The Cost of Terrorism:

How Much Can We Afford?

Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038

Tel: (212) 346-5520 Fax: (212) 732-1916 bobh@iii.org www.iii.org

National Association of Business Economics46th Annual Meeting

Philadelphia, PA

October 4, 2004

Presentation Outline

• TRIA Background & Update• Is Terrorism an Insurable Risk—Yet?

Determinants of insurabilityWorkers comp-specific problems

• Capacity, Capital & Financial Strength• The Global Face of Terrorism• The Market for Terrorism Insurance• Politicization of the Terrorism Threat• Q & A

Terrorism Risk Insurance Act (TRIA): UPDATE

• TRIA expires 12/31/05 (enacted Nov. 26, 2002)

• Pan-industry coalition coalescing around a 2-year extension

• House subcommittee hearings held April 28—went well H.B. 4634 introduced in June 2004

Passed by subcommittee September 30

• Senate hearings May 18—many committee members amenable BUT seem inclined to wait for Treasury study due June 2005

• Reauthorization opposed by some groups (e.g., CFA, AEI)

• Exclusionary language (except WC) for terror already developed by ISO & approved in 46 jurisdictions

Federal National Security and Counterterrorism Spending

$354

$547

$0

$100

$200

$300

$400

$500

$600

FY2001 FY2004

$ B

illio

ns

Source: 9/11 Commission.

• Federal national security and anti-terror spending increased by 55% between FY2001 and FY2004

• Total Excludes: Billions spent by

state and local governments

Mitigation costs borne by private industry

Cost of terrorism insurance

Structure of the Terrorism RiskInsurance Program

$0

$25

$50

$75

$100

Year 1 Year 2 Year 3

($ B

illio

ns)

* Company retention based on direct premiums written.

Source: U.S. Congress, Insurance Information Institute.

10%

In

du

stry

Co-

Rei

nsu

ran

ce

abov

e 7%

Ret

enti

on

Max Loss

$15 billion$12.5 billion

$10 billion

10%

In

du

stry

Co-

Rei

nsu

ran

ce

abov

e 10

% R

eten

tion

10%

In

du

stry

Co-

Rei

nsu

ran

ce

abov

e 15

% R

eten

tion

Fed

eral

Gov

ern

men

t co

vers

90

% a

bov

e 7%

ret

enti

on t

o $1

00B

max

Fed

eral

Gov

ern

men

t co

vers

90%

ab

ove

10%

ret

enti

on t

o $1

00B

m

ax

Fed

eral

Gov

ern

men

t co

vers

90%

ab

ove

15%

ret

enti

on t

o $1

00B

m

ax

7% Retention*10% Retention* 15% Retention*

Government recoups payouts below $10B in Year 1, $12.5 Year 2, $15B Year 3 with 3% max surcharge on policy premium.

Insurance Industry Retention Under TRIA ($ Billions)

$10.0

$12.5

$15.0

$17.5

$20.0

$0

$5

$10

$15

$20

$25

Year 1(2003)

Year 2(2004)

Year 3(2005)

Year 4(2006)

Year 5(2007)

$ B

illi

ons

Source: Insurance Information Institute

Above the retention, federal govt. pays 90% and private

insurers pay 10%. Govt. caps its losses at $100 billion.

Proposed

ARE WE THERE YET?

THREE YEARS AFTER 9/11, IS TERRORISM AN

INSURABLE RISK?

Terrorism Violates Traditional Requirements for Insurability

Requirement Definition Violation

EstimableFrequency

Insurance requires large number of observations to develop predictive rate-making models (an actuarial concept known as credibility)

Very few data pointsTerror modeling still in infancy, untested.US intelligence infrastructure deeply flawed .

EstimableSeverity

Maximum possible/ probable loss must be at least estimable in order to minimize “risk of ruin” (insurer cannot run an unreasonable risk of insolvency though assumption of the risk)

Potential loss is virtually unbounded.Losses can easily exceed insurer capital resources for paying claims.Extreme risk in workers compensation and statute forbids exclusions.

Source: Insurance Information Institute

Requirement Definition Violation

Diversifiable Risk

Must be able to spread/distribute risk across large number of risks“Law of Large Numbers” helps makes losses manageable and less volatile

Losses likely highly concentrated geographically or by industry (e.g., WTC, power plants)Take-up rate low outside most at-risk zones/industries leads to adverse selection problem

Random Loss Distribution/Fortuity

Probability of loss occurring must be purely random and fortuitousEvents are individually unpredictable in terms of time, location and magnitude

Terrorism attacks are planned, coordinated and deliberate acts of destructionDynamic target shifting from “hardened targets” to “soft targets”Terrorist adjust tactics to circumvent new security measuresActions of US and foreign governments may affect likelihood, nature and timing of attack

Terrorism Violates Traditional Requirements for Insurability (cont’d)

Source: Insurance Information Institute

Modeling Severity & Frequency

Exposure

Location

# & Type Employee

Weapons Selection

Blast/Explosion

Chemical

Biological

Radiological

Other (e.g., Dam Failure)

Casualty Footprint

Physical distributio

n of intensity of event

Targets

Type of structure/

facility

Frequency

Weapon availability

Target attractiveness

Relative attractiveness

of region

State-by-State

Analysis

Sources: Insurance Information Institute based on NCCI Item Filing B-1383 & EQECAT modeling.

Information Problems:

Traditional Insurance assumes that emerging issue information is available and shared (Terrorism information sharing is “asymmetric” – Classified data is not shared).

Unique Role & Responsibility of Government:

Insurance is designed for policyholders’ insurable interests (Victims of terrorism are mostly surrogate targets for attacks mainly aimed at government, and the government is in a unique position to influence the likelihood of attack based upon foreign policy.)

Additional Insurability Concerns

Source (this slide and next three): Terrorism, TRIA, and a Timeline to Market Turmoil? by James Macdonald of ACE USA, presentation before the Real Estate Roundtable, April 22, 2004.

Surplus Impairment Risk: Statutory Accounting requires insurers to set aside reserves for the ultimate liabilities arising from the insurance policies they underwrite. (Insurers are not allowed to post reserves for losses that have not occurred. Therefore, insurers are not allowed to post reserves specifically related to catastrophe losses from natural perils or terrorism until they actually occur. As a result, catastrophe losses deplete insurer’s capital & surplus base intended for the security of all policyholders).

Pre-Loss Funding: Almost all insurance assumes that premiums are paid first, normally at the inception of the policy. (In terrorism programs or pools, private and public sector solutions, such as TRIA, often use a combination of pre-loss and post-loss funding. )

Additional Insurability Concerns

Unlimited risk-of-ruin due to uncapped medical obligations and lifetime income payments 9/11 transformed many WC underwriting decisions into capital management decisions.

WC insurers cannot exclude terrorism in any state. WC “take-up” ratio = 100%With the exception of PA state WC laws do not even permit exclusion of war.

Traditional statewide rating approach is completely unsuitable for pricing terrorism Office worker in Times Square = Same premium as office worker in Rochester? Also: Lowest rated classes present disproportionate risk to terrorist loss (assuming an attack similar to 9/11): office, secretarial (8810).

Terrorism & Workers Comp: Unique Insurability Problems

New Exposure Basis:

Employees by location – not yet formally embraced by rating agencies – new underwriting & exposure management systems now required.

Catastrophe Reinsurance:

Prior to 9/11, life insurers provided low-cost WC reinsurance over single event insurer retentions of $10 million or less – with no Terrorism or NRBC exclusion. New Bermuda capacity has not replaced the life reinsurers, who exited market after 9/11. No NRBC is available to today for national account insurers.

Terrorism & Workers Comp: Unique Insurability Problems

Source: Terrorism, TRIA, and a Timeline to Market Turmoil? by James Macdonald of ACE USA, presentation before the Real Estate Roundtable, April 22, 2004.

CAPITAL, CAPACITY & PERFORMANCE

CAN INSURERS AFFORD ANOTHER MAJOR TERRORIST

ATTACK?

Sept. 11 Industry Loss Estimates($ Billions)

Life$1.0 (3.1%)

Aviation Liability

$3.5 (10.8%)

Other Liability

$4.0 (12.3%)

Biz Interruption

$11.0 (33.8%)

Property -WTC 1 & 2

$3.6 (11.1%) Property - Other

$6.0 (19.5%)

Aviation Hull$0.5 (1.5%)

Event Cancellation$1.0 (3.1%)

Workers Comp

$1.8 (5.8%)

Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute

EVENT

WTC victims (workers & visitors)*

WTC hijacked jets (incl. 10 hijackers)

Pentagon victims on the ground

Pentagon hijacked jet (incl. 5 hijackers)

Pennsylvania jet crash (incl. 4 hijackers)

DEATHS

2,605

157

125

64

44

TOTAL 2,995

Source: *New York City Medical Examiner estimate of 2,752 (as of 29 Oct. 2003), less 147 killed on hijacked jets.

Death Toll from September 11, 2001 Terrorist Attack

Top 10 Insured Losses Worldwide,1970-2004 ($2003)

$4.9 $6.0 $6.2 $6.4 $6.4 $6.8 $7.6

$17.3

$20.9

$32.5

$0

$5

$10

$15

$20

$25

$30

$35

$ B

illi

ons

*Insurance Information Institute estimate; Hurricane Charley figure is from ISO/PCS. Both in 2004 $.Sources: Swiss Re, “Natural Catastrophes and Man-Made Disasters in 2003,” Sigma, no. 1, 2004; except Sept. 11 estimate from Hartwig, Robert P., 2004 Mid-Year Property/Casualty Insurance Update, Insurance Information Institute. Figure is stated in 2001 dollars.

Insured Loss Estimates (As of September 13, 2002)

0

500

1000

1500

2000

2500

3000

3500

$ M

illi

ons

Source: Morgan Stanley, Insurance Information Institute as of September 13, 2002.

Top 20 Groups (pre-tax, net of reinsurance, $ millions)

NOTES:

*Includes $474 mil for American Re

**Includes $289 mil for Converium

***Insurer is bankrupt

Top 5 Costliest Terrorist Attacks(by insured property loss*)

*Includes property, business interruption and aviation hull losses.Source: Swiss Re; Insurance Information Institute.

$32,500

$907 $744 $725 $671$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

9/11 TerroristAttacks

Bomb NearNatWest Tower

in London

IRA Car BombNear

ManchesterMall

Bomb in WTCGarage

Bomb inLondon

FinancialDistrict

$ Millions, Adjusted to 2001 Price Level

9/11/01

2,995 Killed

2.250 Injured

4/24/93

1 Killed

54 Injured

6/15/96

0 Killed

228 Injured

2/26/93

6 Killed

725 Injured

4/10/92

3 Killed

91 Injured

Oklahoma City bombing in 1995 cost insurers $125 million

2% 2% 4% 6%12%

20%

68%

0

50

100

150

200

250

9/10 3/4 1/2 1/4 1/20 1/25 3/10 1/50 1/100 1/500 1/1000

Industry Loss with TRIA Federal Contribution Excess of TRIA Limit

Under Most Scenarios TRIA Is Dormant But Vital When Triggered

P&C U/W Loss With and Without TRIA Support

Chance of an Event

U/W Loss ($ B)

Source: EQECAT, NCCI

Total loss as % of policyholder surplus

TRIA not triggered under approximately 98% of

scenarios

Percent of 2003 Surplus Lost Due to a $25 Billion Terrorism Attack in 2004

With TRIA in Place

Source: The Economic Effects of Federal Participation in Terrorism Risk, Analysis Group, September 14, 2004.

Top 10 US P/C Insurers by Market Share

14.4%

32.5%

11.7% 12.6% 13.3%14.7%

11.7%

7.7%

22.1%

4.7%

1 2 3 4 5 6 7 8 9 10

Even with TRIA in place, some major insurers will lose more

than 10% of their policyholder surplus: Terrorism is a clear

threat to stability.

$0.9 $1.1 $1.8$7.4

$15.4

$91.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

SearsTower

AirplaneAttack

El PasoEnergyTruckBomb

9/11 Attack RockefellerCtr. Truck

Bomb

NuclearPowerPlant

Sabotage

New YorkCity

AnthraxRelease

WC

Lo

ss

es

($

Bill

ion

s)

Source: Eqecat, NCCI.

Estimated Workers Comp Insured Losses & Deaths for Terrorist Events

1,000

12,300

173,000

1,300

Fatalities

Port Security War Game Estimates $58B Impact from Simulated Terrorist Attack

Source: OECD report, Security in Maritime Transport: Risk Facts and Economic Impact, July 2003

$0

$50

$100

$150

$200

$250

$300

$350

$400

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

U.S. Policyholder Surplus: 1975-2003

Source: A.M. Best, ISO, Insurance Information Institute

$ B

illi

ons

Surplus (capacity) peaked at $339.3 Billion in mid-1999 and fell by 15.9% ($53.9 billion) to $285.4 billion at year-end 2002

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity at year end 2003 was just 2.3% above its mid-1999 peak

Capital Myth: US P/C Insurers Have $350 Billion to Pay Terrorism Claims

"Target" Commercial*$114 billion

33%

Commercial Reserve

Deficiency$30 billion (est.)

9%

Other Commercial$58 billion

17%

Personal$146 billion

42%

Total PHS = $298.2 B as of 6/30/01

= $291.1 B as of 12/31/02

= $347.0 B as of 12/31/03

*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute estimates based on A.M. Best Q.A.R Data.

Only 33% of surplus backs

“target” lines net of reserve deficiency

US Reinsurers: Change in Policyholder Surplus ($ Billions)

$60.9$58.9

$56.4

$45.2

$48.8

$64.6

$40

$45

$50

$55

$60

$65

$70

1998 1999 2000 2001 2002 2003E

$ B

illi

ons

Source: A.M. Best; Insurance Information Institute

Reinsurer PHS fell 20% from 1998-2002. Capacity today similar to 1998. Same story

globally.

U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3$4.3

$28.1

$5.9

$12.9$17.0

$0

$5

$10

$15

$20

$25

$30

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

04E

*

*2004 figure is 2004 estimate as of September 20, 2004.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2004 could become the second worst year ever for natural

disaster losses in the US

($60)

($50)

($40)

($30)

($20)

($10)

$0

$10

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Underwriting Gain (Loss)1975-2003

Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

In 2001 insurers paid out $52 billion more in loss and associated expenses

than they earned in premiums

-5%

0%

5%

10%

15%

20%

91 92 93 94 95 96 97 98 99 00 01 02 03

ROE Cost of Capital

Property/Casualty Insurer ROE vs.Industry Cost of Capital: 1991 – 2003

Source: The Geneva Association, Insurance Information Institute

US P/C insurers missed their cost of capital by an average 6.4 points from 1991 to 2003

-5%

0%

5%

10%

15%

20%

91 92 93 94 95 96 97 98 99 00 01 02 03 04F

ROE Cost of Capital

ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2004F

Source: The Geneva Association, Ins. Information Inst.

The non-life insurance industry achieved its costs of capital in 2004 for the first time in many years

-14.

6 p

ts -10.

2 p

ts

US P/C insurers missed their cost of capital by an average 6.5 points from 1991 to 2003

-1.2

p

ts

0.4

5

0.4

1

0.4

3

0.4

2 0.6

8

1.2

2

1.7

1

1.1

2

0.4

4

0.5

8 0.8

2

0.9

9

1.0

5

1.7

8

1.1

0.8

3

1.5

6

1.0

8

0.8

0.5

1

0.4

1 0.7

4

1.9

8

3.7

8

3.5

4.93

0

1

2

3

4

5

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03E

Rati

o o

f D

ow

ngra

des

to U

pgra

des

Insurer Downgrade/Upgrade Ratio*

Sources: Impairment Rate and Rating Transition Study—1977 to 2002, A.M. Best & Co.; 2003E from S&P. *U.S. property/casualty and life/health insurers

P/C Company Insolvency Rates:1993 to 2002

Source: A.M. Best; Insurance Information Institute

1.20%

0.58%

0.21%0.28%

0.79%

0.60%

0.23%

1.02% 1.03%

1.33%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

383030

10-yr Failure Rate

= 0.72%

PRICING ENVIRONMENT PRE/POST 9/11

CAN BUYERS OF INSURANCE AFFORD ANOTHER MAJOR

TERRORIST ATTACK?

$6.10$6.40

$8.30$7.70

$7.30

$6.49

$5.70$5.25

$5.71

$6.46

$8.91

$11.96

$4.83$5.20

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

90 91 92 93 94 95 96 97 98 99 00 01 02 03* Cost of risk includes insurance premiums, retained losses and administrative expenses

Source: 2003 RIMS Benchmark Survey; Insurance Information Institute

Cost of Risk: 1990-2003*

1992-2000 = -41.8%

2000

-03

= +1

47.6

%

$2.92$2.72

$2.55

$1.43

$3.63 $3.54 $3.57

$2.07

$1.26 $1.15

$2.49

$1.86$1.67

$1.00

$0.46$0.87 $0.82

$0.96

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

Total WCCosts

Total LiabilityCosts

TotalProperty

Costs

Other Costs Total Admin.Costs

Total Mgmt.LiabilityCosts

2001 2002 2003

Components of Cost of Risk Per $1,000 of Revenue*

* Cost of risk includes insurance premiums, retained losses and administrative expensesSource: 2003 RIMS Benchmark Survey; Insurance Information Institute

+45.8% +90.3% +113.8%

+107.0%

+44.8%+150.0%

% Change

2001 -03

14%

11% 1

3%

16%

19%

22%

28%

31%

31%

28% 3

0% 3

2%

33%

28% 29%

30% 3

2%

30%

27%

25%

28%

22%

18%

18%

17%

16%

12%

12%

10% 12%

11%

9%

7%

7%

5%

4%

9%

9%

0%

5%

10%

15%

20%

25%

30%

35%

Ju

l-01

Au

g-0

1S

ep-0

1O

ct-0

1N

ov-0

1D

ec-0

1Jan

-02

Feb

-02

Mar-

02

Ap

r-02

May-0

2Ju

n-0

2Ju

l-02

Au

g-0

2S

ep-0

2O

ct-0

2N

ov-0

2D

ec-0

2Jan

-03

Feb

-03

Mar-

03

Ap

r-03

May-0

3Ju

n-0

3Ju

l-03

Au

g-0

3S

ep-0

3O

ct-0

3N

ov-0

3D

ec-0

3Jan

-04

Feb

-04

Mar-

04

Ap

r-04

May-0

4Ju

n-0

4Ju

l-04

Au

g-0

4

Source: MarketScout.com

Commercial Premium Rate Changes Are Sharply Lower

Is moderation due to realization of performance and profit goals, increasing capacity/ capital, or market- share strategies?

World Rate-On-Line Index(1990 = 100)

100116

283

372

337

288

248

193

160138 142

194

239260

230

0

50

100

150

200

250

300

350

400

90 91 92 93 94 94 96 97 98 99 00 01 02 03 04

Source: Guy Carpenter

Reinsurance prices rising, limits falling: ROL up significantly, though not as much as after Hurricane Andrew in 1992

THE GLOBAL FACE OF TERRORISM:

MOST MAJOR ECONOMIES HAVE CREATED PERMANENT GOVERNMENT-BACKED

TERRORISM INSURANCE FUNDS

Governments InsuringTerror Risk

Government Backed Terrorism Insurance ProgramsTerrorism Risk Insurance

Country Provider DetailsUnited Kingdom Pool Re Created in 1990’s due to IRA terrorism losses.

Spain Consorcio Covers “Extraordinary Risks” such as Earthquake, Volcanic Eruption, Flood, Storm, Terrorism and Civil Commotion

South Africa SASRIA Created in 1929 due to political climate in South Africa - still in existence today.

Israel PTCF Covers losses triggered by politically motivated violence (including terrorism).

France GAREAT Created post September 11, pool with state guarantee for terrorism coverage.

Germany Extremos Created post September 11, pool with state guarantee for terrorism coverage

Australia Created in November 2002

Source: Swiss Re Focus Report: Terrorism

Total International Terrorist Attacks, 2003 (Revised 22 June 2004)

Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

6

80

220

67

0

338

222

0 3

331

0

61

Africa Asia Eurasia LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Number of Attacks (Total = 208)Deaths (Total = 625) In 2003, there were 208

terrorist attacks resulting in 625 deaths

and 3,646 injuries

Total Casualties Caused by International Terrorist Attacks, 2003

(Revised 22 June 2004)

Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

8

222

0 3

331

0616

1,205

076

1,492

0

867

Africa Asia Eurasia LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Dead (Total = 625)Wounded (Total = 3,646)

In 2003, there were 208 terrorist attacks

resulting in 625 deaths and 3,646 injuries

International Terrorist Attacks by Type of Event, 2003

Bombing, 119

Arson, 3

Assault, 3

Chemical, 1

Suicide Attack, 11

Firebombing, 4

Armed Attack, 49

Kidnapping, 14

Skyjacking, 1

Not Applicable, 1

Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

Bombings accounted for 57% of the 208 attacks in 2003, while armed attacks

accounted for 24%,

International Terrorist Attacks by Type of Facility Struck, 2003

Military, 3

Other, 106

Government, 16

Diplomat, 15

Business, 61

Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

Attacks on businesses accounted for 30% of the 201 terror attacks

against facilities in 2003, while attacks

against govt. facilities accounted for 8%,

International Terrorist Attacks by Casualty, 2003*

Military, 44

Other, 3,835

Government, 355

Diplomat, 8

Business, 29

*Total of 4,271 casualties consists of 625 deaths and 3,646 injuries.Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

Terrorist attacks killed more civilians than any other group (90% of the

4,271 casualties), followed by military personnel

(1%) in 2003. Business personnel accounted for

0.7% of casualties (despite 30% of attacks being

against business facilities).

The Market forTerrorism Coverage

Terrorism Coverage Take-Up Rate Rising

Source: Marsh, Inc.; Insurance Information Institute

23.5%26.0%

32.7%

44.2%46.2%

2003:II 2003:III 2003:IV 2004:I 2004:II

Terrorism take-up rate for non-WC risk rose

through 2003 and continues to rise in 2004

TAKE UP RATE FOR WC COMP TERROR

COVERAGE IS 100%!!

Terrorism Coverage: Take-Up Rates by Region

Source: Marsh, Inc.; Insurance Information Institute

30.3%

26.2%

21.8%

18.6%

Northeast Midwest South West

Terrorism take-up rate is highest in

the Northeast

Terrorism Coverage: Take-Up Rates by Industry

35.3%34.7%

31.5%31.0%

30.2%29.5%

27.1%26.8%

25.9%22.1%

21.6%20.0%

18.2%12.2%

40.5%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Energy

Media

Food & Beverage

Habitational/Hospitality

Healthcare

Real Estate

Transportation

Utility

Financial Institution

Public Entity

Tech/Telecom

Education

Retail

Manufacturing

Construction

Source: Marsh, Inc.

Given the choice, what percentage

of employers would forego WC terror coverage?

Source: Marsh, Inc.; Insurance Information Institute

5.18%

3.67%

4.26% 4.36%

2003:II 2003:III 2003:IV Average

FACTs on Terror Premium Relative to Property Premium

Highest = Energy Industry = 8.03%

Lowest = Construction = 2.36%

Increase reflects fall in price of property coverage

rather than increase in price of terror coverage

Terrorism Premium as a Percentage of Property Premium

Terrorism Premium as Percentageof Property Premium, by Industry

7.65%6.07%

5.09%4.94%

4.76%4.76%4.69%

4.20%4.02%

3.75%3.56%

3.31%3.10%

2.36%

8.03%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9%

Energy

Habitational/Hospitality

Media

Real Estate

Utility

Education

Transportation

Food & Beverage

Public Entity

Technology/Telecom

Retail

Financial Institutions

Healthcare

Manufacturing

Construction

Source: Marsh, Inc.

THE POLITICIZATION OF TERRORISM

If They Don’t Know, Insurers Can’t Presume to Know Either

They’re Here and Plans are “90% Complete” to Attack

• Most major government officials believe another attack is imminent

• Terrorists’ plans are 90% complete for next attack

• Government has no idea of how, when, where, who or what kind of attack is next.

Ability of Terrorism to Affect Political Outcomes Also Suggests

Terrorism Uninsurable• March 11 Madrid bombings

taught us that terrorism can be used to not only kill people and destroy property, but affect political outcomes

• American actions abroad likely influence likelihood of attack in US. [e.g., Is Iraq an al Qaeda recruiting tool?]

• Both seem to be inconsistent with insurability

Number of Chemical Plants that Could Threaten Nearby People

Source: EPA and Department of Homeland Security from the Wall Street Journal, “Chemical Plants Still HaveFew Terror Controls,” August 20, 2004, p. B1; Insurance Information Institute

7,728

123

4,391

2

Threatens More Than 1,000 People Threatens More Than 1,000,000 People

EPA Homeland SecurityHow is it that the EPA

DHS come to such radically different

conclusions?

DHS estimate is 43% less than EPA

DHS estimate is 98% less than EPA

Summary• Large scale attacks still not insurable even 3 years

after 9/11

• Too many solvency-threatening scenarios

• Workers Compensation has many unique problems and take-up rate is 100%; No exclusions allowed

• Politicization of terror risk makes insuring against terror even more problematic

• Timely TRIA renewal in jeopardy

Insurance Information Institute On-Line

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