Managing the Uncertainty of Terrorism Risk

MARSH

TERRORISM RISK INSURANCE

• The September 11, 2001, terrorist attacks created a severe market shortage for terrorism insurance

• The US Congress passed the Terrorism Risk Insurance Act (TRIA) as a federal “backstop” for insurance claims related to terrorism events in the US and US interests abroad– It has been extended (with amendments) twice and the current Act is

scheduled to expire on December 31, 2014, if not renewed

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How The Act Works2007 Renewal (Current In-Force)

$100B Maximum w/out Congressional Action

85% TRIPRA Coverage

Company Retention = 20% of PY DEP

$100M Aggregate Minimum >$5M Event Certification >

Original Policy Deductible

15%

Com

pany

Co-

Parti

cipa

tion

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EVOLUTION OF TRIA/TRIPRA

  TRIA 2002 TRIA Extension 2005 TRIPRA 2007

Termination December 31, 2005  December 31, 2007 December 31, 2014

Make-available provisionMust make coverage available for certified acts of terrorism on same terms and conditions as for other covered risks

No change No change

Covered acts

Foreign terrorism in the U.S. and on U.S. interests abroad.  Includes an act of war for workers’ compensation policies only.

No change

Foreign and Domestic terrorism in the U.S. and on U.S. interests abroad.  Includes an act of war for workers’ compensation policies only.

Certification level  $5 million  No change No change

Program trigger  $5 million

$5 million in 2006 (thru March 31, 2006)$50 million in 2006 (after March 31, 2006)$100 million in 2007

$100 million in insured loss in a Program Year

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EVOLUTION OF TRIA/TRIPRA (CONTINUED)

  TRIA 2002 TRIA Extension 2005 TRIPRA 2007

Covered Lines 

Commercial property and casualty (P&C) insurance (including excess insurance, workers’ compensation and surety insurance)

Commercial P&C insurance (including excess insurance, workers’ compensation and directors and officers insurance)

No change

Excluded      

Federal crop  Private mortgage  Financial guaranty Medical malpractice Health or life insurance 

including group life Flood under NFIA Reinsurance or retro

Added Exclusions:  Commercial auto Burglary and theft Surety  Professional liability Farm owners 

multiple peril

No change

Insurer Deductible (% of direct earned premium)

15 percent in 2005 17.5 percent in 200620 percent in 2007 20 percent

Federal reinsurance quota share  90 percent in 2002-2005 90 percent in 2006

85 percent in 2007 85 percent

Insurance industry retention for mandatory recoupment $15 billion in 2005 $25 billion in 2006

$27.5 billion in 2007 $27.5 billion

Cap on liability $100 billion  No change No change

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• There is limited expectation of TRIA being addressed in Congress until we get closer to the expiration date in 2014

• TRIA has historically received centrist bipartisan support– This could outweigh any far right or left sentiment relative to limiting

government involvement in terrorism insurance

• Three pieces of legislation have been tabled in the House of Representatives

WHAT TO EXPECT

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Property Terrorism Risk Transfer Solutions

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TERRORISM RISK INSURANCE Terrorism Insurance Take-up Rates By Year

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HOW TO PREPARE

Strategies for handling potential expiration of TRIA December 31, 2014

• Align property programs with carriers who will continue to support terrorism coverage in the absence of a TRIA backstop to minimize TRIA “sunset”

• Consider a standalone terrorism policy as alternative to embedded TRIA – bind a standalone terrorism product to lock in market capacity prior to possible TRIA sunset

• Standalone capacity reservation approach – use standalone capacity in excess position with option to “flip” to be primary if TRIA is not extended

• TRIA Captive – pre-agreed terms in 2014 to “flip” standalone terrorism reinsurance to be primary and/or enhanced delayed payment coverage conversion

• Standalone capacity commitment contracts

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Options for Managing Terrorism Insurance Uncertainty

• Secure full term embedded terrorism coverage from All Risk property markets where possible

• Stand-alone terrorism market solutions

– 100 percent or partial stand-alone terrorism coverage

– Capacity commitment contracts

– “Flip/Flop” stand-alone terrorism contracts

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Capacity Commitment

Mechanism to reserve capacity prior to 31st December 2014

Partial take-up of committed capacity is permitted

Coverage offered on the basis of the T4/T4A or the All Risks policy form

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Full term

TRIA with partial Sunset provisions

Post-December 31, 2014 with “Flip/Flop”

Conversion premium identified on quote

Sunset

All Risk

“Flip/Flop” Stand-Alone Terrorism Contract

Excess Standalone Terrorism

All Risk

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TRIA Captive Program – TRIA expiration strategy

Captive TRIA Policy

C. Co-Participation

15%Retention

Reinsured by the Federal Government

TRIA85%

B. TRIA Captive Deductible (20% of prior year’s direct earned premium)

A. Federal Backstop Trigger$100M

Policy Retention

Standalone Terrorism TRIA “wrap”:

• A - $100 million TRIA trigger reinsurance

• B - TRIA deductible reinsurance

• C - 15% Co-participation reinsurance

• D - Option – Delayed TRIA certification/payment coverage

• Captive TRIA Certified Policy: U.S. based captives can act as TRIA authorized insurers and access the U.S. TRIA Federal backstop. TRIA reinsurance offered excess of captive TRIA deductible, captive share can either be retained, subject to sufficient capital, or reinsured with the stand-alone terrorism market.

WORKERS COMPENSATION

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• State regulated and compulsory line of business

• Insurers cannot limit or exclude any form of terrorism coverage

• Nuclear, Biological, Chemical, and Radioactive perils covered and a significant concern to WC writers

–Arguably the most uninsurable risk(s)

–Limited reinsurance capacity

• Policies written on an unlimited basis

UNIQUE ASPECTS OF WORKERS’ COMPENSATION

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• The uncertainty of TRIPRA’s future is having an impact on the WC line of coverage; unique because

–More granular employer concentration data requirements

– Increased scrutiny by carriers on insured employee concentrations

–Some insurers have non-renewed WC programs or are only offering short term renewal policies with 12/31 expiration dates to coincide with current TRIPRA expiration

• Large risks in NYC are most affected, but problem persists in other major urban cities or for industries such as financial institutions, colleges / universities, hospitals, and defense contractors

–Fewer insurer options for buyers and price increases

–Contingent endorsements that allow unilateral pricing increases (subject to regulatory approval) are being added to policies

INSURER REACTION TO PENDING TRIPRA EXPIRATION

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• Insurers monitor their concentrations of insured employees on a portfolio basis as well as in concert with other correlated lines of coverage

• Insurers “overlined” in certain areas or cities decline risks or impose surcharges on premiums

• Concentration data and terrorism catastrophe models have improved, allowing insurers to:

–Manage their potential exposures to terrorism loss scenarios

–Achieve pricing more reflective of the assumed risk

–Satisfy rating agency requirements

EMPLOYEE CONCENTRATION RISKWhy do employee concentrations matter?

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• Be proactive:

–Start renewals early

–120 days or more prior to policy effective date

• Provide high-quality underwriting data

• Use modeling and risk analytics to differentiate terrorism risk profile

–Work with risk advisors to develop communication and presentation strategies for key risk exposures

MANAGING THE UNCERTAINTY: WHAT CAN YOU DO?

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Examples of some additional data elements include:

• Building level employee data

• Employee marital / dependency status

• Employee telecommuting practices and impact on concentration

• Physical security of the building including guards, surveillance cameras, parking areas, and HVAC protections

• How access to the building is controlled

• Construction of the building and location of the offices

• Management policies around workplace violence, weapons, and employment screening

• Employee security procedures / staff

• Emergency response / crisis management plan and procedures

• Fire / life safety program

MANAGING THE UNCERTAINTY: WHAT CAN YOU DO?Highest quality data serves as best differentiator

This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.

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