German motor market

1. German motor market Market allocation Distribution channels Pricing trends Alexandra Mayr Casualty Actuaries of Europe Winter 2007 Meeting 29 November 2007

2. Agenda • Market allocation • Distribution channels • Pricing trends

3. German motor marketDominated by Allianz and HUK-Coburg * * All grouped together Source: Tillinghast KfZ-Studie – KfZ Versicherung 2005

4. Market share development (gross premium income) 35% 30% 25% 20% 15% 10% 5% 0% 1985 1987 1989 1991 1993 1995 1997 2005 1975 1977 1979 1981 1983 1999 2001 2003 Reunification Deregulation Largesize Mutual Insurers Largesize Publicly Traded Insurers Allianz Group Mid- and Smallsize Mutual Insurers Public Law Insurers Direct Insurers Mid- and Smallsize Publicly Traded Insurers Source: Tillinghast estimation based on published market data Direct and Mutual Insurers gain market share Largesize Publicly Traded Insurers lose market share

5. 25 23 21 19 17 15 13 11 9 7 5 1994 1995 1996 1997 1998 1999 2000 2005 2006 2001 1987 1988 1989 1990 1991 1992 1993 2002 2003 2004 motor insurance comprehensive cover third party, fire and theft cover Turnaround in 2004 – How good is the markets memory? Development of gross premium income (in billions €)

6. MTPL:Average claim size is increasing – claim per customer decreasing due to declining frequency. Claims frequency and claims size - motor insurance 15000 140 13000 120 11000 100 9000 80 (pro 1.000 insured) Claims Size (in 000s €) claims frequency 7000 60 5000 40 3000 20 1000 0 1985 1987 1989 1991 1993 1995 1997 1999 1975 1977 1979 1981 1983 2001 2003 2005 claims size claims frequency Source: Tillinghast estimates based on GDV data

7. Agenda • Market allocation • Distribution channels • Pricing trends

8. Distribution channels Motor • Tied agents still dominate the market • The broker and direct distribution channels gain market share • Importance of Bankassurance remains stable

9. Expected importance of distribution channels over the next five years

10. Conclusions • Tied agents organizations are a subject of strategy projects / under scruteny • Short term increase in tied agents is based on a delayed implementation of EU Directive on Insurance Mediation • Brokers‘ market will gain importance • Banks are expected to become more significant according to study‘s participants, however this still has to appear in the data • Internet and direct distribution will gain importance , especially in motor insurance (standardized product and increased price sensitivity)

11. Agenda • Market allocation • Distribution channels • Pricing trends

12. Pricing capabilities are converging Motor loss ratios by top four territories in Europe 105.0% 100.0% 15.7% 95.0% 90.0% Loss Ratio 85.0% 6.7% 80.0% 75.0% 70.0% 1999 2000 2001 2002 2003 2004 2005 GERMANY ITALY UK FRANCE Source: Axco, Tillinghast analisys

13. Ultimate goal is shifting this curve 20% destroy value Cumulative contribution to value added 200% 180 160 140 50% don’t create value 120 100 80 30% generate 150%of value 60 40 20 0% 0% 20 40 60 80 100% Percentage of customers Good customers at risk Managing actively ‘Up or out?’

14. Price Optimisation Process claim propensity models constraints optimisation competitive market analysis new premiums customer behaviour models customer value models

15. Final aim: understand price elasticity ofMr ‘X’ and adjust your tariff accordingly % Lapse rate 100% 80% Price opportunistically by identifying pockets of price indifference 60% 40% 20% 0% 0% 20% 40% 60% 80% 100% % Difference in rates relative to competition or % Change in rates relative to former tariff

16. Claim propensity Competitive market analysis Customer behaviour models Sophisticated Pricing capabilities are ‘Needed to win’

17. Conclusions • Advanced statistical techniques are now necessary for managing the portfolio • More and more companies are adopting the techniques we describe • Implementation and managing the change are key to success

18. Thank you for your attention!