjak, Underwriter, Global Engineering, Swiss Re, Munich, Germany Sergey Moskovskikh, Head of Engineering risks Department, IJSC GEFEST, Moscow, Russia Martina Ringeisen, Underwriter Engineering, Global Engineering, Swiss Re, Munich, Germany Pavel Smirnov-Nebosklonov, Deputy Director, Engineering Insurance Department, Allianz Global Corporate & Specialty (AGCS), Moscow, Russia Philipp Sager, Vice President, Engineering & Property Claims Expert, Claims P&C EMEA, Swiss Re, Zurich, Switzerland Andrey Emelianov, Head of Engineering Division, Senior Underwriter, AlfaStrakhovanie PLC, Moscow, Russia Ulrich Werwigk, Vice President, Claims, Accounting & Liability Management, Swiss Re, Zurich, Switzerland Igor Ryzhkin, Deputy Head of Property & Technical risks Department, Unit Corporate Devision, Rosgosstrakh Ltd., Moscow, Russia Roman Emelianov, Deputy Head of Construction & Erection Insurance Department, OJSC SOGAZ, Moscow, Russia Tatiana Danilova, Deputy director of Reinsurance Department, PJSC IC TRANSNEFT, Moscow, Russia Mikhail Ermishkin, Head of Engineering Underwriter risks Department, Pomosch Insurance Company Ltd., Saint-Petersburg/ Moscow, Russia Alla Loktaeva, Chairman of the Board, Pomosch Insurance Company Ltd., Saint-Petersburg/ Moscow, Russia Maria Morozova, Head of Business Development and Client Management Department, OJSC Russian Reinsurance Company, Moscow, Russia Yulia Kendyukhova, Legal Adviser, OJSC Transsiberian Reinsurance Corporation, European bureau, Moscow, Russia Stefan Saur, Facultative Engineering & Property Underwriter, Munich Re, Munich, Germany Tomasz Zgadzaj, Deputy Underwriter for Facultative Reinsurance Engineering, Hannover Re, Hannover, Germany Gerhard Hurek, Head of Facultative Business Germany, Austria and CEE, Mapfre Re, Munich, Germany Kurt Gebistorf, Member of Management, Senior Underwriter, Engineering Large and Special Risks, Nationale Suisse, Basel, Switzerland Matthias Furter, Senior Claims Manager, Nationale Suisse, Basel, Switzerland Michał Żelaśkiewicz, Product Manager, Property & Engineering, Polish Re, Warsaw, Poland Magdalena Czaja, Chief Client Manager Russia, Senior Underwriter, Polish Re, Warsaw, Poland Eric Bentz, Business Solutions Senior Claims Manager, SCOR Global P&C, Paris, France Pavel Maximov, Head of Property risks department, Moscow Re OJSIRC, Moscow, Russia Peter Tailby, Senior Underwriter Engineering, Arab Insurance Group, Manama, Kingdom of Bahrain 3

Petr Naumenko, General Director, British Insurance House Ltd., Moscow, Russia Dario Popovic, Underwriting & Claims Director, Infrassure Ltd., Zurich, Switzerland Petr Mareš, Underwriter / Facultative Reinsurance, VIG Re, Prague, Czech Republic Dr. Sylva de Fluiter, Deputy Chief Risk Officer, Infrassure Ltd., Zurich, Switzerland Robert Maurer, Head of Engineering Germany & CE, Allianz Global Corporate & Specialty (AGCS), Munich, Germany Dr. Andreas Shell, Global Head of Claims Short Tail, Allianz Global Corporate & Specialty (AGCS), Munich, Germany Alexander Souslov, Deputy General Director, Executive Director, Reunion Insurance Broker, Moscow, Russia Igor Prandetsky, CEO, Reunion AG, Zug, Switzerland Irina Volochkovskaia-Guérin, Director, Reinsurance Placements, Reunion AG, Zug, Switzerland Jean-Francois Rossetto, Senior Underwriter Civil Construction, ACE Overseas General, London, United Kingdom Ivan Samsonov, Director of Underwriting & Reinsurance Department, AzRe Reinsurance OJSC, Baku, Azerbaijan Simon Marshall, Global Construction Practice Leader, Navigators of Lloyds of London, London, United Kingdom Svetlana Chepeleva, Deputy CEO, Chief underwriting officer, Unity Insurance and Reinsurance Company Ltd., Moscow, Russia Alexey Shtanko, First Deputy General Director, ISLAB LLC (RusSurvey ), Moscow, Russia Evgeny Malachinsky, General Director, Cunningham Lindsey Russia, Moscow, Russia Daniil Cherepanov, Deputy Head of Property Claims Department, Cunningham Lindsey Russia, Moscow, Russia Alexander Potitov, Associate Director General, Chief Underwriting Officer (CUO), Liberty Insurance (OJSC), Saint-Petersburg, Russia 4

GEFEST joint-stock Insurance company, Moscow, Russia Vladimir Karyukin Education: Experience: Position: Sergey Moskovskikh Education: Experience: Position: Moscow State University of Railway Engineering Over 11 years insurance experience First Deputy General Director Construction Engineer (Diploma of Moscow State Construction University) Over 8 years insurance experience Head of Engineering risks Department Allianz Global Corporate & Specialty (AGCS), Moscow, Russia Pavel Smirnov-Nebosklonov Education: Experience: Position: Finance University under the Government of the Russian Federation, Moscow, Insurance specialization (diploma with distinction) 5 years Engineering insurance experience Deputy Director, Engineering Insurance Department AlfaStrakhovanie PLC, Moscow, Russia Andrey Emelianov Education: Experience: Position: Rosgosstrakh Ltd., Moscow, Russia Moscow State Construction University, Moscow State University of economics, statistics and informatics, Allianz trainings, MBA (The Russian Presidential Academy of National Economy and Public Administration), strategic management Deutsche Management Akademie, Niedersachsen 13 years of engineering insurance experience (ROSNO 3 years and Alfastrakhovanie 10 years) Head of Engineering Division, Senior Underwriter Igor Ryzhkin Education: Experience: Position: Moscow Automobile and Road Construction Institute, Civil Engineer 30 years as a civil engineer, 16 years as a technical risks insurer Deputy Head of Property & Technical risks Department, Unit Corporate Devision PJSC IC TRANSNEFT, Moscow, Russia Tatiana Danilova Education: Experience: Position: Finance and Economics Institute 17 years reinsurance experience Deputy director of Reinsurance Department Pomosch Insurance Company Ltd., Saint-Petersburg / Moscow, Russia Alla Loktaeva Education: Experience: Position: Higher degree in economics, the candidate of economic Sciences From 1995 leadership positions in Pomosch insurance company Chairman of the Board Mikhail Ermishkin Education: Experience: Position: Moscow Institute of Transport Engineers, specialty economy and management in construction; Moscow International Business School, specialty risk management in construction; Russian Academy of Entrepreneurship, specialty insurance 7 years in construction business; 11 years in insurance business Head of Engineering Underwriting Department 5

Liberty Insurance (OJSC), Saint-Petersburg, Russia Alexander Potitov Education: Experience: Position: Radio and Electronic engineer Since 1993 in property / casualty underwriting Associate Director General, Chief Underwriting Officer ISLAB LLC (RusSurvey ), Moscow, Russia Alexey Shtanko Education: Experience: Position: Yaroslavl Military Academy of Finance and Economics 18 years with Ministry of Defence of Russian Federation, 11 years with VSK Insurance House, Since 2012 ISLAB LLC (RusSurvey ) First Deputy General Director Cunningham Lindsey Russia, Moscow, Russia Evgeny Malachinsky Education: Experience: Position: Licensed Deck officer (graduated from Novorossiysk Marine Academy) Since 1997 with Cunningham Lindsey Russia as a marine surveyor, Loss Adjuster on marine/nonmarine claims, since 2008 Executive Director, since 2012 General Director General Director Daniil Cherepanov Education: Shadrinsk State Pedagogical Institute, Faculty of Foreign Languages, Specialty Teacher of English and French Experience: 3 years Interpreter experience at Uralmash Heavy Machinery Plant; 6 years experience as a Fleet Manager of Nefteyugansk United Airline Transportation Company in United Nations Missions, since 2010 Loss Adjuster in Cunningham Lindsey Russia Position: Deputy Head of Property Claims Department OJSC Russian Reinsurance Company, Moscow, Russia Maria Morozova Education: Experience: Position: Moscow Engineering and Construction Institute Since 1993 in reinsurance Head of Business Development and Client Management Department OJSC Transsiberian Reinsurance Corporation, European bureau, Moscow, Russia Yulia Kendyukhova Education: Experience: Position: Pyatigorsk State Linguistic University (Department of International Relations), Moscow State Academy of Law (Law, bachelor) Since 2010 Transsiberian Reinsurance Corporation, OJSC Legal Adviser Unity Insurance and Reinsurance Company Ltd, Moscow, Russia Svetlana Chepeleva Education: Experience: Position: Financial University under the Government of Russian Federation 27 years Deputy CEO, Chief underwriting officer Moscow Re OJSIRC, Moscow, Russia Pavel Maximov Education: Experience: Position: All-Russian Distance Institute of Finance and Economics, Specialty Finance and Credit 20 years insurance/reinsurance experience, since 1999 with Moscow Re Head of Property risks department 6

Swiss Re, Munich, Germany / Zurich, Switzerland Manuel Bezjak Education: Experience: Position: Civil Engineering and MBA degree (TU Munich) 5 years construction industry (special foundation), 6 years primary insurance (HDI-Gerling). Since 2010 Swiss Re Underwriter, Global Engineering Martina Ringeisen Education: Experience: Position: PhD in Biosystems, Engineering Studies Industrial Engineering and Management Client service in banking sector, 5 years in mechanical and plant engineering. More than 2 years experience in reinsurance Underwriter, Global Engineering Philipp Sager Education: Experience: Position: Ulrich Werwigk Education: Experience: Position: Master of Science in Mechanical Engineering (ETH), Master of Advanced Studies in Information Technology (ETH) Senior Gas Turbine Commissioning Engineer (ABB/ALSTOM), Senior Commissioning Engineer for Turbo Compressors (MAN Turbo), Senior Consultant for Kiln Control and Operation (Holcim) Vice President, Engineering & Property Claims Expert, Claims P&C EMEA Lawyer 17 years as a lawyer in the construction industry, since 2005 as claims manager at Swiss Re with the main focus Central and Eastern Europe and core area in property and engineering claims Vice President, Claims, Accounting & Liability Management Munich Re, Munich, Germany Stefan Saur Education: Experience: Position: Civil Engineer 4 years in Underwriting Facultative Engineering & Property Underwriter Hannover Re, Hannover, Germany Tomasz Zgadzaj Education: Experience: Position: Civil Engineer (1997, TU Berlin) 17 years of construction and site management, since 2010 Hannover Re Deputy Underwriter for Facultative Reinsurance Engineering Mapfre Re, Munich, Germany Gerhard Hurek Education: Experience: Position: Bayerische Rück / Swiss RE Since 1982 in reinsurance business Head of Facultative Business Germany, Austria and CEE Nationale Suisse, Basel, Switzerland Kurt Gebistorf Education: Experience: Position: El. Engineer HTL and Executive Master of Business Studies In the insurance field: 4 years Global Corporate Zurich Insurance, 2 years Nationale Suisse Member of Management, Senior Underwriter, Engineering Large and Special risks 7

Matthias Furter Education: Position: Mechanical Engineer Senior Claims Manager Polish Re, Warsaw, Poland Magdalena Czaja Education: Experience: Position: Warsaw School of Economics 2000-2001 Ernst & Young, since 2004 Polish Reinsurance Company Chief Client Manager Russia, Senior Underwriter Michał Żelaśkiewicz Education: Experience: Position: SCOR Global P&C, Paris, France Institute of Banking and Insurance in Warsaw. Engineer and Master s degree 17 years in insurance industry as property and engineering underwriter, team manager. Since 2010 at Polish Re Product Manager, Property & Engineering Eric Bentz Education: Experience: Position: Civil Engineer specialized in geotechnics 9 years with contractors (Tender, Methods, on site in France and abroad), 16 years in reinsurance with SCOR and Swiss Re (CAR/EAR, IDI, FAC, Treaties, direct insurance) as Underwriter and more recently as Claims Manager Business Solutions Senior Claims Manage Arab Insurance Group, Manama, Kingdom of Bahrain Peter Tailby Education: Experience: Position: H.N.D. Mechanical Engineering Over 30 years insurance experience Senior Underwriter Engineering British Insurance house Ltd., Moscow, Russia Petr Naumenko Education: Experience: Position: Russian State Social University, Economist in the finance and credit Total experience in insurance 20 years, CEO 10 years General Director VIG Re, Prague, Czech Republic Petr Mareš Education: Experience: Position: Technical school in Prague 10 years at Allianz as Senior Underwriter Engineering Insurance, International Corporate Clients Department, Industry Insurance Division; 4 years at VIG Re as Underwriter Specialist Property and Engineering Facultative Reinsurance Underwriter / Facultative Reinsurance Allianz Global Corporate & Specialty (AGCS), Munich, Germany Robert Maurer Education: Experience: Position: Diploma in insurance administration (DVA), Fellow of the Chartered Insurance Institute (FCII) Various positions within the Allianz group in Germany and abroad, including Head of Engineering and Marine department of Allianz South Africa, Head of the Strategy department Property/ Engineering of the Allianz Global Risk Division in Munich. Since 2007 Head of Engineering Germany of Allianz Global Corporate & Specialty Head of Engineering Germany & CE 8

Dr. Andreas Shell Education: Experience: Position: OJSC SOGAZ, Moscow, Russia Attorney at Law Over 20 years experience of claims management, both within Allianz and as a practising lawyer, senior management positions, member of ARIAS Europe and serves on international arbitration panels Global Head of Claims Short Tail Roman Emelianov Education: PhD Experience: Over 7 years in construction insurance Position: Deputy Head of Construction & Erection Insurance Department ACE Overseas General, London, United Kingdom Jean-Francois Rossetto Education: Experience: Position: Master of Science in Civil Engineering ESTP Paris Over 25 years experience in insurance, mostly Property and Engineering Facultative Reinsurance Senior Underwriter Civil Construction AzRe Reinsurance OJSC, Baku, Azerbaijan Ivan Samsonov Education: Experience: Position: University of Missouri-Kansas City, MO, USA, National Academy of Aviation, Azerbaijan, The Chartered Insurance Institute, Certificate in Insurance, various professional trainings Over 9 years reinsurance experience Director of Underwriting & Reinsurance Department Navigators of Lloyds of London, London, United Kingdom Simon Marshall Education: Experience: Position: Bachelor of Engineering with Honors, Chartered Mechanical Engineer 10 years industry experience followed by 17 years insurance experience Global Construction Practice Leader Infrassure Ltd., Zurich, Switzerland Dario Popovic Education: Experience: Position: Mechanical Engineer, MAS BA 20 years industry experience (Power Plants), 5 years insurance experience (Underwriting and Claims Management) Underwriting & Claims Director Dr. Sylva de Fluiter Education: Experience: Position: Reunion AG, Zug, Switzerland PhD, LLM, MBA, MSc 15 years of international experience in the insurance and reinsurance industry Deputy Chief Risk Officer Igor Prandetsky Education: Experience: Position: Doctor of Philosophy in Economical Sciences, Shevchenko University, Kiev, Ukraine Over 20 years in reinsurance business, incl. Munich Re and Swiss Re, since 2009 with Reunion AG as reinsurance broker CEO 9

Irina Volochkovskaia-Guérin Education: Saint Petersburg State University of Economics and Finance, Russia; speciality Finance and Credit, specialization Insurance (Diploma with Honors), various professional trainings Experience: Over 9 years reinsurance experience as a Head of outwards reinsurance department, Senior underwriter, Director of reinsurance placements Position: Director, Reinsurance Placements Reunion Insurance Broker, Moscow, Russia Alexander Souslov Education: Experience: Position: High 8 years in Property and Construction Insurance Deputy General Director, COO 10

Risk assessment of facilities under construction and erection for insurance purposes 1 chapter Igor Prandetsky Good morning ladies and gentlemen. It really is a pleasure to see all of you here and makes us at Reunion feel very proud as we have spent a long time organizing this event. We are very proud to welcome you today to the 3rd Reunion Engineering Insurance Round Table. We invited you all as you are representatives of the leading Russian and international insurance and reinsurance companies. This event is aimed to give us the opportunity to freely discuss issues that we view as important. We feel this was achieved in Munich two years ago and last year in Sochi. We want to continue this pattern. We would also like to thank our regular participants, particularly those who have now attended all three events. We have over 40 registered participants here today. I would like to stress that it is your experience that we value. We encourage you to share your experiences with the room. As with previous events, the main focus of our discussions will be the application of insurance and reinsurance practice with regards to the Russian Engineering Insurance Market. During the previous two events we selected 11 topics to discuss: five in Munich and six in Sochi, with all six relating to the underwriting of engineering. This year, we have chosen a different field of topics all based around engineering insurance and reinsurance. Topics include risk management and claims handling with regards to engineering insurance and reinsurance within Russia. Comparisons can be drawn between a claims free policy and a healthy life. I can compare risk management with the prevention of diseases and maybe claims handling as a treatment for illness. Both aspects are very important. We need to sell our services to our clients and in return our clients expect a fair approach. We feel this is a two-way relationship that should be based on trust and professionalism. We want to discuss different aspects of risk management with you all and also claims handling, however we haven t chosen specific topics, we have just split six hours of discussion into two hours for risk management and four hours to discuss risk claims handling. Our discussions will be held in the same manner as in previous years meaning there will be a 15 minute introduction. I would like to thank all of the gentlemen for the time they have devoted into creating their presentations. The presentations will be followed by a free discussion period. We feel this allows flexibility. Our first discussion is to be made by Alexey a representative of RusSurvey with an introductory presentation with regards to Risk Management Aleksey Shtanko Good morning colleagues. The RusSurvey group of companies has been operating in international markets since 1996. Risk assessment is one of the key areas of business for the group and has been a major focus. As of today we hire the largest number of surveyor staff with extensive experience out of any of the surveyor organisations. The assessment of construction risks is done under international standards, in particular The London Engineering Group Survey Protocols which takes into account the specific environment in the construction industry in Russia. CAR risks, the insurance of owners and other participants have become increasingly important. This involves the pre-construction stage, the construction stage and afterwards when the surveyors are determining the probability of danger to be able to assess the probable maximum loss. The construction stage is the least extended by adding the liability assessment and also the safety systems liability. In the assessment of CAR risks, the following features should be taken into account. Firstly, the continually changing situation of the construction site, which is specifically relevant to risk progress reports. Unlike any other type of insurance, the value of the building being constructed is growing continuously from 0% to 100% of the insured amount. Accordingly, the extent of construction risk is also expanding. For example, during initial ground works, the risk of possible fire is limited to temporary structures and cannot lead to substantial damage. As a whole, the risk of fire is much more relevant in assembly and commissioning. According to fire safety requirements in Russia the fire safety systems should be in place only at the commissioning stage and the operational stage with the exception of internal finishing. In many cases automated fire safety devices are only put into operation after commissioning. But expensive equipment and materials allocated throughout the building often remain in warehouses during construction and these warehouses are not always sufficiently equipped with fire protection devices meaning fire risks are substantial. When damage does occur in such a warehouse it is often a worse fire than at the construction site. Any accident of this kind will result in a delay in the 11

commissioning date. As well as the financial losses, actual damage can be major and this must be taken into account when determining the insurance coverage. When office buildings and warehouses are insured, the normal practice is to sign rental contracts in advance and any delays in commissioning will result in a loss. Very often we witness unsatisfactory controls over the compliance of safety rules in fire procedures. The potential damage to the construction project can only be partially recovered by liability insurance covers of the contractors. Emergency fire units usually do not perform any training at construction sites and do not have the necessary training or information about the specific potential hazards on sites. Risk assessment is usually made in a number of steps. Once the preliminary information is collected, a physical integration programme is set with the surveyors. From this, informing the parties concerned is critical in such inspections. The personnel need to arrange the necessary meetings with the relevant parties. Not only does the construction site need to be inspected but also the warehouses of materials, which often hold high value goods. Once the inspection programme is confirmed, the surveyors will visit the construction site, hold meetings with personnel on site, study working documentation, study the total working log, inspect the technical supervision logs, review the construction laboratory documentation, view the quality of the construction material and consult many other important documents with particular attention paid to the industrial and fire safety on site. A typical report on risk will contain the following: last year s losses, insurance coverage, a description of the site, geological and climatic conditions, the general layout, a description of the project, technical and economical parameters, planning solutions and construction technology, the progress of work, current preparedness, industrial safety, technical surveillance, safety, fire safety, fireworks, water sources, fire fighting appliances and fire gates. Security issues will involve: including access control, physical security guards, technical tools, risk, climatic risks, delays in commissioning, mistakes in design, theft, and so on. When necessary, reports also include a valuation of the potential damage as a result of various risks being realised. However, risk assessment is not a guarantee of preventing any potential situation but instead enables you to minimise the consequences which makes this beneficial for all parties concerned. To conclude my presentation, this slide show highlights a few examples of inspections performed by RusSurvey s experts. To prevent the events occurring on the slides you need to collect the necessary information and understand the potential impact which means mitigating possible risks. To fully exclude potential hazardous situations is impossible. But the assessment of insurance and compliance with an expert s recommendations will not only enable you to categorise your insurance items but also to prevent dangerous events and losses. Igor Prandetsky Thank you very much Aleksey. So ladies and gentlemen we have now touched on the subject starting with a wide range of issues. As we are talking about engineering insurance it is critical that we understand the scope of risks and also the exposure in the course of construction. Why don t we now openly exchange our opinions on the issue? Philipp Sager I am involved in handling engineering claims and I feel that it is wonderful to conduct risk surveys and risk inspections. I have seen many good reports in which good recommendations have been given but sometimes I see these recommendations are not implemented. Due to this, the risk surveys can be pretty useless and I don t see a way to force the implementation of standardized policies. Simon Marshall I spent some time as a risk surveyor and you have to consider the advantages of complying with recommendations. Often the biggest effect is on premium. As insurers, a recommendation is to correct something that is unsafe and that can limit the coverage that we provide on policies. We can also amend coverage if we observe something through the surveys that is not what we believe it should be. I am not sure we have the same legal rights but perhaps we can consider the limit of what offer the insured. Certainly, the opportunity to discuss it with the insured is important. I would hope that any insured would be open to assistance in improving their risks because at the end of the day insurance should only be a last resort. Maria Morozova Legislation provides for a number of measures that should be taken into account on a construction site to ensure that there is adequate fire safety. I believe that our market requires work on a couple of key points. The first point is one of acceptance of risks for the insurer. I believe it is up to the insurance company to act promptly in this process but I ve never seen a list of measures covering what needs to be done. In particular, there should be created an actual record covering specifically what is covered by the project design and is actually done at a specific construction site. So when a risk is accepted for insurance you can identify what needs to be done according to the law, according to general practice norms and what needs to be done on the particular construction site. From this we should be able to see what is actually being done on a construction site and if it complies with existing requirements. The same applies to claims handling. I believe the reports we see on claims handling lack this first part. We can work out why loss occurred and to which amount but 12

we cannot see in the report what was supposed to have been done in part of loss prevention measures. Therefore, while handling the claims we have to be able to actually see why those fire safety measures, which are specified by a project, why they failed to work. We also need to provide feedback to the insured party to convey that this is an area getting special attention from us, is something we are looking at carefully. We want to help the insured in every way possible. In the same way we should be able to use analysis such as the surveyor s reports to accumulate experiences for the future and provide feedback to the insured and insurance companies. It would be interesting to hear if this happens on the international market. Eric Bentz I would like to state several points. Risk surveyors are for the benefit of the Insurer but also for the Insured itself as losses are covered or not by the insurance contract. I feel that the surveyor should sell the concept, not only its image, and prove the benefits of it to the Insured. Some recommendations are not necessarily implemented by the Insured. Then, what can you do as an insurer? There are special clauses that state if recommendations are not implemented then the coverage can be stopped. However, as Insurers are in commercial marketplace this endorsement is rarely applied. I have seen it twice maybe in ten years but this is something I feel Insurer can be stronger on. Again if we can sell the benefit of the insurance survey it will be for the benefit for the insurer but also for the insured. Having said that it is true that the implementation of these recommendations could lead to extra expenses to the Insured. For instance the use foam on a construction site that burns easily and as a result leads the Risk Surveyors to recommend another product unfortunately more expensive. What will be the position of the contractor? He will say to his own client Okay I can do this but it will cost you more because it s not in my budget. Depending on the contract details between the Owner and the Contractor these recommendations are indeed not easy to manage. It s quite an interesting topic and not an easy one to implement. I have participated in a number of surveys and I can see the limitations in the field that will need to be worked on. Gerhard Hurek I would like to comment on how we can implement recommendations. I will give you an example of what has happened in Germany in the steel industry. There were a couple of major losses with a high frequency of loss. Following this, the insured was hit with what they call penalty deductible. In this instance it was deductible of 100 million when the usual deductibility is 20 million. But it was clear that the insureds could reduce this deductibility if they fulfilled certain recommendations. Three of the leading insured companies did this and were able to reduce and receive a discount on their premium. The last big loss occurred in 2006 and losses have ceased. Now, we want to reduce the deductible back to 20 million, which will help the insured, the insurance industry and the reinsurance industry. Igor Prandetsky Thank you very much Gerhard. I feel it s important for us to understand how risk management issues are handled and organised in the Russian construction industry. The implementation occurs on site and it s important that professional Russian insurance companies introduce certain policies to control the risk on the sites that they are insuring. May I ask for Michael Ermishkin to comment on this? How do you control risks? Manuel Bezjak Maybe I can add another question as this is such an exceptive topic. I see a lot of Russian construction sites in my line of work and thus a lot of fire safety rules and a lot of security issues. My question is how is the risk management really implemented and are there emergency scenarios on site if something occurs? How are emergencies in particular areas handled? Mikhail Ermishkin To begin with I will start with the control system in Russia which is changing dramatically. Up until very recently the Russian control system was based on Soviet time principles. This involved quite a few rules and regulations that described in great detail the rules around of all kinds of work including both design and construction. In the last ten years, the Russian government has adopted a policy to simplify these safety rules and now most of these are mainly recommendations. Now let me move on to the role of the developer on a construction site. Within the state control system for construction sites in Russia there are specific authorities responsible for this and they have the right to stop the work if there is a non-compliance with existing requirements. The insurance companies have no leverages of this type. All insurance companies can do is refuse to pay any compensation in the event of the non-compliance of particular rules or regulations. On the other hand this may not always be the case if the dispute between the insurer and the insured goes to court. Russian courts take the side of the insured because there is a negative attitude to the insurance business within Russia. The insurance company has the right to deny paying the indemnification but this can undermine the rest of their construction insurance business. This is the art of the insurer: to be able to pass between two mountains and find the river with the treasure, as the Ancient Greeks used to say. By paying damages in the event of a premeditated action on the part of the insured they may also fail to comply with 13

safety rules in the hope that the insurance company will compensate for that. It is important that the insurer does mitigate and minimise these losses. Equally important is that the insurer educates the insured that safety rules need to be complied with whether they are required by government or not. Andrey Emelianov This is an important topic. I would like to focus on post insurance assessment for complex insurance objects or expert evaluation assessments. You will probably remember my last presentation where I told you about the Federation Tower. We had a quarterly survey held jointly with the RusSurvey and each report contained recommendations as to what needed to be anticipated and rectified to avoid losses on site in future. However, to sell or rather to force the client to comply with all the recommendations was very difficult. Michael was right about the leverage being denying paying for damages. These can be sufficient grounds for denying the payment but I am not a 100% sure this will work in all cases and it is important here that we include all post-insurance surveys into the insurance practice. This is because there is such competition in the market now and great pressure on the insurance pricing. If the construction object is complicated then these reports need not be quarterly and may be less frequent. It is very important that they are done, however, and you need to explain this to the client and, of course, to show them where the problem areas are. Pavel Smirnov-Nebosklonov I would like to add another way to make implementation of these regulations more effective that is by changing your attitude towards the client. It is important not to see the client as a single entity: they have different departments and individual managers. The risk manager for a department could be fired in the worst case scenario. In this case people who are personally interested in safety could be a major source of internal influence maybe more than the surveyor or risk managers. We have visited facilities with our clients and they have asked us to detail many possible recommendations, even the smallest ones. Improving a culture of cooperation allows you to get the best results. Igor Prandetsky Thank you very much. I think it is a very important aspect which we would like to stress. We ve noticed and we ve compared this situation from 10 years ago to today and found some interesting results. We can really state that the general culture, approach and understanding of risk management approaches with Russian clients and policy holders has developed in a positive sense. We had discussions yesterday in a free and friendly atmosphere one on of our discussions focused around the role of risk managers for all big clients and policy holders in Russia. This is important as this word was not actually known 5,6,7,8 years ago. As only the most advanced companies had their own risk managers. Nowadays every company has a department and a risk manager so general approach changes are a good thing. I feel insurers and reinsurers played a big role in this process to educate and to bring this application in the companies. Stefan Saur Regarding risk management in Russia I would have a question to RusSurvey. I could see from the presentation that you mainly survey EAR-risks but I would also be interested in surveys of CAR-risks, in particular tunnelling risks. As you said the risk management is becoming more and more important in Russia. Do you think it is possible to implement the tunnel code of practice (TCoP from ITIG) for tunnelling risks? I ask for it because I think that it would be very important since tunnelling risks are of course very challenging projects which should be well controlled and the responsibilities should be clearly defined. Internationally the TCoP is generally accepted but if we ask for it in Russia we have got the answer that it is not possible and also not necessary to implement it because the contractors have their own risk management system. Igor Prandetsky To what extent is it realistic to introduce the commissions of tunnel construction code in Russia as a criteria for insurance and reinsurance because this code of practice exists internationally? Russian cedents do not want to have this direct reference to the construction code. Aleksey Shtanko In the Russian Federation there are certain requirement applying to construction and in particular to tunneling. For each particular object of construction there is project documentation which is prepared and approved. The mentioned code as far as I know is not a mandatory document regulating construction activity in Russia and may be viewed just as a recommendation. The insurer can probably insist on the insured having to apply the versions of the code. As for tunnel construction it is true that RusSurvey is experienced both in risk assessing and claims handling, including cases of collapse and soil injection. However the reasons for this may be diverse. The reason of the latest tunneling loss in Sochi namely the injection and soil ingression on the tunnel was caused by the construction of buildings on the surface without a proper construction permit being issued. They now have been partly removed, but all of them were built after the tunnel construction began. Of course the contractor of the tunnel project was supposed to reach this construction permit before the work was started. Finally it was discovered, there were more than one 14

hundred buildings illegally built and had to be removed. Igor Prandetsky Thank you very much. I would like to mention at this point that according to our experience, provisions such as subjectivities which are included into the reinsurance slip are seen as factors which would likely limit reinsurers liability so the Russian Insurance company fears that in case of a loss the reinsurer may refer to the tunneling codex and say Look, the provisions of this tunneling codex were not fulfilled so we will not pay. However, at the same time we completely understand that the reason for mentioning tunneling codex when looking at reasonable risk management. The policy on site is just as responsible and necessary to control risks on site as anything else. Everyone is interested in this such as the insurer, reinsurer and the policy holder. Sergey Moskovskikh I agree with Mikhail in that risk must be allocated to the insured as well as the insurer. The insured must be held directly responsible for what they do. But what is really happening now on the Russian CAR insurance market. There are a large number of insurance brokers that have entered the Russian CAR insurance market and they are approaching directly construction customers as well as major investment companies. They will then offer them insurance protection of large construction projects and attempt to move all responsibility from the insured to the insurer. In doing so, they often ignore the reservations typical of insurance and reinsurance contracts as they interpret them to the benefit of the insured. In this situation everyone would prefer as broad coverage as possible, and if granted, would easily disregard construction and assembly safety regulations. They are supposed to bear responsibility for safety but instead they would think: Well I m insured anyway, they will pay whatever happens. In this respect out international colleagues who are joining our CAR insurance market often bring with them unrest, as they offer the insured maximum coverage you would not normally receive in Europe. It is true, as was mentioned by previous speakers, that companies have their internal risk management services. But without very tight control from the insurer and unless responsibilities are properly allocated between the insured and the insurer, losses will persist on construction sites just because contractors will not comply with safety measures. Both parties will then suffer financially: the insurer will face higher claims while the insured will have the project delayed. Any recommendations on the part of the insurer will be useless without allocation of liability between the insurer and the insured. Igor Ryzhkin The Russian construction law is in the making. It is 20 years since the Soviet Union ceased to exist and still safety regulations are very much in the Soviet style. As of today, apart form the Urban Building Code, there are two key legislation documents governing construction: the Technical Regulations for Fire Safety and Technical Regulations for Safety of Buildings and Structures. These are two documents which rely on very different approaches. The fire safety regulations take into account risk management requirements but when the Duma debated and provided building and structure safety regulations they removed everything about risk management completely. So any requirements from insurers about the inclusion of risk management in CAR insurance contacts meet with insurants opposition. So my conclusion is that the role of the insurance companies in the legislative process is insufficient in particular when draft legislation have construction regulations put in place. Not a single insurance company was involved, even those that had this opportunity were not involved in drafting this technical regulation document. Igor Prandetsky Thank you very much, Igor. As a general point, everyone who is related to the Russian insurance market knows that Russian insurance legislation is developing. But there are still gaps which are not clearly regulated. Eric Bentz Some construction codes don t necessarily prevent material damages (like paraseimic codes) and as a result are not for the benefit of construction policies by improving the risk. Svetlana Chepeleva One important theme in Russia is the pre-construction stage as it relates to reinsurance. There are some projects where the reinsurer is changed during the process and the conditions of insurance change. Maria Morozova Svetlana raised a very important issue around clauses that say if certain conditions are not met we will deny the payment of claim. I am not supporter of this approach. It is as if we wait and when a loss happens we will deny payment of indemnification. We are professional market place and we should not use such methods for safety. Legislation of course everything is developing in Russia and the law will be better in the future. I believe that putting such clauses in the contract is good but, as a reinsurer, it will make the client very uncertain. On the one hand they are buying reinsurance; on the other hand, there is subjectivity which they have no idea how to work. I would rather not rely on such subjectivities as a guarantee the frequency of losses in construction will diminish. Andrey gave an example of a complex facility where they 15

cooperated with the RusSurvey to do a mid-term survey. I would rather emphasis the importance of teamwork between the insurer and reinsurer in part of risk progress inspections. I am civil engineer by background and it is my belief that if insurers and reinsurers visit the construction site they can use to explain to the client how the contract of insurance works and to remind that the insurers liability may be limited should certain obligations of the insured not be fulfilled. If we remind them it will work much better than any clause. Unfortunately, as an insurer we are involved in a large number of CAR cases and settling a lot of claims. In risk allocation I do not see this being taken into account. We are dealing with the very big insurance coverages and our international colleagues are the leaders. I do not see the brokers and leaders having an agreement with the insurance company that a couple of visits of risk engineers will take place in the course of construction. I would emphasise on this. Why don t we look at sites more. It will be a great help if the insurance company could say if you do want your risk placed with A- security then we visit your construction site two or three times and do some monitoring. Let s put into the insurance contract a clause where you promise that you will allow us to arrive and do the inspection. That would make out coverage much more transparent and the insurance much more effective. The process with the insured will be much more fair and open. Petr Naumenko It is not as bad as it would seem. It is true that Russian law is improving but let me remind colleagues that the construction business in Russia operates under the selfregulation principal. Every company that does construction is a member of some SRO. There are about 240 of them all very different in nature. Some of them are more commercial, some may not be 100% compliant, while others are very decent with an emphasis on quality. Because they apply certain qualification requirements to construction companies you will not receive a construction permit unless you employ certain number of highly skilled people in your organization. They also do a lot of training. There is a law in Russia on self-regulation and an Urban Building Code with the principal of subsidiary liability. Starting from July 2013 Article 60 of the Urban Building Code changes the practice of indemnification in Russia. The joint liability of principal, designers, self-regulated organizations, state expert companies, construction supervision authorities is introduced. From my point of view both the self-regulating organization and its members should care who the other members of their SRO are because they will have to pay money if some members are not competent. This financial mechanism will make the quality of construction much better. The second source of improvement is the introduction of technical regulations. Everyone who represents the construction business including government authorities and the national construction associations want such regulations to become effective as soon as possible. As soon as it happens I am sure the attitude of construction organizations, construction customers and contractors will change and they will take risk management seriously. At the moment, it is very difficult to force the insured to do something. The court often takes the side of the client. Their principal is that the insurer is always wrong. Using clauses that say if you don t do something, we will not pay do not work. But if you apply economic tools to encourage the insured to risk manage that will work better. For example, if the insured knows that if RusSurveyor prepares a surveying report and he follows its recommendations he will pay 0.05% the premium but if he fails to do implement these he will pay 1%, it makes it cheaper to implement those recommendations then to pay a higher premium. I absolutely agree that insurers and reinsurers and brokers should work as a team. This is the only way we can make any progress. It was also be nice to see our western colleagues to take part in the Russian law making process. I know that people working in the construction sector are doing everything possible for Russian legislation to move improvements. I believe these will be achieved for the better. But there are some improvements we need to take into account in assessing the risk of the construction. Igor Prandetsky Thank you very much, Petr! Thank you, ladies and gentlemen! Let s take a break. 16

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Requirements to the liability insurance of builders 2 chapter Igor Prandestky Let us continue. We now start the second part of our discussions on risk management. I promised that Mr. Dr. Shell could comment and then Igor will do his presentation. Dr. Andreas Shell When listening to the discussion that we had before the break, it struck me that we were only talking about laws and regulations and forcing clients to do things with contractual clauses. But our insureds need to improve and I don't think laws or regulations are the key. It's about risk perception and social awareness of risk and what risk means. It seems to me that some insureds still believe that when they buy a life insurance policy they won't die. That's not true. They will die and somebody else gets the money. The issue here is similar. With risks, you have to be aware. One study showed that even if an insurance contract pays out in full, it still only covers about 40 percent of the actual economic loss sustained. That should tell you that insurance is not the only solution, it's only a tool. It seems to me that some insurance buyers, or the majority of insurance buyers in Russia, need to understand that being aware of risk and dealing with risk is far more important than anything. That needs to be not only a perception at the top but something needs to be carried through the organization. Rules and regulations do not work unless the culture in a company educates people around what risk is, how to deal with it and that it is important to address risks. Otherwise, you will put yourself in financial jeopardy. So discussions around laws, regulations and procedures are all very nice but the more challenging aspect of transforming society is around understanding risks and not delegating that process to laws, insurers or somebody else. If you put pressure on people or force them to do things, that's not going to solve the problem. I think insurers and brokers are critical in establishing this culture and helping insureds understand they primarily need to address risks themselves and that insurance is only one tool. Igor Prandestky Thank you very much, Mr. Dr. Shell. So I suggest, Igor, you would continue with your presentation. Igor Ryzhkin My presentation today will be purely informative. I will touch upon the topic of TPL insurance in light of the new Urban Building Code. The Urban Building Code is a key legal enactment for the construction sector in Russia. The new version Code, in force from July 1, changes substantially the risk disposition of the various parties involved in the construction process including insurance companies. All construction and erection risks can be split into four types, depending on the type of hazard. Number one is faulty design, defective workmanship and engineering survey, and errors by construction contractors. The second category includes various third party actions, which are treated differently in different laws. Group three includes catastrophic risks and force majeure. The fourth group includes illegal acts by third parties. The law approaches these groups in differently ways. Under the current Urban Building Code, construction companies that caused damage by doing their work improperly, or designers who put the project together in the wrong way, or engineers who made mistakes when identifying construction site conditions will be held liable to the persons hurt. Once damages are paid the injured person can also claim indemnification from self-regulating organization (SRO) that issued the relevant work authorization and assumed liability for unpaid damages. There is also joint liability for organizations that performed expert review of project documentation and engineering surveys on behalf of the government, as well as construction supervisory authorities. If the designers, land surveyors and construction contractors responsible for damage had their professional liability insured, the insurance company will pay the damages first within the insured amount. The unpaid portion of damages will be covered by the SRO, followed by the government and the authorities that performed expert review and control of the work that caused damage. The new version of the Urban Building Code amends the system for damage liability. There are now different indemnifications mechanisms for different types of construction projects. In the case of multi-apartment blocks, if damage was caused through faulty design, engineering survey or construction, the injured person may claim damages from the entities that prepared project documentation, performed engineering survey and construction work; and, by way of joint liability, from SRO s authorizing the work, organizations that completed expert review of project documentation and surveys, and finally, to the government as construction supervisor. If damage was caused by failure or destruction of a construction project other than a multi-apartment blocks, the liability for damage lies with the construction company/developer in the construction project. It is obliged to pay not only damages but also RUB 3 million rubles in compensation to family/spouse in case of mortal injury; RUB 2 million rubles for severe bodily damage, and RUB 1 million if bodily damage is moderate. These are fairly large amounts. We estimated that those 26

compensations alone in last year s claims in Russia could amount to RUB 1.5 trillion. Having paid damages and compensation the construction company can have recourse against the state and the organizations that were involved in expert review and control of the construction project. The builder s liability can be insured under the CAR/ EAR coverage Section 2. However, this section does not currently cover compensation, nor does it cover damages payable to employees of the insurer and insured persons; but the new Code requires such coverage. With due regard to the above-mentioned provisions in the new Urban Building Code, the Rossgosstrakh insurance company has written a number of rules concerning TPL insurance for entities involved in construction project development and implementation. We suggest colleagues would consider the possibility to have those risks, i.e. damage to insurant s employees and insured persons and compensations, reinsured by major reinsurance companies. In particular, we ask you to consider the inclusion of the latter two risks as additional risks under section two of the CAR/EAR policy. Igor Prandetsky Thank you very much, Igor. This shows how insurance legislation in Russia is developing. Who would like to add to this subject? Michał Żelaśkiewicz Adding to the topic of risk management, we have to keep in mind that an insurance policy is an agreement of a great trust. We, as insurers or reinsurers, are able to cooperate with a client to a certain extent. In the end, it's the chief officer of the construction site or the manager of the whole construction project, who is the specialist and has the greatest knowledge of the issues related to the construction. As insurance and reinsurance companies, we can discuss our view in mitigation of a loss, but the final realization of the contract is done by these specialists. Our influence is still limited. That's why an insurance policy it is an agreement of trust. The cooperation of all parties is important and can lead to prevention. Additionally, we also have to keep in mind that risk management is a very broad topic. Insurance is only one of the tools of risk management. Therefore, the trust in the realization of construction works is a part of it. We consider risk management on a daily bases. When we buy a car, for instance, we deal with certain amount of risk management like whether we choose a powerful engine and its economic usage. When we see what kind of safety systems are installed, that is also risk management around our health. Insurance is somewhere at the end actually. What kind of coverage we buy and what parameters we have could influence the premium in the end. Risk management as a topic is very important for construction sites but a broad subject, which as insurance companies we are only part of, but not the other way around. Simon Marshall My counterpart said that insurance is based on trust. But ultimately it is a contract and places certain obligations on the insured and insurer. The insured has an obligation to act in safe and proper manner. It is all about risk, risk control and coverage. The reason insurers conduct surveys is to get a picture of how the risk is managed and the knowledge transfer mechanism. The surveyors visit locations in different parts of the world. They see various conditions: the good and the bad. Peter Tailby Not all things are equal. Our role as insurer and reinsurer is in selecting risks but contractors can vary. I'll give you an example. Kuwait-city is enormously crowded so the authorities are building two eight-lane highways from the city center out to a new city. These highways are very similar in construction and only 500 meters apart. But one of them has series of claims. They've had some large losses and attritional losses. The other one has run pretty much risk free. It's all to do with a quality of the contractor. I think that's an important part of what we evaluate. When we visit these risks as underwriters, we are gaining knowledge of the conditions that make us feel comfortable that ensuring the terms and the prices that we have set for the risk are adequate. Manuel Bezjak What has been missing from this discussion is any mention of entrepreneur risks, which are borne by the contractor. They have to act as if they are not insured. We cannot cover everything and we do not want to cover everything because there have to be certain entrepreneur risks they cover by themselves. Coming back to the tunneling code of practice, this is going into the same direction. There are many construction companies in the Russian market with great experience. They know how to handle these risks; they have the knowledge. I don't really understand why there is such a fear of applying a tunneling code of practice, because they are really acting according to the standard already. Vladimir Karyukin In fact, Article 60 has been amended in the Urban Building Code but there are diverse opinions on that. We at Gefest are ready for this law. But even among construction companies opinions differ. As for risk management, we do all of that by ourselves because in the underwriting department and engineering risks department we have engineers with years of experience working at construction sites. Those people 27

understand what is needed. So, when we try to advise clients, although the insurer cannot impose anything, people listen to us. We are invited to construction conferences because they want to listen. Of course, our recommendations are not mandatory but in many cases our recommendations have prompted them to adjust their practices. Of course they are under the pressure on their own schedules and they don't want to lose their face but we normally suggest that for risk management they use our staff. I recommend you should have people in your departments who really know this stuff. As for tunneling, I used to build metro tunnels in Moscow. Yes, the code is now in place. Gefest is a member of the Russian Tunnel Association and there is an International Tunneling Congress taking place in Zurich right now. We have in our portfolio very complex, large-scale projects. We do global risk management and we are not just insurers but life-long business partners. We want our clients to see us as more than a partner who will help in the case of financial losses. Then they will take our recommendations more seriously. We could put a provision in any contract that they must implement our conditions, but unfortunately, if something happens the courts will force us to pay unless there is intent on the part of the insured. So, do your best to be partners with your clients. And do that even before you win a contract. Roman Emelianov Things are not too bad in risk management. I would like to share some examples of successful client regulations. In offshore facilities where construction is of a very specialist type, we found that by applying various construction certification methods and by directly monitoring the tools used, we have succeeded in making our clients projects safer. Originally, there was opposition and they might ask why a marine warranty surveyor was arriving but then they recognized this is highly skilled person giving very useful recommendations. We also had the condition in place that we could issue breach of warranty if our recommendations were not taken. It was tough but afterwards they found that the outcome was positive and our clients did accept our recommendations. If there is a good will on both sides in a construction project in Russia you may make projects safer. Mikhail Ermishkin The issue of including an insurance contract as a provision into the tunneling code was mentioned already as a tool to force the insured to comply with the code. In fact I don t think that this is a big problem. A few years ago when insurers were very tough about including tunneling code provisions, insureds were saying this document is relevant because the government imposes regulations. I was analyzing the code and the safety regulations for underground construction, which are mandatory. I found there are many provisions in both documents, which are similar. There are differences in terms of fire safety because in the tunnel code the underlying philosophy is to prevent any ignition. But the state regulations are focused on the prevention of catastrophic or large scale fire and fire spreading. Otherwise, technically speaking, the Russian safety requirements are even stricter then the code. Especially around designing the prevision and availability of safety systems and engineering facilities in the underground environment. I came to the conclusion that it is the insurer s obligation to explain it to the both insured and reinsurer that these things are very much the same but set in different words. Igor Prandetsky I have a question for the reinsurers. We know that international reinsurers may quote the provision of engineering fees on larger projects, which will allow them to send nominated engineers to deliver risk-progress reports. In Russia, what is your experience in this regard? Manuel Bezjak It is not about having really strict requirements. We do it because we want to have a picture of the site. Not a full picture but we are not alone on the covers. As a leader, we have obligations towards other participants on the cover. That's why it is important to get this picture. We are trying to improve as well. We start by using the local market because they know the regulations. But we use international risk managers as well. We have a longstanding contract with them but I would favor using local risk managers. Igor Prandetsky Thank you very much, Manuel. I think that is a good message to Russian risk managers and engineering companies. Stefan Saur It is not always necessary to implement certain engineering fees but it is definitely necessary to know the risk and to have a good communication between all involved parties: between reinsurers, insurers and the insured. Risk surveys are very important for reinsurers. Every bigger risk shall be surveyed regularly some once a month, some every half a year. If we then have the feeling that there is something going wrong we can take a closer look at it. 28

Igor Prandetsky You've touched on a very important point. We all want to be informed and know our risks. And complicated risks need a lot of experience. That is why larger projects are usually covered by experienced insurance companies and reinsured by leading reinsurers. Manuel Bezjak Risk surveyors also have to understand the construction market. The better they know the market, the better they know how risks are handled in that market. And the faster you have your rates. Gerhard Hurek Language is a big problem. We do not have staff who speak fluent Russian. The risk managers tell me that it gets complicated if the local Russian people speak in their own language on surveys and it can be difficult to translate. We try to trust local expertise, but it can be complicated. My next point is that when a loss happens, we look to attend within 24 hours but we do not get a visa in this time. That is reality. Igor Prandetsky That is a great issue. We can only support and welcome reinsurers, who are risk-carriers, to make site visits to go into the field and see the reality in Russia. When you visit, you see more and understand things better. Well, at this stage I would like to suggest a break. Thank you very much! 29

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CAR/EAR Claims Settlement Practices in Russia 3 chapter Igor Prandetsky So, ladies and gentlemen, now we start a fascinating subject that is very important: claims handling. Without this, there would be neither insurance nor reinsurance. I would like to ask Evgeny from Cunningham Lindsey Russia to share his company s experience as an independent professional company very much engaged in claims handling in Russia. Evgeny Malachinsky I would like to thank our colleagues from Reunion for this opportunity to be one of the speakers. Actually, we were asked to look at one of the losses in construction in order to review the practices in the loss handling and settlement process in construction in Russia. One of the losses was perhaps the largest and most complex we have ever settled in relation to construction and erection. We are talking about a loss by fire that occurred at a newly built 500KW electric substation still not commissioned located in Moscow. During the course of high-voltage testing, one of the transformers set on fire causing significant damage to the building and the substation. The damage was huge. The transformer and all peripherals were damaged beyond repair costs and the building accommodating gas insulated switch gear was also damaged badly, including the utilities systems. Also, burning oil spilled onto the secondary switching cable lines. These were seriously damaged. But the worst thing of all was that the entire building was seriously contaminated by soot. Cunningham Lindsey Russia was nominated by reinsurers both, Russian and international, and our colleagues were appointed by a local insurer. The loss happened in May 2008. It was really huge at about 62 million. It took more than three years, about 12 survey reports, a number of purely technical reports and around 10 market meetings held both in Moscow and in Germany to finallysettle this claim on a compromise basis of about 56 million. Before we come to the core part of my presentation, I would address a few general issues just so you have a better picture of how the loss adjusting procedure works in Russia as we have some issues you will not see in other countries. Some of you will be really surprised to know that loss adjusters in Russia are not considered as experts. Our legal status is still undefined so it is completely up to the judge how to regard a loss adjuster. Often this means that your counterparty can simply ignore or neglect what you say. Another issue is around document-focused investigations. The insureds often complain about number of the documents requested by loss adjusters in support of their claims. There is a reason for that, which is that Russian legislation is very strict. For local insurers to be able to pay a claim a pack of documents must be provided with each document being properly filled in, signed and stamped. Otherwise, the insurers can be fined heavily or their operating license can be withdrawn. Local insurers often simply delegate this work to loss adjusters who actually collect the documents. Lastly I would mention what I would call a Small claim like Big. We can receive instructions on a relatively small loss and it might seem illogical to make a full scale investigation. However, irrespective of big or small, local insurers must still have a full pack of documents in support. They cannot simplify the procedure, and in our turn we cannot say we have investigated this claim and we do not have the necessary documents but we still confirm that this claim is fairly stated. So moving on and coming to the loss under review, here is the communication scheme which was implemented by interested parties, and we, as I have mentioned, were instructed by reinsurers. The idea of this scheme was apparently good, to channel enquiries via the insurer thus making things more transparent for all involved. But on implementation it somehow turned into a huge problem. The insured simply considered our inquiries as extra work and not necessary to answer. And because we lacked open dialog with the insured we simply could not discuss complex issues with them. I have to say that a number of multilateral meetings did not help. I would say the implemented procedure significantly reduced the ability of the parties to discuss and negotiate this claim. My next point covers the scope of repairs and review. When handling construction and erection claims in particularly big claims, it is imperative you have all the necessary documents such as damage reports to understand the damage and the scope of repairs. So, in this particular case, we never received a detailed claim from the insured, but variety of submissions. The documents to support these were often submitted a few months after the relevant works had been executed. So we could do nothing but keep our civil engineer on site almost on a daily basis just to control scope of the workings. Then, based upon preliminary agreed scopes, the insured undertook to prepare construction estimates for us to have another deeper look into these documents and recommend some revisions to the figures. But we didn t have actual damage reports or a detailed plan for reinstatement. We were not aware of the total scope of repairs to be incurred. For us it has turned into a sort of a game. We cut what we had to but then the insured would send further documents in an attempt to recover the cut costs. Now we come to the key issue in this claim: the damaged 36

equipment cleaning (restoration) vs. replacement. Cleaning in this case means a necessary to dismantle all the equipment and to clean the interior of it all before putting it back together. Actually, a few items were damaged physically but the majority were contaminated by soot. We used very reputable professional cleaners who had tested the soot-covered equipment first just to demonstrate their ability in this regard but the insured decided to replace some equipment including control switch boards and cabling regardless of our cleaners and ours advice to the contrary, and we received no technical arguments to justify this decision. We failed to follow their logic. The amount disputed was around 1.5 million. After many discussions and presentations the insurers have decided to compensate the replacement costs for one reason: I think the insurer would not have been able to defend their position in court. In Russia, the judge would have likely considered that the policy meant brand new equipment, the insured would have ended up with something different (that is repaired equipment) and it would have been likely considered a breach. Just to illustrate the restored equipment, this picture demonstrates the ability of the cleaners to restore the equipment to an as was condition. Another big discussion was around VAT-costs recovery. Again, the amount disputed was huge: around 5 million. There is a straightforward and commonly shared practice with regard to the compensation of VAT costs in the West.If these costs are insured, they are not recovered from insurer but from the budget. There is no dispute about that. In Russia it is different. In a court, if the VAT costs are insured, the judge would likely decide these costs are paid by the insurer and then the insured can recover these costs from the budget. Just because the first situation with insurer is governed by the civil code of the Russian Federation, whilst the second example of recovery from budget is governed by the tax code. So, we have two approaches. Finally, this amount was paid to the insured by interested insurers. How do we deal with this in the future to avoid this issue? Actually, we recommend that insurers simply exclude VAT costs from coverage. It solves the problem. Or, if you see that these amounts are covered by the policy and you have to pay, perhaps insurers could write a letter to the tax authorities indicating that these VAT costs have already been recovered by the insured. It will then be up to tax authorities to control this and not to pay these amounts from the budget. This case also involved some other issues we frequently see. Very often, the replacement price of equipment is higher than that of the original manufacturer. This is mainly due to a chain of suppliers each adding their profit. It is difficult therefore to find a compromise solution. Sometimes we can see a trial usage of equipment before the acceptance forms have been issued. This trial can last for a year. It may pose a problem if it is damaged, as not commissioned equipment shall be covered under the first section of the policy, which covers construction, and not under the second section, which covers maintenance. The issue of bad workmanship and the low quality of subcontractors is also often one we face. Even wellknown international contractors might use low-quality subcontractors. I saw an article recently that suggested in relation to construction that if you win a tender, you have probably made a mistake on price. This partially self-explains this problem. Another issue we face is where the insured has not broken down the different items into groups of property or equipment, so we cannot identify what allocations should be made per damaged item. Now let s turn to the slides. This slide shows a huge loss. It is an office building in Moscow in its latest commission stage. It had been populated just before the fire occurred so it was a challenge because the tenants were international brands such as banks and funds. Again, for us it was a real challenge. At this slide you may seea damage to a pipe and our surveyors spent around month on a pipe-laying ship near Sochi. That was a good experience for us. So why Cunningham Lindsey? I would suggest that our priorities are well known: these are transparency and professionalism. And as Cunningham Lindsey Russia we are part of the Cunningham Lindsey group, which is one of two truly global loss adjusting networks. We are the largest one. We can always rely on our international colleagues whenever we need to, including on construction and erection. We have dedicated specialists including civil engineers and technical experts with the skills to deal with the most complex and major losses. And, of course, we have excellent knowledge of the market in Russia, so we try to simply convert this knowledge into most accurate, professional and successful claim handling and settlements. Igor Prandetsky Thank you very much, Evgeniy for an interesting presentation. There are different claims of different natures. The Russian insurance market is in transition with insurance legislation in development, the market is growing, as well asthe capacities provided by insurance companies to reflect the corresponding exposures. Some 15 years ago, there were just a couple of risks covered; now, there are plenty of risks and much larger claims. We need to know how to deal with such claims: what should happen and how reinsurers get informed about the situation. There are many aspects involved in the issue of claims. We hope that we can discuss these issues now. Simon Marshall In your presentation, you said the status of loss adjusters is uncertain in Russian legal circles. What about the qualifications from the professional associations? Are they ignored? 37

Evgeny Malachinsky We are not talking just about professionalism or qualifications recognized or not by courts. No, in practical terms this is more about a way of defending money. We try to find common ground with the insured, insurers, reinsurers and brokers but often we are ignored not because of quality of our advice was low or lack of the qualifications but because theinsuredshave no other way to defend their investment. As an example, we knew they would not have the guarantee of the manufacturer but they would have the guarantee of the cleaners, who were insured with a first class insurance company. If there was a new loss, they would have the money another way. But it was still not accepted. So, this is where the problem lies. Daniil Cherepanov I just want to add that in the Russian Federal code of professions and occupations, the profession of loss adjuster is not included. There is an association of loss adjusters which consists of well-known and well established loss adjusting companies. This association is seeking the inclusion of the profession of loss adjusters into the code. They are pushing this project with the Russian government. Ulrich Werwigk As claims manager at Swiss Re I discussed the role of the loss adjuster in front of the court and his qualification as a recognized expert in litigation various times. In my opinion, and I come from the legal profession, this is first not so different in another European countries and second a high professional work of the adjuster will always (mostly) withstand at the court. Usually, the loss adjuster is mandated by one of the participants and therefore he is part of this party in a legal sense. What is important from a legal perspective that the assessment of the loss is done in a very high professional standard. It is key to look on the quality of the reports to get proper evidence of the loss. Evgeny Malachinsky Actually we are experts and we are building a good tool to makethe most professional, adequate, and transparent recommendations to the market. Sergey Moskovskikh Gefest is directly involved in claims settlements. I can explain why we hardly ever use loss adjusters. As absolutely correctly was mentioned before, there is no system for loss adjustment in Russia. There is a system of experts and expert organizations that may representone or the other party in court. In our case, we have former construction specialists with some experience in insurance. There is no reason to hire an organization that cannot maintain its point of view in courtin case when the Insured is not agree with the report provided by loss adjuster. When during a loss settlement process there is a comflict of interests related to investigation of the reasons and amount of loss, the insured may appeal to an independent expert organisation for resolving the matter. In case if we disagree with the conclusions of such an organisation, we hire from our side a Russian expert organisation which possess all necessary rights and juridical documentations for conducting such an expertise. Based on these report we continue our negotiations with our clients insureds. I don t understand why surveyor organizations operating in Russia do not obtain the same legal documents Russian organizations have that allow them to produce high quality and independent assessments that can be presented to the court. Evgeny Malachinsky That was a very interesting statement. In fact, it is rarethat our involvement in court litigation is required. As professional player, we try to speak same language as the insuredsdo on the legal side and on the technical side. We don t want to go as far as conflict. Very rarely will we go to court, As for the documents, there is the association of loss adjusters, that has been mentioned before, and one of its priorities is to work with the government to make sure the legal status of loss adjusters would be recognized so the loss adjuster appears in court as expert. Aleksey Shtanko In fact, the judicial practices in Russia are such that judges would not accept a loss adjuster s statement as evidence. Rather, it is considered an evaluator would do this work. It used to be a licensed activity whereas now it is sufficient to be a member of self-regulating organization. The courts accept also as evidence a report issued by organization performing technical construction expertise (which is a member of a self-regulated organisation of contractors). RusSurvey is member of such an organization and we do such expert appraisal for our clients. Dr. Andreas Shell I am a bit surprised that it is so unclear what expectations the Russian market has from loss adjusters. A tiny number of our losses go to court, so, the need for a loss adjuster to be admitted to court is usually not necessary. That s not the function of loss adjuster.we view loss adjusters as more a project manager who deals with the loss by coordinating the activities and doing site visits. An expert in court is talking only about their specific area of expertise and that may be admitted as evidence.i think confusing experts in the true sense of the word with loss adjusters is not helpful. If you look at the international markets, in none is there an expectation for loss adjusters to appear before court because their evidence is used. I think that a good loss adjuster drives the process of the claims handling procedure, bringing up all the relevant 38

points that then can be addressed by experts if necessary. If that can be done it represents successful claim handling. Igor Prandetsky Thank you very much, Mr.Dr.Shell. Ladies and gentlemen, thank you very much for an interesting discussion. 39

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Claims Handling in Russia 4 chapter Igor Prandetsky Now we can continue with our discussion on claim handling issues. I would like to invite Mr. Dr. Shell to start this discussion. Dr. Andreas Shell I will talk very shortly about AGCS claims management so that you have an idea of who we are and what we do. Allianz Global Specialty is the worldwide specialty lines insurer for Allianz. We have offices all over the world and I am going to be talking about international insurance solutions and then claims handling in Russia. AGCS prides itself on being a first class technical insurer with a claims management capability that is constantly refined. The company has revenues about 5.3 billion and we pay out around 3.4 billion per year servicing 75,000-80,000 claims a year in international business. We pride ourselves on local delivery and global support. Our customers deals with someone local who speaks the language but the global support team is 400 people strong including lawyers, engineers, accountants and the like. It is important to us to promote cooperation and bring international standards into all the countries we service. International standards are coming to Russia to stay that what I always see in growing markets. It is called globalization. Shopping malls everywhere in the world have the same stores and this will be the future for the insurance business as well. We also do international programme business for lines such as property, engineering liability and marine business and that s why we set up networks and servicing locally. Now let s talk about claims handling in Russia. Insurance in Russia is, from my perspective, still at an early stage. It is something that is just beginning to grow. It is not something that has a long tradition, at least as a private sector. It also appears that some ways of introducing insurance have not been effective. Culturally, a lot of people still think that insurance companies just take premium but never pay. This is not a good start for a partnership, which is what an insurance contract should be. It is also reflected by the fact that a university qualification in the area of insurance only began in the mid-90s. So the expectation cannot be to have many highly qualified insurance experts. There are people who have worked in insurance for a long time but this new generation will receive an education in this field which they will put then in practice. This will be another entry point for international standards to be introduced in Russia. It is also notable that the authorities seem rather critical and sceptical of this industry, given the checks that they do with tax authorities, currency control and the supervisory agencies. They make it quite difficult to do business and to handle claims. For example, tax inspections hamper the payment processes of claims which means you must be really careful around how payments are made and good documentation. There is a lot of red tape and bureaucracy around making payments. That is not beneficial for clients. That atmosphere is often not cooperative but actually more confrontational. It is really interesting that everybody here when talking about claims handling already has a dispute in mind, which is quite surprising. We use courts very seldom. What is certainly an issue for companies doing business in Russia is corruption. We have seen evidence of that on a few losses. We can see it, for example, in cargo cases when you try to import machinery to get a business moving again and customs officials work very slowly unless you give them some kind of fee, which we do not. We have corruption controls in our company that are very strict. This hampers processes that should work better. Further, many insured properties are still government property and it can be difficult to access restrictions. They might have some kind of secrecy about them. We also struggle with decision-making. We constantly struggle to find somebody who can actually take a decision and settle the claim with us. There is nobody who will take responsibility. Usually, it s left to committees, which slows down the process. Another problem is the VAT issue. To have to discuss whether VAT is payable or not was certainly a surprise for Western companies. It depends on the policy but still you will find policyholders who argue in spite of the actual language in the policy. Another issue is where insurance companies are owned by financial groups and there are conflicts of interests. We find that if there is direct cover with the group owned insurer you will find very difficult to find a technical and objective claims handling processes. We have also seen wordings translated a certain way in order to make things work. Translation is a very difficult animal because the meaning of words may not cross cultures. It is, therefore, paramount that training and education is increased and improved to ensure wordings are precise, make sense and can be adjusted to clients and insurers needs. Risk management is also not as good as it should be. A lot of companies may have somebody called a risk manager but is not in the sense they actually analyze risks, manage risks and act as the interface to the claims handling insurer. Further, there is sometimes a lack of interest in financial results which means cost efficiency is not always clearly in mind. It seems a manager s value is often measured by the amount of staff he has and not by what they do. There 54

needs to be a cultural shift towards ensuring that people understand that they are working for companies to make money. One way of doing this is through processes that are not costly but make the best use of the resources available. Perhaps insurance companies can find ways of better training their clients risk managers, which is something we have been doing for several years. We invite them to conferences on technical topics, especially risk management topics, so they can better understand what we do and how we can best cooperate. We have also seen that local brokers are not yet as professional as they could be because they don t see themselves in the role of actually facilitating what happens after underwriting around policy administration and claims handling. And perhaps in terms of managing expectations as to what insureds faced with a loss should actually expect. We have also seen disputes if the claims documents were not provided within the policy year. That what we found very difficult to understand because the contract is a contract and if you have a loss on 31 December there is no way you are going to present documents in that year. Thank you very much. Igor Prandetsky Thank you very much, Mr. Dr. Shell. So, it s pleasure to see and to hear that Allianz is very much aware of what is happening in Russia. Ladies and gentlemen, I suggest that we start an open discussion now. Gerhard Hurek Most of the points you hear are also true for other countries such as Columbia, Argentina or Brazil or whatever. I have done business in Russia for many years, and the reality is so that there are fewer claims than in Germany, for example, and better results. So something must be good in your market. Also, late notification to decrease premium was something I was confronted when I started doing reinsurance with the US markets. They do the same. That is something that happens in Germany sometimes. Dr. Andreas Shell The presentation is about showing the view that we have. We see it as a major market but starting out. A lot of other countries had the same issues once. It s just a case of the market maturing. Dr. Sylva de Fluiter I would agree. This is a developing market and we have spoken about risk management on the insured s side but I think risk management is also needed from the insurers and reinsurers sides. When we access risks, the economic environment and developmental stage of the country is part of our assessment. I would agree with this list of issues but the question is how do we deal with them today, in which direction is the market moving and do we want to see how it develops? Ultimately, this should be encouraging to move further in this direction until we all get to a level where we feel comfortable. Petr Naumenko Surely, there are cases of abuse in the market but I think this is something that happens more or less in any other country. The Russian insurance market is gradually taking a more civilized shape. From January, the1st, this year, there is a new legal procedure which requires all public procurement organizations including the related parties or subsidiaries to put insurance contracts to a competitive bidding process. The cases of the excessive premium rates will be gone with time. It will certainly make excessive rate setting rather difficult. As regards to claims settlement I do not know of any cases where a government authority to be involved in this process and has prevented a civilized settlement. The statistics on the Russian market are very favorable many countries have it worse. Any insurer that wants to do serious business in construction insurance business would need to do it properly. We recognize that the market is maturing and we do not want to underwrite bad or dubious risks. There are sectors that are not good but when you consider the overall economic situation it is understandable why they cannot be insured. Generally, the insurance business is becoming more civilized and the government moves in this direction will also be effective. Maria Morozova In terms of the claims settlement process, we should also consider internal factors and our ability to handle claims. It is absolutely true that we are an emerging market and writing premium is easier then settling claims. I would rather place emphasis on how we can improve our infrastructures, our internal communications and the communication between insurer and insured, and insurer and reinsurer so that claims settlement is a more expedient process and more professional. Our insurers are learning the business and the development of insurance culture in Russia highly depends on our ability to handle claims. In summary, teamwork between insurers and reinsurers in claims settlement is critical. We should not overestimate external factors but we should not place all the blame on them when we fail to do something properly. Actually, maybe we just do not really know how to organize this process internally. Mikhail Ermishkin When it comes to technical risks, many Russian insureds may assume that the foreign insurance company is unaware of the realities of the Russian market. My advice 55

to international companies working in Russia is to hire specialists who really know the Russian realities. We find, we often face what we love to call cognitive dissonance : that is when Russian insureds and foreign insurers speak different languages. Roman Emelianov I would address the western insurers with the following questions. We know the London market and the continental market offer different types of coverage. If we look at the system developed by German insurers compared with endorsements from the London market like LEG 3 or DE5 it seems they caused substantial adjustments to the way insurers work with their insureds and with you. Because some of you do not accept those endorsements and do not define precisely what do we pay for and what we do not. Of course our market is imperfect. It is improving but maybe there is something you could do from your side by making the coverage systems and rules of the game clearer. Some of the endorsements may be interpreted in different ways, even if you read the same wordings. On your markets there are also litigation cases to determine what should be paid for and what should not be paid for. There is some work for you as well. Dr. Andreas Shell The interesting thing is that this probably will never be achieved because it hasn t ever been achieved in the West. A lot of disputes arise out of words used for a long time and suddenly they take a twist in meaning due to one case. I think the expectation of having perfect conditions that are unambiguous is unrealistic. Yes, there are continental European markets, US markets and the UK market and differences in coverage and types of endorsements. You get an understanding and then along comes a decision which completely redefines a clause. So, yes, as an industry we need to make sure our wordings are as clear and transparent as possible but we will never reach the stage where everybody will understand the same thing. Roman Emelianov When it comes to the acceptance of risks, the London market may accept something that the continental market does not under the same coverage. Maybe you should negotiate between yourselves within Allianz: London part and continental part? Simon Marshall That is a very difficult question to answer. Allianz has an Allianz London branch and a continental branch. Peter Tailby Ten years ago, when I was working for GE Frankona in London we decided that we would no longer offer LEG3 cover as it is difficult to evaluate true exposures with such a broad cover. We invited the brokers to meet with us to allow us to explain our position and reasons for doing so. This was a good idea in terms of transparency and clarity but we found the brokers stopped showing us any business as they only wanted to support markets that would at least consider giving LEG3 cover. We had to back track and reconsider our position. The question of what is covered and not covered can only be resolved during the loos investigation and adjusting process, there will never be completely clarity in terms of insurance cover. Petr Naumenko I want to share a case from my own practice. Our company works a lot on the third party liability insurance market in line with Russian Federation laws. I failed to reinsurer these risks abroad and all my risks are placed in the Russian market. As an example, there was such a claim. A transmission mast has been painted and paint soiled several cars. A big loss is reported. When we addressed the professional loss adjustment people, their bill was bigger than my coverage under the policy. Because there were plenty insurance policies like that, we had to set up our own structure alongside the insurance company that would respond to any construction related incidence when it comes to third part liability and related claims. This structure now includes lawyers, construction experts, however, the costs for their jobs are much lower than hiring professional loss adjusters. But it does work and is quite effective. Depending on how the insurance event is recorded and how the parties involved behave, a successful adjustment on minimization of loss is possible. It very much depends on how professional you are in the very first hours. I will just address one issue to my western colleagues. I am aware of what are called western rules of the game and a system of reinsurance that has been developed for years. You have your representative offices and subsidiaries in Russia that operate under the Russian law. I think it makes more sense to look deeper into the specifics of the Russian law. Russian civil law talks about indemnification and many SROs have a requirement that the insurance coverage must depend on the reconstruction of an organization s revenue. But sometimes we have to deal with contracts under which liability is maybe half a billion or one billion rubles. Placing such risk on the Russian market is impossible. So we are intent on devising all kinds of solutions. We require your assistance here. Pavel Smirnov-Nebosklonov I want go back to the previous discussion about the LEG 3 wording because it is important for us to understand that. Russian companies place large risks on the international market and if there is reinsurance it is translated into the direct policy as well. There are endorsements which application can only be defined in 56

course of a loss. Then for the company it is important to understand that it will not be left with the loss under the direct contract with reinsurers taking a different position. It shall be clear that the parties should be willing to work together and problems tackled jointly. Igor Prandetsky Thank you very much, Pavel. So at this stage may I ask you allow me to make a stop. 57

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Risk Management and Claims Handling 5 chapter Igor Prandetsky We continue with a presentation prepared by Swiss Re and presented by Ulrich and Philipp. Ulrich Werwigk Thank you for the opportunity to present some facts about Swiss Re claims management especially in the line of business engineering claims. My colleague Philipp Sager will share this task. Philipp is an engineer coming from the technical side located in Zurich. I am based in Munich and come from the legal side handling engineering claims. Some short comments about our organizational structure. We both are part of the EMEA Division meaning Europe Middle East and Africa. This includes the whole Russian area and also countries such as Azerbaijan and Kazakhstan, parts of the CIS. Our headquarter is located in Zurich and we have offices in Rome, Paris, London and Munich. We have colleagues in Hong Kong, Rome and Paris and, most important is Philipp and his colleague Isaac who are based in Zurich. These two are strongly focused on technical aspects of Engineering claims; they are technical experts. In the average we are handling around 6,000 engineering claims in Europe per year. We have legal qualifications and also insurance expertise in our group and we work very close together to share experience and a shared approach to claims handling. Every engineering claim is seen by Philipp and his colleague for a technical survey. We do this so that we are sure the technical expertise is used in the claims handling department and brought into our claims management. Finally we have established an engineering network which is global and we exchange the experience and knowledge as much as we can and assist with large claims so that we can react fast also towards our clients. By sharing ideas and experience, it is also possible to detect very early claim trends and other issues and provide solutions. It is also important for risk management and risk prevention. A crucial point is also having an expert network of loss adjusters especially given the dependences between the claim handling teams in different countries on very difficult and complex projects. We see the need for expertise also from abroad. As the claims department it is our duty delivering on the promise of Swiss Re and to pay in a case of the loss. It is crucial to have a close and confidential cooperation. From an international perspective we see the Russian market as different with some historically based approaches. If we look to Europe where we have a long and deep common history, also in legal matters, between Austria, Switzerland and Germany however we recognize multiple substantial differences in handling claims. I think this shows how complex and how difficult claims handling between countries can be and means we have to consider different market practices. Our goal is to understand your market practices because that makes it easier for us to pay fast. Therefore it is very important to have a close cooperation of the claims handling process. Also the experience we gain can help underwriting and risk management in our business. Legal aspects of the assessment of a claim may affect also the reinsurance relationship and the principle following a settlement. We will want to better understand a risk and if possible look at how we can contribute. This is a key and an unwritten requirement for the principle following the settlement. We recognize the great experience of our Russian clients in handling claims but we also see opportunities to assist by offering our global perspective, which can bring value. For direct claims handling, it is important to have a local approach and use local loss adjusters. For this we appreciate cooperation with our customers and loss adjusters. Another important issue is claims reporting. The problem of late reporting is nothing new. We observe this at global companies also, it is a big problem. If the client gets notification of a claim very late or a reinsurer is informed late by his client no possibility exist to react appropriate. Every late reporting removes the possibility to react quickly, be proactive and influence developments. A proper and timely claims reporting also in the reinsurance relationship is one of the key requirements for a proper claims handling and timely remittance of the payment also in this relationship. On the next slide you may see a compilation of prominent Engineering losses in the last years; at first one of the most prominent: the collapse of the new terminal at the airport Charles-de-Gaulle in 2004. Some other losses: manmade at various power plants in Germany, Sweden, Poland and Russia, losses at the Warsaw metro project, others due to heavy rainfalls during construction of large buildings in particular infrastructure projects in Dubai and Portugal, nat-cat impacts also at projects e.g. in Sochi and other manmade losses in Cyprus, Egypt and Nigeria and finally divers technical issues at large windfarms in the North Sea. Philipp Sager In the next slide I am going to share my experiences and the challenges I met handling gas turbine claims. As my colleague already said I am a mechanical engineer and worked for several years as a commissioning engineer for gas turbines. Here you see a power plant. It was damaged quite a lot 66

due to an explosion. Major damage was caused to the exterior of this power plant. Here you see the crater caused by explosives equivalent to several hundred tons of TNT in about 80 containers confiscated ammunitions and weapons. This explosion occurred on the opposite side of this hill you see. On the other side is the power plant and major damage was caused by the pressure wave. Here, you see the fuel oil tanks and you see the damage. Most of the damage was caused to buildings. You can see below the level of the fuel oil you don t see any destruction to the tanks. Here you see one wall of the power plant close to the center of this explosion and the massive damage. Here you see the fundamental damage: of the gas turbine. It was moved away from the centre of explosion by the wind and the pressure wave. Now, we are getting closer to the gas turbine. This is the outside of the so-called local control module. Inside is all control for the gas turbine and a lot of their supervision and control electronics. Fortunately, the gas turbine was not running in the time of the explosion and the doors of the control models were closed. The only damage in the module was a heavily bent roof and slightly bent walls. Here you see two pictures from the inside of this module. On the right you see the logic controller and left you see the other control equipment. The glass doors were not broken. There was no damage to the equipment inside the container. Only the container, the roof and the wall were damaged. The original equipment manufacturer of the gas turbine said the whole module had to be replaced. We strongly disagreed and two expert reports said it was completely unnecessary to replace it because there was no damage, no proof of loss and no damage could be expected. The manufacturer has written to withdraw the warranty of the gas turbine if those modules were not replaced. The replacement of the modules also includes disconnection, reconnection and testing of about 1,000 signals and field signals, which causes additional delays of about two months. That s something the insured didn t want so they were fighting with the manufacturer to replace those modules. All we said was that there was no damaged and no proof of loss and that we would not pay the insurers. They replaced it overnight. This is the situation we face almost with every gas turbine loss. Those modules were not only replaced when it was not necessary, they also charged high costs. I remember a case where a manufacturer charged 2 million just for replacing the blades of a small compressor. From my experience, I know that takes about two weeks for two persons. So you can calculate the hourly rate they are charging for that. Also we had two different experts saying different things. One said there was no need to replace it because it was simply not damaged; another said the container could have been cut on the bottom, the roof removed and then the new one put on top. That would have saved millions of euros and a lot of time. The manufacturer, by saying this had to be replaced, earns a lot and huge profits. If the warranties are withdrawn that puts a lot of pressure on the insured and also on the insurers. Generally there is no competitive bidding or tendering because, especially on the latest turbine technology, there are no competitors and no spare parts available from the original equipment manufacturer. Also there is no know-how on how to repair the gas turbine. So in a non-competitive market, that leads to big profits. Another challenge we often see is that loss events are abused. If a loss causes the turbine to be opened and parts inside are damaged or need to be replaced, they are replaced and claimed from the insurers despite this being no relation to the loss event. This is a real challenge. There is a lack of transparency and there are no spare part prices. Nowadays, power producers buy power plants together with long term service agreements. But these agreements are kept confidential and if there are no official prices available the manufacturer can charge any price they want. If the insurance is paying out, they often charge several times the terms of the long term service agreement. And that s why it is so important the loss adjuster insists in looking at the long-term service agreements. The loss adjuster has usually also to sign a confidentiality agreement. They are not allowed to take a copy but they can look at the prices and insist on the price the manufacturer has agreed with the operator of the power plant. The loss adjuster is critical in successfully handling claims around gas turbine losses. There are only a few loss adjusters in the market with gas turbine knowledge but they are really essential and can prevent a lot of problems during the handling of such claims. Ulrich Werwigk Each loss is different and we have to care about what is also needed for the individual case. This is mainly adequate experience and expertise, especially on the technical side, in the claims handling. Swiss Re is prepared to give the requested technical or practical assistance especially in large losses. Igor Prandetsky Thank you very much, gentlemen. It was interesting to learn more about the approach of Swiss Re. Vladimir Karyukin My question is on the involvement of your adjuster did it allow you to avoid the 2 million payment for the blades? Philipp Sager In this case, it did not allow that. In fact, it was even worse. A fire occurred in the filter house when the gas turbine was running. The turbine tripped very quickly but they even exchanged a lot of turbine blades, which are very expensive. 67

There was only soot and a little dirt inside turbine. The loss adjuster agreed to exchange of all the blades which was very expensive. I challenged this and asked to explain why the blades would be damaged. They said it was by vibration and later changed it and said it was impact damages. I asked for a picture of the blade and they sent me a picture of the blade inside a plastic bag. I then offered to travel to look at the blades myself and they said they had already stripped them out because the loss adjusters said they were unusable. That s the full story. You see the loss adjuster is key. If the loss adjusters challenge the manufacturer and says and argues there is no relation with the loss event that is much easier than if the claim expert or direct insurer, or even worse of the reinsurer, has to step in to correctly assess and adjust a loss. Vladimir Karyukin I would like also to share a few cases we had around how to fight against these suppliers. In 2003 when the Lefortovo Tunnel was built in Moscow, there was a fire at the warehouse where bearings were stored. A bulb exploded it fell on a box. It wasn t a big fire but still they said that the warranty would be removed and we had to agree that the bearing be taken back to the Germany and be repaired. It was my second year in the business and they said they would not do anything until the insurer signed the relevant report. The price they quoted was something we couldn t check. It was impossible. So I believe the only way forward is to have a good relationship between the insurer and the insured. If the insured uses unique technologies, the manufacturer can set any price they like and make the other side pay everything. You need friendly relations with your client. It should be a partnership. Even so, I don t doubt that adjusters are needed for some cases but the use of loss adjusters doesn t guarantee that losses will be reduced when there are unique manufacturer on the other side. Sometimes we have managed to bring down costs and negotiate but I don t think we have had any single situation when the insured was unfriendly or took us as enemies. Once you explain it to them, they take your side and even start negotiating with those unique vendors. Evgeny Malachinsky Vladimir has raised something interesting regarding suppliers dictating the replacement of something that technically has suffered but can still be repaired, which option could be faster and less expensive. I would like to suggest that we think in a different way. The supplier has their sales department who normally wants to sell as much as possible. Maybe we should look for and contact the repair departments more interested in repairs. And, at the end of the day it would still be profitable for the supplier. Ulrich Werwigk I agree with this approach. Having good partnerships in the loss adjustment process is a crucial challenge. In all cases I have settled with our clients we tried to have the basis of a partnership and we have discussed claims topics very openly. Sometimes it can be controversial but a common approach always finds a common solution. I think this approach is crucial and benefits everyone. There are some claims that go to court. This can happen and is nothing which should trouble us as long as it is on a reasonable basis. We often negotiate a settlement and I am convinced that this is best way to do it. Cooperation between reinsurance and insurers is important. It includes some mutual obligations but also includes the component of trust. What is important that direct insurer and the reinsurer cooperate, and that the reinsurer is informed about the claims as soon as possible. Late claims notifications reduce the possibilities in the loss assessment and often create additional problems. An early claims report also to the reinsurer opens the opportunity to communicate and understand the client. Partnership is on all levels of the claims adjustment process is the most important issue. Vladimir Karyukin Thank you for that. We believe that reinsurers are our partners in claims settlements, partly because small claims rarely occur. Let me give you an example. Back to 2004, there was this loss in the construction of the Lefortovo Tunnel and we paid out some 3 million. We made a presentation to the reinsurers to show them what happened. We showed them everything that happened: what measures were taken to stop the loss extending and what was done to minimize the size of the loss. We showed all the calculations openly because you are our partners. Our business without you is impossible. These risks are unique, are huge. Peter Tailby I just want make a comment about the turbines and long term service agreements. I worked for both Siemens and GE and the profit margins on selling turbines are very small. All the money is made on these service agreements, which can range from five to 20 years. Some of these companies have created reverse engineering departments so they can manufacture their competitor s parts. Because these agreements are so lucrative, they take every opportunity to compete for these service contracts. When you suffer a loss on the turbine, I would suggest going to a competitor to see how much it would cost to be repaired. Then, you get a sensible view on replacement costs of the damaged items. When you talk to the client, you can also suggest that, if the manufacturer is going to charge this extra amount, the same will happen to the client when they come to the service replacement. That way you win a support of the client and you get a better adjustment on the loss. It goes a little bit further because if the competitor gets the contract to replace the equipment, he will also get the 68

benefit of the salvage on the equipment recovered. We had a turbine rotor in the Middle East that was sitting in a sandy desert. GE bought it for tens of thousands of dollars and sold it to another client for $6 million. The value of salvage is often underestimated by insurers and reinsurers. Philipp Sager I have a few further ideas from the perspective of the insurers. One is to include depreciation clause in the policy. The very expensive parts in the gas turbine are generally in the so-called hot gas path. That s from the combustion chamber to the turbine exit and which contains very sophisticated parts that can resist a very high temperature. Those generally have a limited life before being replaced. If the depreciation clause says that you get basically the same as you had before, do you buy new one? But if the loss occurred at less than the expected life say halfway the insurer would pay only half of the price of a new blade. This also helps reducing abuse by exchanging parts which are not damaged due to the loss event. Another idea too: whenever possible use other experts than those from the manufacturer of the turbine. Go to the competitor and ask them for their expert opinion. 69

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Major claims experiences and possible improvements 6 chapter Eric Bentz I hope you are fresh for this last presentation. The first part will cover transferring risk. Then we will look at loss adjusting. On the third part, we will try to define the risks we face. In the fourth part we will share some ideas about improvement. We will start with the context. You have the insured, the broker, insurers and then reinsurers. You have a big panel of people involved. So communication is important not only in terms of underwriting but also in terms of loss adjusting. Before and after a loss it is important to communicate but with so many parties that is not always easy. The insurer should be close to the insured but when there is a claim you have the loss adjusters involved. They might require more technical detail. So you need communication between loss adjuster, the insured and the panel. Then, you need to also keep in mind the legal context and the jurisdiction of the policy. This comes down to the wording of the direct policy and jurisdiction in the insurance contract. Then you have legal advisers involved and that makes communication even more complex. When a claims notification is started, then you start the loss adjusting process. Then you need more information available and more technical detail. There is the question of policy liability and whether the wording is clear. The next step is the agreement between the insured and insurers in regard to the liability of the policy. Sometimes the insured believes more covered than actually is. This again comes back to communication. Lastly, you apply all this to the indemnification of the insured. A key issue is that the insured makes a claim in an acceptable time frame. All this is not always easy and there can be difficulties around getting information, especially technical information. There might be issues around security or if someone has been killed and there is a criminal investigation you might not be able to access to the site. There will be a big need for expertise and a focus on the wording. Apologies for this remark but sometimes in a competitive market, brokers can take advantage of that and we have to accept certain wordings we would not dream of. That can be a problem. It can cause misunderstanding and frustration. The consequence is you can have negotiation, mediation and arbitration but which do not benefit the relationship. There can be frustration and difficulties in communication. There are some countries such as the US, Brazil or Australia where you start the process with a legal adviser and it is not to speed things up. That is the reality and it can be difficult to settle the claim in a fair timeframe. I would suggest it is better to explain the content of the wording to the insured prior to any losses, damages or claims. There is a big job for the insurer and reinsurer to do. The broker should also explain the content of the policy to avoid any frustration. Secondly, different procedures can be followed when there is a claim. It is important to avoid any delay to the communication of a claim. It is helpful to organize communications about what happened for the insurers and reinsurers. It is better to do this at an early stage with contact details of all the people involved. The wording can also have a provision on this. And the name of the loss adjuster should be on the paper. We prefer that so we can deal with that properly. There might be different levels of loss adjusters if some minor problems can be managed locally. It allows you to manage the claims handling procedure. Some procedures can be long and so you need to update this document on a regular basis as people can move around organizations. Something we are trying to achieve is to have meetings not only with underwriters but also with claims specialists. It makes communication easier. And we want wordings that are clear in order to avoid questions coming in. Igor Prandetsky Thank you very much, Eric. I think that in relation to the subjects of risk management and claims handling, the most important word we have heard today is cooperation. I think we need the cooperation of all parties engaged in risk sharing the policyholder, insurer, reinsurer, claims handling companies and risk assessment companies to really handle the risks in a manner that is satisfactory to all parties. We are now on final stage of today. We now have time to ask questions. I suggest we make the most of this opportunity given there are so many important and experienced people here. We have questions to start with, which were raised earlier. So, Aleksandr. Alexander Potitov Thank you, Igor. In the context of the two key topics of claims handling and risk management and considering anticipated changes in the regulation of loss coverage and the responsibility of developers and constructing companies under the Urban Building Code effective on 84

July 1, what will happen? To me, there are two big differences: personal injury indemnification, which does not only include the actual cost of damage but also additional fixed compensation similar to moral damage compensation; and that in the case of residential construction, the point that the developer or another key person in charge can be held responsibility for personal injury. That could include compensation to building workers and construction workers for the contractor and subcontractor, which in the classical section of CAR/EAR is excluded. We will have to work in this environment because the law is effective and the courts will base their decisions on that new version of the code. But we want to understand the implications of this and maybe our reinsurer colleagues will share their position. We want this coverage to be additional to section two of CAR/EAR. That would seem logical and more convenient because the risk is linked to construction projects. If the opinion of reinsurers is that it should be treated under the liability section than we need to hear that feedback because we need to understand how our policy should be designed in seeking for reinsurance protection. Pavel Smirnov-Nebosklonov One month ago we received the policy that includes this section. It is employer s liability and includes the risk of bodily injury to employees and construction workers. The client wants to cover it by the CAR and ЕAR policy in the section of the liability. According to my experience, this is not standard and it is not covered by our engineering treaty because in that treaty there is only a liability section regarding third parties. Workers are not third parties and it is another line of insurance. Internationally it is called employer s liability. We discussed this issue with our liability colleagues who, on individual cases, could provide their own liability capacity for such risk and for such projects to clarify how to treat this section. But there is the question of underwriting. We often have no information about how many people are on site, their experience or qualifications. All we would know is that a project will be under construction for five years, for example. We could provide employer s liability but our underwriters from liability will say they need more information. From my point of view it will be not correct to extend the coverage of the TPL for this employer s liability. Michał Żelaśkiewicz I thoroughly agree and the example we looked at today around losses on a Polish subway construction site is a good example of third party liability (TPL) losses and the regulations that apply to bodily injury and the inclusion to the TPL section 2 of CAR policy. Section two should be limited as it is not extended to various typical TPL extensions or covers. This material loss has additional implications for TPL, for professional indemnity, for general third part liability or contractual liability and these risks were covered by separate TPL policies. The TPL exposure should not be together with the construction one unless is just typical third party liability from section two. And I agree with this recommendation that if such situations occur and there is a need for the extension of the employer s liability the contractors TPL policy is given desired extensions. Igor Ryzhkin I agree that we are talking about a combined insurance policy for CAR and TPL. Maybe for the next conference we could invite liability reinsurers for construction risks. Igor Prandetsky We have here reinsurers of all lines of business. Igor Ryzhkin But it seems they do not do TPL insurance. There is also another relevant issue. Last year the government adopted a document called The road map. It is long term document which covers many insurance types including some kind of mandatory insurance covering something unknown at the point a project was put into operation. In other words, the insurance of damage caused as a result of a designer s mistake and other faults. We can compare it with hidden faults insurance used in the west. In Russia, this kind of insurance has never been used. Next time we meet I suggest we address this issue. Igor Prandetsky Thank you very much for interesting proposal. We will put to our schedule for the next event. Svetlana, I think you asked a question in the first part of our discussions with regard to this situation? You mentioned that there are cases when a client s construction companies come with projects at a later stage of completion. It that correct? Svetlana Chepeleva In fact, we have discussed the question and the positions of my colleagues are clear. Let me just thank the leading international reinsurers for teaching the Russian reinsurers many things. There are no longer reinsurers in Russia ready to write premiums and not pay losses. Before last year, there were some. But no more. This is why we do not quote on the lower layers in your programmes. Please take into account the possibility of non-original deductibles and other thing that international reinsurers used until this does no longer exist on the Russian market. So we are now in line with you. 85

Mikhail Ermishkin In our practical work when we deal with clients over major losses our insureds request two additional conditions. First, they ask for information on the reinsurance protection for major risks in the top layers and most European and international reinsurers are involved. The second thing they want is an independent expert. They want a loss adjuster to be involved in the loss assessment. That is a positive trend for Russian reinsurers. By providing this information we confirm that we have protection from highly rated companies and, in if there is a dispute over loss adjustments, we can remind the insured that we have reinsurers behind us to whom we must justify and explain all the aspects of the loss. And that the insurer is also required to do so. Also, if the policy includes the condition of involving an independent loss adjuster or expert, this makes the loss adjustment easier. There are fewer ways to challenge the loss adjuster s opinion. I take these things as a positive sign that the market is moving to a better insurance culture especially on major risks. And I do hope that Russian insurers will enjoy a mutual understanding with loss adjusters and western reinsurers. Eric Bentz I just wanted to give an example of a tunnel collapse case, on which we participated with 5% share. It was looking like a 70 million claim. We were involved in market meetings also with the insured. It came down to the question of whether the contractor faced unexpected soil conditions. Even the appointed loss adjuster was not appropriate to deal with such a very technical problem. By sharing our experience with the insurer leader, we found means to adjust this claim, and it was team work. It worked better because we worked together. Roman Emelianov I would like to raise the issue of information. In construction projects there is usually a big pool of information such as the project design, work plan, etc. Do you believe that detailed questionnaires alone are sufficient without detailed itemized information? Otherwise, some information may come up in the middle of the work process. If we consider gas turbines in the power sector, your questioners will be quite long if filled in completely. Manuel Bezjak This is a very complex topic. I am not sure how to respond. The only thing I can say is we just need to understand the risk to access it properly. Also, the better we understand the risk, the more competitive we are in pricing. A lack of information means assumptions and those assumptions are costly. Eric Bentz I fully agree with that. The questionnaire is not enough given the complexity of some cases. You need to go into detail and that s the beauty of market presentations where you are exchanging opinion about risk. Philipp Sager I just can confirm what Manuel says. We don t ask for a certain questionnaire. Of course we have one but we want understand the risk and then we ask specific questions. Igor Prandetsky Thank you very much. I can add from our experience that we have to deliver a certain volume of information. But there are cases when some parts of the information are of less importance or it can be delivered at a later stage. So we try to define these parts of information and agree on a timeframe as to when they are delivered. Peter Tailby In the underwriting process, the very first stage is understanding your exposures, that is why we need this information. You also have to consider internal risk management procedures. We have capital and allocate capacity for risk according to each companies internal guidelines both regulators and the rating agencies expect us to adhere to these procedures. When we say we have an underwriting guide and XYZ information on the file it helps us document how much capacity to allocate to a particular risk. If we accept the risk when we haven t gone through the procedure or collected the information, we could be penalized. That could mean we are not allowed to allocate capacity or could, in a worst case scenario, affect our rating. So there is a pressing urgency that we do have the correct information and that it is kept on file or recorded for internal risk management processes. Ulrich Werwigk Questionnaires are very important for the underwriting process and can improve risk awareness but we should not forget that construction projects are man-made. Even if we have a lot of information which are helping us to understand the risk and to take prevention measures we can never exclude the situation that losses happen. Tomasz Zgadzaj We need to understand what is behind the risk and what is behind the project. But also we need all the information about the values. We have to also calculate the PML to estimate what share we will take. Igor Ryzhkin In the case of construction risks that are modified, we accept certain risks at the beginning and at the end the risk 86

might look different. So how should we relate to the client? How we should treat this modification risk? It is a separate question of trust vis-à-vis client. We can develop this further. And I suggest CAR insurance in terms of changing risks should be probably addressed separately in the future. Igor Prandetsky Thank you very much. I have a feeling we have had a very interesting and informative event and shared a lot of interesting aspects of our daily work with regard to risk management and claims handling. We cannot discuss everything in the framework of this event. Each and every topic which was raised deserves consideration and can be discussed for hours. But we have mentioned the subjects important to us and hopefully our international reinsurers have a better understanding of the Russian insurance market. It is a market in transition and it is developing established institutions and practices. Our best practices should correspond to international best practice, which allows us to conduct this business on a long term basis professionally. And this is I think one of the important messages we take from this event. So our next day s arrangement is much more practice oriented. It will be site visit of a very interesting construction object and I would like to thank Nationale Suisse for making it possible. Vladimir Karyukin On behalf of all my colleagues I would like to thank Igor for all his effort in organizing these seminars for the third year. I believe we had some 30 people on the first round table. Now we have 40 or 50. So this is a very good platform to exchange professional opinions of the professional players on the market. Igor Prandetsky Thank you very much. At this stage I would like to thank my colleagues Irina, Mariia, who actually accepted the main part of the responsibility of this organization of this event. Thank you very much. And I would like to thank everyone participating here in this room. Last but not least I would like to thank our interpreters who did great job. 87

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Feedback Stefan Saur, Munich Re, Munich, Germany Good event since (almost) all players of the market discuss and exchange opinions. This leads to better understanding of all parties. Thank You! Eric Bentz, SCOR Global P&C, Paris, France Congratulations for the organization! The visit of the Dam / tunnels project was very interesting. It was also a pleasure the share this moment with people I am use now to meet regularly. 91

Analytics Development of the Russian construction and erection insurance market in 2012 and the first half of 2013 The following events may be named as important for the Russian insurance market in 2012 and the first half of 2013: Preparation and creation of a financial Megaregulator under the auspices of the Bank of Russia. As a result of that starting from the 1st of September 2013 the Federal Service for Financial Markets (FSFM) was abolished and supervision of all financial markets, including insurance market, was transferred to the Bank of Russia s Financial Markets Service (BRFS). The BRFS was also delegated all the authority of FSFM for regulation, control and supervision in the field of financial markets. Discussions followed by introduction of significant amendments to the law About the organization of insurance business in Russian Federation. The law, particularly, determines the requirements for the content of the Unified State Register of Subjects of Insurance Business; establishes the authority of the Bank of Russia in regards to transfer to it of the rights of FSFM; establishes the obligation of Insurers to inform the consumers of their services about their business and offered insurance services; specifies the procedure for calculation of quota for foreign capital in the statutory capitals of insurance companies; defines the term widely used in legislation and in insurance practice; specifies the procedure to form insurance reserves, conduct of internal control and audit and licensing; establishes the requirements for insurance agents and brokers and the maximum amount of their fees; determines the requirements for the provision of solvency of insurers; monitoring of the assets of life insurance companies and companies offering mandatory types of insurance, as well as pension insurance is assigned to a specialized depository. Beginning of maintenance of insurance companies accounting as per International Financial Reporting Standards (IFRS). The given shift from RAS to IFRS is deemed to present a more adequate picture of a real financial state of insurers. In May 2013 the first companies submitted their accounts to FSFM compiles as per IFRS. The experts presume that the given events will overall help to boost society s trust towards the insurance industry and improve the industry s reputation. For the construction and erection insurance the important amendment to legislation was the amendment to Urban Building Code: new edition of article 60 of the Urban Building Code, which became effective since 1st of July 2013 and which changes significantly distribution of liabilities among the participants of the construction process, as well as approaches to the insurance of property interests of organizations-members of Self-regulated organizations (SRO). At the end of 2012 the volume of the Russian Insurance Market reached 812.47 billion roubles, showing an increase, as compared to 2011, by 21.5%.The contribution of insurance premiums in GDP increased from 1.22% in 2011 to 1.30% in 2012. Total loss payments amounted to 370.78 Billion roubles (see table 1). In the first half of 2013 the Russian Insurance Market showed an overall decreased growth rate as compared to the similar period of 2012, amounting as per the Federal Service for Financial Markets data (from 01.09.2013 Bank of Russia Financial Markets Service) to 467.54 billion roubles. The volume of the insurance market grew by 13.3% in comparison with the first half of 2012, however according to a study by the Expert Ra rating agency, the indicator of growth rate in the first half of 2013 dropped by 11 percentage points (see table 2). According to the Expert Ra forecast the volume of the Russian insurance market will reach the level of 910-920 billion roubles in 2013 with a growth rate of 13%. In terms of various types of insurance it is noticeable that apart from such segments like life insurance and accident insurance, construction and erection insurance grew faster than the industry s rate of growth. The rate of growth of the said segment in the first half of 2013 was approximately 16%. The amount of insurance premiums for constructions and erection insurance including liability insurance within the framework of SRO, for the given period, was 18.8billion roubles, with a growth rate of 14.2% (see table 3). The growth of construction and erection insurance market was mainly due to the growth of market for the material damage insurancewithin the framework of construction and erection insurance, the increase in premiums for which amounted to 2.38 billion roubles. Nevertheless, the construction and erection insurance industry, as well as the whole market is facing a slowdown of its growth, which, as per the experts point of view, will continue through 2013. As per the estimates of Expert Ra specialists, in 2013 the construction works insurance market will reach the 37-40billion rouble figure, with a growth rate of 10-15%. For comparison sake, the rate of growth of the given segment in 2011 as compared to 2010 was equal to 35.8%, which the experts, however, assess as an exclusive indicator rather than a stable trend. The objective macroeconomic factors of such slowdown include the decrease in rate of growth of GDP, investments in fixed assets, damping of the effect of the post-crisis recovery of construction industry. The given period was, as well, the time of completion of large-scale state 92

construction projects, most importantly the construction of Olympic facilities in Sochi for 2014, preparation of APEC summit in Vladivostok in 2012 and summer University Olympics in Kazan in 2013. In the structure of the Russian Insurance Market the contribution of construction and erection insurance (including liability insurance within the framework of construction and erection works) in 2012 was nearly 4.3%. The dynamics of contribution of construction and erection insurance in the overall volume of the market for the period of 2009-2012 can be observed in Figure 1. The structure of construction and erection insurance market in the first half of 2013 underwent insignificant changes as compared to the similar period in 2012: 88.9% of the total is for the property insurance within the framework of CAR/EAR (see Figure 2). The average level of payments for the whole of 2012 for top 20 companies was equal to approximately 6% in terms of material damage insurance within the framework of construction and erection insurance (see table 4). In tables 5 and 6 you can see the relevant data for liability insurance within the framework of construction works insurance and liability insurance within the framework of SRO. Under the conditions of the slow-down in rate of growth of insurance market in all and in particular in the construction and erection insurance market, with the consolidation of financial and industrial groups, in the absence in 2012 and the first half of 2013 of losses significant for the industry, the tendencies towards concentration, towards tougher competitive conditions, towards further lowering of tariffs as compared to 2011 remained effective. As of 31st of December 2010 the Unified State Register of the Subjects of Insurance Business included 625 insurers; as of 31st of December 2011 the number came down to 572; as of 31st of December 2012 it was down to 469 insurers and on 30th of June 2013 the same number reduced to 454 insurers (out of which 443 are insurance companies and 11 are mutual insurance companies). As per the Expert Ra data regarding the total insurance premiums for construction and erection risks the top 5 companies in the first half of 2013 contributed 61.9% of the market. The top twenty contributed 85.5% of the total worth. At the same time the experts forecast further consolidation of the market in 2014. Tables 7, 8 and 9 show the top 20 companies as per the insurance of material damage within the framework of construction and erection insurance, liability insurance within the framework of construction and erection insurance and insurance of liability within the framework of SRO for 6 months of 2013. Overall as per total outcome for the first half of 2013 the list of market leaders of construction and erection insurance saw some changes. The top-10 companies as per insurance premiums for construction and erection insurance, including insurance of liability within the framework of construction and erection risks, and insurance of liability within the framework of SRO are shown in table 10. Table 11 shows the companies with a greater specific weight for the given types of insurance in the total payments for 2012. The key factors for the growth of construction and erection insurance market in 2014 and in mid-term period will be the implementation of new federal projects. Such type of projects include works related to the preparation for hosting the Football World Championship in 2018, implementation of construction of pipelines and largescale federal infrastructure projects, announced by the President of Russian Federation in June 2013. The nominated projects, for the investment in which 450 billion roubles are planned to be spent from the National Welfare Fund, include: Construction of high-speed Moscow-Kazan line, pilot portion to be built between the Povolzhye center (Volga river basin) and Ural economic region; Creation of Central Circular Road (CCR), which would go through Moscow region and areas of New Moscow; Modernization of trans-siberian railway line and expansion of its through-put capacity. Year 2014 will be the year of design and draft of the given projects, whereas the main incomes will be shown approximately during 2015-2017. 93

Таблица 1. Общие сведения о страховых премиях и выплатах за 2012 г. / Table 1. Total insurance premiums and loss payments in 2012 Вид страхования / Type of insurance млрд. руб./ bln RUB Страховые премии / Insurance premiums % к общей сумме/ % to total sum % к соответствующему периоду прошлого года / % to the same period of previous year млрд. руб./ bln RUB Выплаты / Loss payments % к общей сумме/ % to total sum Страхование жизни / 52,88 6,5 151,1 13,35 3,6 172,5 Life insurance Личное страхование (кроме 183,97 22,6 124,7 92,35 24,9 112,3 страхования жизни) / Personal health insurance (except life insurance) Страхование имущества / 375,71 46,3 112,2 181,6 49 123,3 Property insurance Страхование гражданской 30,03 3,7 108,3 5,35 1,4 145,4 ответственности / Third Party Liability insurance Страхование предпринимательских 19,66 2,4 159,1 2,04 0,6 135,1 и финансовых рисков / Insurance of entrepreneurial and financial risks ОСАГО / 121,44 14,9 117,1 64,13 17,3 113,6 Compulsory Motor Third-Party Liability insurance Обязательное страхование (кроме 28,78 3,6 381,7 11,96 3,2 184,3 ОСАГО и ОМС) / Compulsory insurances (except MTPL and Compulsory health insurance) ИТОГО (кроме ОМС) / 812,47 100 121,5 370,78 100 121,4 TOTAL (except Compulsory Health Insurance) Источник/ Source: СБФР / BRFS http://www.fcsm.ru/ % к соответствующему периоду прошлого года / % to the same period of previous year 94

Таблица 2. Общие сведения о страховых премиях и выплатах за первое полугодие 2013 г./ Table 2. Total insurance premiums and loss payments in 1H 2013 Вид страхования / Type of insurance млрд. руб./ bln RUB Страховые премии / Insurance premium % к общей сумме/ % to total sum % к соответствующему периоду прошлого года / % to the same period of previous year млрд.руб./ bln RUB Выплаты / Loss payments % к общей сумме/ % to total sum Страхование жизни / 36,38 7,8 165,1 5,41 2,8 93,8 Life insurance Личное страхование (кроме 119,14 25,5 115,7 46,96 24,2 112,9 страхования жизни) / Personal health insurance (except life insurance) Страхование имущества / 194,41 41,6 108,3 94,43 48,6 111,7 Property insurance Страхование гражданской 14,22 3 94,8 3,04 1,6 119,2 ответственности / Third Party Liability insurance Страхование предпринимательских 10,78 2,3 123,3 0,69 0,3 66,1 и финансовых рисков / Insurance of entrepreneurship and financial risks ОСАГО / 62,98 13,5 110 36,59 18,8 127 Compulsory Motor Third-Party Liability insurance Обязательное страхование (кроме 29,63 6,3 108,8 7,27 3,7 167,4 ОСАГО) / Compulsory insurances (except MTPL and Compulsory health insurance) ИТОГО (кроме ОМС) / 467,54 100 113,3 194,39 100 115,3 TOTAL (except Compulsory Health Insurance) Источник/ Source: СБФР / BRFS http://www.fcsm.ru/ % к соответствующему периоду прошлого года / % to the same period of previous year 95

Таблица 3. Структура взносов за 1-е полугодие 2013 г. по видам страхования/ Table 3. Structure of insurance premium incomes for the 1H2013 Вид страхования / Type of insurance Страхование автокаско / Motor casco insurance ОСАГО / Compulsory Motor TPL ДМС / Voluntary medical insurance Страхование имущества юридических лиц от огневых и иных рисков / Insurance of property of legal parties against fire and other risks Страхование от несчастных случаев / Personal accident insurance Страхование имущества физических лиц / Insurance of property of individuals Страхование жизни / Life insurance Страхование СМР / Insurance of construction and erection works Страхование грузов / Cargo insurance Обязательное личное страхование / Compulsory personal insurance lines Страхование сельскохозяйственных рисков / Agricultural insurance Страхование авиационных рисков (имущественное + ответственности) / Aviation insurance (property + liability) Страхование предпринимательских рисков / Entrepreneurial risks insurance Страхование финансовых рисков (кроме выезжающих за рубеж) / Financial risks insurance (except risks of citizens travelling abroad) Страхование водного транспорта (имущественное + ответственности) / Marine insurance (property + liability) Страхование ответственности за неисполнение обязательств по госконтракту / Insurance of liability due to failure to perform obligations under state contract Страхование выезжающих за рубеж / Insurance of citizens travelling abroad Первое полугодие 2012 г. / 1H2012 Взносы, млн. рублей/ Premium incomes, mln RUB Первое полугодие 2013 г. / 1H2013 90361 101271 12 57147 62977 10 68452 74550 9 38504 40190 4 30508 40270 32 12012 13000 8 22040 36378 65 15000 17380 16 10318 10030-3 19077 18484-3 7041 6433-9 4186 4063-3 3122 3266 5 5206 7120 37 3379 3218-5 639 384-40 3733 4320 16 Темпы прироста пг 2013 / пг 2012, %/ Rate of increase 1H2013/ 1H2012 % 96

Таблица 3. Структура взносов за 1-е полугодие 2013 г. по видам страхования/ Table 3. Structure of insurance premium incomes for the 1H2013 Вид страхования / Type of insurance Первое полугодие 2012 г. / 1H2012 Взносы, млн. рублей/ Premium incomes, mln RUB Первое полугодие 2013 г. / 1H2013 Страхование ответственности предприятийисточников 1124 1078-4 повышенной опасности / Insurance of liability of companies-sources of increased danger Страхование ответственности грузоперевозчиков / 625 720 15 Insurance of carriers liability Страхование космических рисков (имущественное 1000 900-10 + ответственности) / Space risks insurance (property + liability) ДСАГО / 3762 3540-6 Voluntary insurance of motor TPL Страхование профессиональной ответственности 1050 1190 13 (кроме профессиональной ответственности туроператоров) / Professional liability insurance (except liability of travel companies) Страхование профессиональной ответственности 150 140-7 туроператоров / Insurance of travel companies liability Страхование пассажиров (туристов, экскурсантов) / 500 390-22 Passanger insurance (tourists, tripper) Страхование ответственности в рамках СРО / 1450 1410-3 Liability insurance in framework of SRO Прочие виды страхования гражданской 3000 2900-3 ответственности / Other types of liability insurance Страхование гражданской ответственности 169 80-53 перевозчика перед пассажиром воздушного судна / Insurance of aviation carriers TPL Страхование железнодорожного транспорта 730 598-18 (имущественное + ответственности) / Insurance of rail transport (property + liability) ОС ОПО / 7952 7963 0 Compulsory insurance of dangerous production objects ОС ОП / - 3108 - Compulsory insurance of carriers liability Прочие виды страхования 185 194 5 / Other insurance types Всего / 412423 467545 13 Total Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru; СБФР / BRFS http://www.fcsm.ru/ Темпы прироста пг 2013 / пг 2012, %/ Rate of increase 1H2013/ 1H2012 % 97

Таблица 4. Страхование строительно-монтажных рисков (имущество), 2012 г. / Table 4. Construction and erection insurance (property), 2012 Место / Place Компания, группа компаний / Company, Group of companies 1 Группа СОГАЗ / Group SOGAZ 2 ГК РОСГОССТРАХ и КАПИТАЛ / Group of copanies Rosgosstrakh and Kapital 3 ОСАО «РЕСО-Гарантия» / Insurance OJSC «Reso-Garantia» 4 СОАО «ВСК» / Insurance OJSC «VSK» 5 ООО «Страховое общество «Помощь» / Insurance company «Pomosch» Ltd. 6 Группа «Ингосстрах» / Group «Ingosstrakh» 7 ЗАО «САО «ГЕФЕСТ» / Insurance CJSC «Gefest» 8 Страховая группа «Альфастрахование» / Insurance group «Alfastrakhovanie» 9 ООО «СК «Согласие» / Insurance company «Soglasie» Ltd. 10 ЗАО «СК «ТРАНСНЕФТЬ» / CJSC «Insurance Company «Transneft» 11 ООО «Британский Страховой Дом» / «British Insurance House» Ltd. 12 ОАО Страховое Общество «ЯКОРЬ / OJSC Insurance Company «Yakor» 13 ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» 14 ООО СК «ВТБ Страхование» / Insurance Company «VTB Insurance» Ltd. 15 ОАО РСТК / OJSC RSTK 16 ОСАО «Россия» / OJSC «Rossiya» 17 Группа «Альянс» / Group «Alliance» 18 СОАО «Русский Страховой Центр» / Insurance OJSC «Russian Insurance Centre» 19 ОАО «СГ МСК» / OJSC «Insurance group MSK» 20 ООО «Регард страхование» / «Regard insurance» Ltd. Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 2011 г., тыс. руб. / Premium incomes 2011, thousands RUB Уровень выплат, % / Level of payments 12407413 442130 8 638 087 3,6 43,6 2885337 321607 1 373 980 11,1 110 1137817 101529 1 322 177 8,9-13,9 1105489 84993 1 078 035 7,7 2,5 865578 18446 761 746 2,1 13,6 860733 38534 716 380 4,5 20,2 806899 74047 1 535 704 9,2-47,5 678984 175446 691 677 25,8-1,8 640983 29954 790 123 4,7-18,9 581142 138739 528 573 23,9 9,9 572162 0 85 502 0 569,2 568907 1122 475 026 0,2 19,8 563857 438 470 376 0,1 19,9 434181 16430 298 319 3,8 45,5 427559 0 139 646 0 206,2 334035 2203 101 058 0,7 230,5 325238 14526 229 182 4,5 41,9 204295 0 99 395 0 105,5 194164 538 119 954 0,3 61,9 122621 0 6 262 0 1 858.2 Темпы прироста взносов, % / Rate of premiums increase 98

Таблица 5. Страхование строительно-монтажных рисков (ответственность, кроме страхования ответственности в рамках СРО), 2012 г. / Table 5. Construction and erection insurance (liability, except liability insurance in frameworks of SRO), 2012 Место / Place Компания, группа компаний / Company, Group of companies 1 ООО «Страховое общество «Помощь» / Insurance Company «Pomosch» Ltd. 2 Группа СОГАЗ / Group SOGAZ 3 ОАО «СГ МСК» / OJSC «Insurance Group «MSK» 4 Группа «Ингосстрах» / Group «Ingosstrakh» 5 ОСАО «РЕСО-Гарантия» / OJSC «Reso-Garantia» 6 Страховая группа «Альфастрахование» / Insurance group «Alfastrakhovanie» 7 ОАО СГ «Спасские ворота» / OJSC Insurance Group «Spasskie vorota» 8 ГК РОСГОССТРАХ и КАПИТАЛ / Group of companies ROSGOSSTRAKH and KAPITAL 9 ЗАО СК «Мегарусс-Д» / CJSC Insurance company «Megaruss-D» 10 ООО СК "ВТБ Страхование" / Insurance company "VTB Insurance" Ltd. 11 ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» 12 ОАО РСТК / OJSC RSTK 13 СОАО «ВСК» / Insurance OJSC «VSK» 14 ООО «ПРОМИНСТРАХ» / «PROMINSTRAKH» Ltd. 15 ООО «СО «Регион Союз» / Insurance company «Region Soyuz» Ltd. 16 ЗАО «СК «ТРАНСНЕФТЬ» / CJSC «Insurance company «TRANSNEFT» 17 ОСАО «Россия» / Insurance OJSC «Rossiya» 18 Группа «Альянс»/ Group «Aliance» 19 ЗАО СК «Инвестиции и Финансы» / CJSC IС «Investment and Finance» 20 ЗАО СК «РСХБ-Страхование» / CJSC Insurance company «RSHB-Insurance» Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 2011 г., тыс. руб. / Premium incomes 2011, thousands RUB Уровень выплат, % / Level of payments 297 851 2 592 250 0-49,7 100 268 3 973 89 110 4 12,5 74 115 275 12 844 0,4 477 68 706 0 73 310 0-6,3 59 649 128 38 418 0,2 55,3 56 201 8 787 64 794 15,6-13,3 49 594 0 18 035 0 175 38 118 0 495 488 0-92,3 37 562 0 50 861 0-26,1 36 407 237 24 881 0,7 46,3 30 811 308 20 902 1 47,4 30 107 0 9 881 0 204,7 29 250 0 33 504 0-12,7 29 095 0 58 179 0-50 21 611 0 25 912 0-16,6 17 851 237 15 727 1,3 13,5 16 567 666 22 578 4-26,6 11 085 0 9 072 0 22,2 9 614 0 370 0 2 498.4 9 142 0 300 0 2 947.3 Темпы прироста взносов, % / Rate of premiums increase 99

Таблица 6. Страхование ответственности в рамках СРО, 2012 г. / Table 6. Liability insurance in frameworks of SRO, 2012 Место/ Place Компания, группа компаний / Company, Group of companies 1 ООО «Британский Страховой Дом» / «British Insurance House»» Ltd» 2 СОАО «ВСК» / Insurance OJSC «VSK» 3 Группа СОГАЗ / Group SOGAZ 4 Группа «Альянс» / Group «Alliance» 5 Группа «Ингосстрах» / Group «Ingosstrakh» 6 ООО «СК «Согласие» / «Insurance company «Soglasie» Ltd 7 ГК РОСГОССТРАХ и КАПИТАЛ / GC ROSGOSTRAKH and KAPITAL 8 ЗАО «ГУТА-Страхование» / CJSC «Guta-Insurance» 9 Страховая группа «УРАЛСИБ» / Insurance group «Uralsib» 10 ЗАО «САО «ГЕФЕСТ» / CJSC «Insurance joint-stock company «GEFEST» 11 Страховая группа «Югория» / Insurance group «Ugoria» 12 Группа Ренессанс Страхование / Group Renaissance Insurance 13 ООО «СО «Помощь» / CJSC «Insurance company «Pomosch» 14 ОАО «САК «ЭНЕРГОГАРАНТ» / JSC «Insurance JSC «ENERGOGARANT» 15 ЗАО «СК «ТРАНСНЕФТЬ» / CJSC «Insurance Company «TRANSNEFT» 16 БИН страхование / BIN insurance 17 ОАО «СГ МСК» / OJSC «Insurance Group MSK» 18 ОСАО «Россия» / Insurance JSC «Rossiya» 19 СГ «МАКС» / Insurance group «MAKS» 20 СГ «Альфастрахование»./ Insurance group «Alfastrakhovanie» Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 2011 г., тыс. руб. / Premium incomes 2011, thousands RUB Уровень выплат, % / Level of payments 358 748 1 089 343 506 0,3 4,4 303 018 13 742 301 445 4,5 0,5 173 164 3 924 161 275 2,3 7,4 161 091 1 859 199 033 1,2-19,1 148 738 6 448 115 209 4,3 29,1 98 538 697 95 401 0,7 3,3 95 347 568 95 563 0,6-0,2 91 548 0 38 245 0 139,4 83 764 1 686 77 791 2 7,7 81 810 242 72 081 0,3 13,5 69 657 2 312 75 175 3,3-7,3 59 543 0 16 749 0 255,5 57 980 171 38 246 0,3 51,6 52 901 838 32 951 1,6 60,5 48 253 724 0 1,5-37 900 72 29 929 0,2 26,6 30 635 5 87 374 0-64,9 30 453 572 32 249 1,9-5,6 29 517 255 0 0,9-26 497 200 4 482 0,8 491,2 Темпы прироста взносов, % / Rate of premiums increase 100

Таблица 7. Страхование строительно-монтажных рисков (имущество), 1-ое полугодие 2013 г. / Table 7. Insurance of construction and erection risks (property), 1H 2013 Место/ Place Компания, группа компаний / Company, Group of companies 1 СГ «СОГАЗ» / Insurance Group «SOGAZ» 2 РОСГОССТРАХ / ROSGOSSTRAKH 3 ЗАО «САК «ГЕФЕСТ» / CJSC «Insurance joint-stock company «GEFEST» 4 СОАО «ВСК» / Insurance OJSC «VSK» 5 ЗАО «Страховая бизнес группа» / CJSC «Insurance business group» 6 ООО СК «ВТБ Страхование» / Insurance company «VTB Insurance» Ltd. 7 ОСАО «РЕСО-Гарантия» / Insurance OJSC «RESO-Garantia» 8 ООО «Страховое общество «Помощь» / Insurance company «Pomosch» Ltd 9 СГ «Альфастрахование» / Insurance group «Alfastrakhovanie» 10 Страховая группа «ТРАНСНЕФТЬ» / Insurance group «TRANSNEFT» 11 ООО «Британский Страховой Дом» / «British Insurance House» Ltd 12 Группа «Ингосстрах» / Group «Ingosstrakh» 13 ООО «СК «Согласие» / Insurance company «Soglasie» Ltd 14 ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» 15 СОАО «НСГ» / Insurance OJSC «National Insurance Group» 16 ОАО «НАСКО» / OJSC «NASKO» 17 Группа «Альянс» / Group «Alliance» 18 ООО «Строительная Страховая Группа» / «Construction Insurance Group» Ltd 19 ОАО «СГ МСК» / OJSC «Insurance group MSK» 20 ОСАО «Якорь» / Insurance OJSC «Yakor» Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 1 пол. 2012, тыс. руб. / Premium incomes 1H 2012, thousands RUB Уровень выплат, % / Level of payments 6821073 248 650 5 571 161 3,6 22,4 1997457 н.д. 1 590 511 н.д. 25,6 664796 59 280 268 211 8,9 147,9 567547 13 395 503 040 2,4 12,8 511153 70 411 685 0 24,2 438952 998 287 891 0,2 52,5 433418 64 528 556 125 14,9-22,1 423002 11 285 531 582 2,7-20,4 340152 91 016 363 641 26,8-6,5 315881 25 754 373 338 8,2-15,4 292393 0 124 877 0 134,1 254918 4 592 435 993 1,8-41,5 251694 6 855 177 781 2,7 41,6 201666 382 256 524 0,2-21,4 199710 816 18 489 0,4 980,2 198017 2 226 3 403 1,1 5 718.9 133788 24 216 270 027 18,1-50,5 110834 0 104 323 0 6,2 97717 50 73 305 0,1 33,3 95881 495 118 177 0,5-18,9 Темпы прироста взносов, % / Rate of premiums increase 101

Таблица 8. Страхование строительно-монтажных рисков (страхование ответственности, кроме страхования ответственности в рамках СРО), 1-ое полугодие 2013 г. / Table 8. Insurance of construction and erection risks (liability insurance, except liability insurance in the frameworks of SRO), 1H 2013 Место/ Place Компания, группа компаний / Company, Group of companies 1 ООО СК «ВТБ Страхование» / Insurance company «VTB Insurance» Ltd 2 СГ «СОГАЗ«/ Insurance group «SOGAZ«3 ООО «Страховое общество «Помощь«/ «Insurance company Pomosch«Ltd 4 ОСАО «РЕСО-Гарантия«/ Insurance OJSC «Reso-Garantia«5 Группа «Ингосстрах» / Group «Ingosstrakh» 6 Страховая группа «Альфастрахование» / Insurance group «Alfastrakhovanie» 7 ОАО «СГ МСК» / OJSC «Insurance group MSK» 8 ООО «Строительная Страховая Группа» / «Construction Insurance Group» Ltd 9 ЗАО СК «Мегарусс-Д» / CJSC Insurance company «Megaruss-D» 10 РОСГОССТРАХ / ROSGOSSTRAKH 11 Группа «Альянс» / Group «Alliance» 12 Страховая группа «ТРАНСНЕФТЬ» / Insurance group «TRANSNEFT» 13 ЗАО «Страховая бизнес группа» / CJSC «Insurance business group» 14 СОАО «НСГ«/ Insurance OJSC «National Insurance Group» 15 ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» 16 ООО «ПРОМИНСТРАХ» / «PROMINSTRAKH» Ltd 17 ОАО «СК ГАЙДЕ» / OJSC «Insurance company «GAYDE» 18 ОАО «НАСКО» / OJSC «NASKO» 19 Страховая группа «Чулпан» / Insurance group «Chulpan» 20 ООО «СО «Регион Союз«/ CJSC «Insurance company «Region-Soyuz«Источник/ Source: «Эксперт Ра«/ «Expert Ra«www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 1 пол. 2012, тыс. руб. / Premium incomes 1H 2012, thousands RUB Уровень выплат, % / Level of payments 190535 299 16 371 0,2 1 063.9 72797 60 29 254 0,1 148,8 71324 130 60 620 0,2 17,7 22842 32 40 167 0,1-43,1 22522 0 30 490 0-26,1 22400 5 655 26 828 25,2-16,5 20067 1 38 770 0-48,2 19762 0 17 946 0 10,1 Темпы прироста взносов, % / Rate of premiums increase 17086 0 2 0 854 200.0 16904 н.д. 26 791 н.д. -36,9 16817 0 10 216 0 64,6 12869 47 12 430 0,4 3,5 12411 3 283 13 817 26,5-10,2 10025 0 717 0 1 298.2 9443 0 8 215 0 14,9 7387 0 3 848 0 92 6407 0 80 0 7 908.8 5673 28 584 0,5 871,4 4894 0 1 685 0 190,4 4792 0 6 093 0-21,4 102

Таблица 9. Страхование ответственности в рамках СРО, 1-ое полугодие 2013 г. / Table 9. Liability insurance in the frameworks of SRO, 1H 2013 Место/ Place Компания, группа компаний / Company, Group of companies 1 ООО «Британский Страховой Дом» / «British Insurance House» Ltd 2 СОАО «ВСК» / Insurance OJSC «VSK» 3 СГ «СОГАЗ» / Insurance Group «SOGAZ» 4 Группа «Альянс» / Group «Alliance«5 Группа «Ингосстрах» / Group «Ingosstrakh» 6 ООО «СК «Согласие» / Insurance company «Soglasie» Ltd 7 РОСГОССТРАХ / ROSGOSSTRAKH 8 Страховая Группа «УралСиб» / Insurance Group «Uralsib» 9 ЗАО «САК «ГЕФЕСТ» / CJSC «Insurance joint-stock company «GEFEST» 10 ООО «Страховое общество «Помощь» / Insurance company «Pomosch» Ltd 11 ЗАО «ГУТА-Страхование» / CJSC «Guta-Insurance» 12 ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» 13 СГ «Альфастрахование» / Insurance group «Alfastrakhovanie» 14 Страховая группа «ТРАНСНЕФТЬ» / Insurance group «TRANSNEFT» 15 СГ «МАКС» / Insurance group «MAKS» 16 Группа «ЦЮРИХ» / Group «ZURICH» 17 ОСАО «Россия» / Insurance OJSC «Rossiya» 18 ОАО «СГ МСК» / OJSC «Insurance group MSK» 19 ООО «СО «Сургутнефтегаз» / Insurance company «Surgutneftegaz» Ltd 20 ОАО Русская страховая транспортная компания / OJSC RSTK Источник/ Source: «Эксперт Ра» / «Expert Ra» www.raexpert.ru Взносы, тыс. руб. / Premiums, thousands RUB Выплаты, тыс. руб. / Loss payments thousands RUB Взносы, 1 пол. 2012, тыс. руб. / Premium incomes 1H 2012, thousands RUB Уровень выплат, % / Level of payments 183202 98 162 788 0,1 12,5 170495 4 224 161 228 2,5 5,7 100428 1 282 97 309 1,3 3,2 85957 2 685 128 288 3,1-33 83365 635 86 469 0,8-3,6 53633 454 55 173 0,8-2,8 49841 н.д. 55 279 н.д. -9,8 44167 276 45 149 0,6-2,2 33856 208 37 278 0,6-9,2 31806 450 25 843 1,4 23,1 30172 0 46 879 0-35,6 27836 0 22 043 0 26,3 22723 70 13 844 0,3 64,1 22678 314 15 474 1,4 46,6 17204 4 17 026 0 1 15638 478 13 067 3,1 19,7 14178 5 17 575 0-19,3 11775 66 0 0,6-9570 14 12 295 0,1-22,2 7625 50 0 0,7 - Темпы прироста взносов, % / Rate of premiums increase 103

Таблица 10. Топ-10 компаний по взносам по страхованию СМР (включая страхование ответственности в рамках СРО), первое полугодие 2013 г. / Table 10. Top-10 companies as per insurance premium incomes for construction and erection insurance (Including liability insurance in the frameworks of SRO), 1H 2013 Место в 1 пол. 2013 / Place in 1H2013 Место в 1 пол. 2012 / Place in 1H2012 Компания, группа компаний / Company, group of companies 1 1 СГ «СОГАЗ» / Insurance group «SOGAZ» 2 2 РОСГОССТРАХ / ROSGOSSTRAKH 3 3 СОАО «ВСК» / Insurance OJSC «VSK» 4 11 ЗАО «Страховое акционерное общество «ГЕФЕСТ» / CJSC «Insurance joint-stock company «GEFEST» 5 12 ООО Страховая компания «ВТБ Страхование» / Insurance company «VTB Insurance» Ltd 6 4 ООО «Страховое общество «Помощь» / Insurance company «Pomosch» Ltd 7 7 Закрытое акционерное общество «Страховая бизнес группа» / CJSC «Insurance business group» 8 13 ООО «Британский Страховой Дом» / British Insurance House Ltd» 9 5 ОСАО «РЕСО-Гарантия» / OJSC «Reso-Garantia» 10 9 Страховая группа «Альфастрахование» / Insurance group «Alfastrakhovanie» Источник/ Source: «Эксперт Ра«/ «Expert Ra«www.raexpert.ru Взносы, тыс. рублей / Premiums, thousands RUB 6994000 22,8 2064000 23,4 738000 6,5 699000 129,0 629000 106,9 526000-14,9 524000 22,7 476000 65,3 456000-23,5 385000-4,7 Темпы прироста взносов, 1 пол. 2013 / 1 пол. 2012 / Rate of increase, 1H2013 / 1H2012 График 1. Динамика доли премий по СМР в общем объеме рынка за период 2009-2012 гг. Chart 1. Dynamics of share of construction and erection insurance premiums in total premium incomes for the period 2009-2012 Источник/ Source: По данным «Эксперт Ра» / Based on «Expert Ra» data www.raexpert.ru 104

Таблица 11. Доля взносов по страхованию СМР, включая страхование ответственности в рамках СМР и СРО, в портфеле по итогам 2012 г. / Table 11. Share of premium incomes per construction and erection insurance including liability insurance in the frameworks of construction and erection and SRO, in total portfolio, 2012 Компания / Company ООО «Британский Страховой Дом» / British Insurance House Ltd ООО «Страховое общество «Помощь» / Insurance company «Pomosch» Ltd ООО «Регард страхование» / «Regard insurance» Ltd ЗАО «САО «ГЕФЕСТ» / CJSC «Insurance joint-stock company «GEFEST» ОАО Страховое Общество «ЯКОРЬ» / OJSC Insurance company YAKOR Группа СОГАЗ / Group SOGAZ ОАО РСТК / OJSC RSTK ОАО СГ «Спасские ворота» / OJSC Insurance group «Spasskie vorota» ОАО «САК «ЭНЕРГОГАРАНТ» / OJSC «Insurance JSC «ENERGOGARANT» ЗАО «СК «ТРАНСНЕФТЬ» / CJSC «Insurance company «TRANSNEFT» Взносы по СМР, 2012, тыс.руб. / Premiums per construction and erection lines of business 2012, thousands RUB Источник/ Source: По данным «Эксперт Ра» / Based on «Expert Ra» data www.raexpert.ru Общий сбор премии 2012, тыс.руб. / Total premiums, 2012, thousands RUB 930910 1241219 75,00% 1221409 2301220 53,08% 123092 252874 48,68% 888709 1934132 45,95% 573608 1336711 42,91% 12680845 84142590 15,07% 472715 3141696 15,05% 52998 631386 8,39% 647569 7915031 8,18% 647246 8727265 7,42% Доля СМР в общих сборах премии, % / Share in total portfolio, % Диаграма 1. Структура взносов по страхованию СМР в первом полугодии 2012 г. и первом пологодии 2013 г. Diagram 1. Structure of construction and erection insurance premiums in 1H2012 and 1H2013 6 мес. 2012 г. / 6 months 2012 Страхование имущества в рамках СМР / Property damage insurance 6 мес. 2013 г. / 6 months 2013 Страхование имущества в рамках СМР / Property damage insurance Страхование ответственности в рамках СМР/ TPL insurance Страхование ответственности в рамках СМР/ TPL insurance Страхование ответственности в рамках СРО / Liability insurance in frameworks of Self-regulated organizations (SRO) Страхование ответственности в рамках СРО / Liability insurance in frameworks of Self-regulated organizations (SRO) Источник/ Source: По данным «Эксперт Ра» / Based on «Expert Ra» data www.raexpert.ru 105

Law extract RUSSIAN FEDERATION FEDERAL LEGISLATION ABOUT AMENDMENTS TO URBAN BUILDING CODE OF THE RUSSIAN FEDERATION AND SEPARATE LEGISLATIVE ACTS OF THE RUSSIAN FEDERATION Ratified by State Duma On 17 November 2011 Passed by Federation Council On 25 November 2011 EXTRACT Clause 20 article 1 comes to effect from 1st of July 2013 (article 18 of the current document). 20) article 60 to be read as follows: Article 60: Compensation of damage caused by destruction, damage to capital constructions, breach of safety requirements during the construction of capital facilities, requirements for the provision of safe operating conditions for buildings, structure 1. In case of cause of damage to a citizen s person or property, property of a legal entity resulting from the demolition, damage to building, structure or parts of building or structure, breach of requirements for the provision of safe operating conditions for building, structure the owner of such building, structure (except for the cases, stipulated by part 2 of the current article), unless he proves that the given destructions, damages, breaches occurred due to complainant s design (intention), third party actions or emergency and unavoidable in the prevailing conditions circumstances (force majeure), he compensates the damage in accordance with the civil law and pays compensation on top of indemnity: 1) To the complainant s relatives (parents, children, adopted children, foster parents), spouse in case of complainant s death equivalent to three million roubles; 2) To the complainant in case of causing severe damage to his/her health amounting to two million roubles; 3) To the complainant in case of causing medium level damage to his/her health amounting to one million roubles. 2. In case of causing damage due to demolition, damage to building, structure or parts of building or structure, breach of requirements for the provision of safe operation of building, structure during the effect of concession agreement, whose subject matter is the construction or reconstruction and operation (use) of such building, structure, compensation of damages and payment of compensation above indemnity, stipulated by part 1 of the current article, is to be effected by the concessioner, unless otherwise stipulated by the concession agreement or unless he/she proves that the given destruction, damage, breach occurred due to complainant s intention, third party actions or force majeure. 3. In case of infliction of damage due to demolition, damage to under-construction facility (object), breach of requirements of safety during construction of such facility compensation of damages and payment of compensation above indemnity, stipulated by part 1 of the current article, is to be effected by the builder or the technical customer, if the relevant agreement stipulates the liability of the technical customer to compensate the caused damages or unless the builder or the technical customer proves that the given destruction, damage, breach was caused by the complainant s intention, third party actions or force majeure. 4. In case if the civil liability of persons, mentioned in parts 1 3 of the current article, for infliction of damage resulting from demolition, damage to capital construction object or part of building or structure, breach of safety requirements during the construction of capital construction object, requirements for the provision of safe operations of building, structure insured in accordance with the laws of the Russian Federation, the mentioned persons compensate 106

damages, not covered by insurance and in case if stipulated by the federal Law, through indemnifications by professional union of insurers. 5. The owner of the building, structure, concessioner, builder, technical customer, who indemnified in accordance with the civil law damages, caused as a result of demolition, damage of building, structure, facility or parts of building or structure, object of incomplete construction, breach of requirements of safety during construction capital object, requirements for provision of safe operations of building, structure and paid compensation above indemnity in accordance with parts 1 3 of the current article, have the right to reclaim (regress) equivalent to indemnity and payment of compensation above indemnity from: 1) The person who fulfilled relevant works related to engineering surveys, preparation of draft documentation, regarding construction, reconstruction, capital repairs of capital construction object, due to which damage was caused; 2) Self-regulatory organization within the capacity of compensation funds of the self-regulatory organization in case, if the person, who fulfilled works related to engineering surveys, preparation of draft documentation, for the construction, reconstruction, capital repairs of capital construction object, due to deficiencies of which the damage was caused, at the time of performance of works had certificate allowing engagement in such works, issued by the given self-regulatory organization (National union of self-regulatory organizations of the relevant type in case of exclusion of information about this self-regulatory organization from the state register of self-regulatory organizations within the capacity of compensatory funds of the given self-regulatory organization, deposited to the account of such National union); 3) The organization, which conducted state inspection of results of engineering survey or non-state inspection of the results of engineering surveys if the damage is caused due to the noncompliance of results of engineering survey with the requirements of technical regulations and has positive conclusion of state inspection of results of engineering survey or positive conclusion of non-state inspection of results of engineering survey; 4) Organization, which conducted the state inspection of draft documentation or non-state inspection of draft documentation if the damage is caused due to non-compliance of draft documentation with the requirements of technical regulations and (or) the results of engineering survey and there is a positive conclusion to the state inspection of draft documentation or positive conclusion of non-state inspection of draft documentation; 5) The Russian Federation or subject of the Russian federation if the damage is caused due to non-compliance of built, reconstructed object of capital construction and (or) works, fulfilled during construction, reconstruction of object of capital construction, with the requirements of technical regulations and (or) draft documentation and there is positive conclusion by the State Building Inspection Authority. 6. Persons, mentioned in clause 1-5 part 5 of the current article, are collectively liable to the owner of the building, structure, concessioners, builders, technical customers, who compensated in accordance with the civil law damages, caused due to demolition, damage to building, facility either part of building or structure, of under-construction object, breach of safety requirements during the construction of capital construction object, requirements for the provision of safe operations of building, structure and paid damages in accordance with parts 1-3 of the current article. 7. In case of inadequacy of property of the state public institution, which conducted the state inspection of draft documentation and (or) state inspection of the results of engineering surveys, subsidiary liability for damage, caused due to demolition, damage to building, structure or part of building or structure, under-construction facility, is borne by the Russian Federation or subject of the Russian Federation. 8. Owner of the building, facility, concessioner, who indemnified in accordance with the civil law damages, causeddue to demolition, damage to building, structure either the part of building or structure, breach of requirements for the provision of safe operation of building, structure and indemnified in accordance with parts 1 and 2 of the current article, have the right to reclaim (regress) from the person (entity), who fulfilled during the operation of building, structure on the basis of agreement, concluded with the mentioned owner, concessioner, relevant works related to maintenance and (or) servicing of building, structure, due to deficiencies in which the damage was caused, equal to the amount of compensation of damages and indemnification. 9. If the number of building, structure owners is two or more, they are collectively liable for infliction of damage due to destruction, damage to building, structure either part of building or structure, breach of requirements for the provision of safe operations of building, structure. In case if the damage is caused due to breach of requirements for the provision of safe operations of building, structure by one of the owners, other owners, who compensated in accordance with the civil law damages, caused due to destruction, damage to building, structure either part of building or structure, breach of requirements for the provision of safe operations of building, structure, as well as paid compensation in accordance with part 1 of the current article, have the right to reclaim (regress) from the mentioned owner. 10. Provisions of parts 1 9 of the current article are not applicable to cases of infliction of damage due to destruction, damage of apartment building, part of such building, breach of requirements for provision of safe operations of such building. 107

11. Compensation of damages, caused due to the destruction or damage to apartment building, it parts, breach of requirements for the provision of safe operations of apartment building, is effected in accordance with the civil law. In case if the said damage is caused due to deficiencies in surveys, preparation of draft documentation, for construction, reconstruction, capital repair of object of capital construction, collectively with the person (entity), who fulfilled the engineering survey works, preparation of draft documentation, for construction, reconstruction, capital repair of the object of capital construction, due to deficiencies of which the damage was inflicted, liable are: 1) Self-regulatory organization within the capacity of compensation funds of the self-regulatory organization in cases if the person at the time of fulfilment of said works was certified to engage in them, issued by the given self-regulatory organization (National union of self-regulatory organizations of relevant type in case of deletion of information about the given self-regulatory organization from the state register of self-regulatory organizations within the capacity of compensation funds of the given self-regulatory organization, deposited to the account of such National union); 2) Organization, which conducted the state inspection of results of engineering surveys or non-state inspection of results of engineering surveys, if the damage was inflicted due to noncompliance of results of engineering surveys with the requirements of technical regulations and there is a positive conclusion of state inspection of results of engineering surveys or positive conclusion of non-state inspection of results of engineering survey; 3) Organization, which conducted the state inspection of draft documentation or non-state inspection of draft documentation, if damage is caused due to non-compliance of draft documentation with the requirements of technical regulations and (or) results of engineering surveys and there is positive conclusion of state inspection of draft documentation or positive conclusion of non-state inspection of draft documentation; 4) Russian Federation or subject of the Russian Federation if damage caused due to non-compliance of built, reconstructed object of capital construction and (or) works, fulfilled during construction, reconstruction of object of capital construction, with the requirements of technical regulations and (or) draft documentation and there is positive conclusion from the state building inspection authority. 108

Reunion AG, Zug, Switzerland established in 2009, provides international insurance and reinsurance brokerage as well as consulting services in insurance, reinsurance and corporate risk management for clients in Russia and CIS countries. The company has a seat in Zug, Switzerland. We specialize in servicing of property interests of large corporations associated with insurance and risk management including the field of investment construction projects. 109