Reproductive biology

• System investment

• The level of investment in banking IT systems has not been matched in insurance

• Indeed, banking systems are complex but the requirements for insurers are equally so, particularly in the age of heightened internal control requirements

• This is particularly the case for both domestic companies and foreign players operating in partnership, where IT systems may not be adequate, requiring investment and development

• Automation of processes and CRM

• Off the shelf and bespoke software enables insurers to more rapidly process large volumes of applicants and manage insureds

• Best practice abroad will increasingly be implemented in Turkey and foreign entrants have the opportunity to move their partners up the tech-tree and increase efficiency (As above)

• Computing power

• Advances in computing have facilitated greater depth of data analysis underpinning underwriting processes for companies desiring to develop a competitive advantage

• Direct and internet distribution

• The proliferation of the internet has laid the foundation for online insurance distribution, however given the nascent nature of the industry, knowledge of insurance, per se, is under-developed

• Once comprehension increases, online sites (including comparison ones) will proliferate.

• Direct, telephone marketing will grow concurrently

• Internet driven information era

• Ability to more rapidly access comparative information of insurers will engender even more competitive pricing for consumers

5-FORCES (*) (1 0F 2)

Force Analysis Threat

Threat of new entrants

• New entrants persist annually, with recent additions from Dubai, Coface etc.

• There are minimal barriers to entry to the Turkish market

• Insurance cannot be tied to other services in bancassurance for example (mortgage insurance), there are emerging leading brands, but little loyalty, minimal switching costs and unprohibitive legislation (Capital requirement is not too high)

• Whilst insurance is a scale business, there are enough large insurers globally who all want a piece of Turkey. Requirements to obtain licences to operate are not impossible to obtain (As they were in China for AMC initially)

• There are no discernable profitable niches insurers operates in that should fear new entrants; it is across all branches; credit insurance with only 15 operators has been generating underwriting losses for example. Having said that, no premiums have been generated in the support branch

Power of Suppliers

• Defining suppliers as insurers and capital providers, none have much control over the market. There is already an excess of capital and plenty to be found to support growth as needed

• The market of insurers is highly fragmented with little concentration

• Outsourcing is generally low in Turkey at present although third parties such as IT providers are utilised. There is little power here

• In terms of human capital there is limited supply but little anecdotal evidence to assert there is a battle for talent as of yet (underwriters being poached)

• There is only one reinsurer licenced in Turkey with 30% of the market, but global cession is permitted

• The residual market is dealt with entirely by the Undersecretariat funded by insurers

• Smaller incumbents are aware they lack the firepower so whilst their relative power is limited it will not be for long as they receive endless proposals from foreign insurers

• Structurally there is little ability to create “power”; many suppliers and substitutes, low switching costs in GI, penetration is low other than in compulsory insurance and no intermediaries to consumers to speak of

(*) 5-forces is an industry level analysis with 4 factors impacting the resultant degree of industry-competitive rivalry

5-FORCES (2 0F 2)

Force Analysis Threat

Power of Buyers

• Personal lines do not pose a threat to the insurance industry

• Given the nature of the industry, commercial lines do not have excessive pricing control. As a commoditised product there is little latitude in tariffs, and insurers are aware of maintaining their LOR (thought there are invariably insurers that will sacrifice growth for profit). There are limited large commercial line customers to be fought after to gain the “millions in premiums”

• As the insurance market matures, supported by information availability through the internet, price and service can be easily compared. This taken together with high price elasticity increase bargaining power of customers

• In terms of distribution, there are multiple channels. Banks (bancassurance) are in the driving seat, spoilt with choice. Insurers cannot directly control brokers and agents but certainly can compete for them

Availability of

Substitutes

• There are innumerable substitutes (Or as of 2009, 37 GI insurers) in the market and the majority of which offer the same suite across the same branches

• There are a few specialty insurers in the market in single lines, but empirically have not demonstrated competitive advantage, the niches are small and furthermore there are not barriers to entry

Degree of Competitive Rivalry

• In the face of a growing, large market, competition to become a leading player in Turkey is incredibly fierce. With little ability to differentiate, and selling a commoditised product, the general insurance market is difficult

• Rivalry is much higher in the non life market than the life one

• Majority of players are global heavyweights implying little differentiation. Due to penetration competition is for new customers, rather than stealing existing ones from one another

• Success is a two phase notion. Initially, brand building is integral with best access to

distribution to drive GWP. Low cost structure, greater efficiency and better customer service will beat out competitors eventually and aid in generating underwriting result across the cycle. This is to be supported by strong investment generation capabilities. In the second phase, applying hitherto generated underwriting knowledge to minimise the LOR and effective cost control to minimise COR will support further market penetration to cement market position