The Terrorism Risk Insurance Act of 2002

Now You See It . . .

Christopher Yaure, EsquireGE Insurance SolutionsPresentation to CAReSeptember 13, 2004

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September 13, 2004

“Uncertainty is the only certainty there is, and

knowing how to live with insecurity is the only

security.”

John Allen Paulos, quoting his father, in A Mathematician Plays the Stock Market (2003 New York)

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September 13, 2004

What Is Different About (Re)Insuring Against Terrorism?Underwriting

>Non-random events>Risk difficult to quantify>Expected frequency can change quickly>Asymmetrical information>Interdependent risk>Historical data less relevant>Difficulty proving cause of loss

Distribution of risk>Multiline risk>Correlation between geographically remote events>Correlation between events in different countries

Corporate level concerns>Correlation between loss events and asset values>Shareholder awareness>Public policy considerations

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Lines of Coverage

Property Workers Compensation Aviation Marine

General Liability Auto Liability

Directors and Officers LiabilityProfessional Liability

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Type of Terrorism Coverage

TRIA Non-TRIA

Foreign person or interest

Domestic

Commercial lines Personal lines

Property and casualty insurance losses exceed

$5,000,000

Smaller events

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September 13, 2004

TRIA on Reinsurance to Cover Exposure

“Obtaining Coverage. – This title may not be construed to limit or prevent insurers from obtaining reinsurance coverage for insurer deductibles or insured losses retained by insurers pursuant to this section, nor shall the obtaining of such coverage affect the calculation of such deductibles or retentions.”Sec. 103(g)(1)

“Limitation on Financial Assistance. – The amount of financial assistance provided pursuant to this section shall not be reduced by reinsurance paid or payable to an insurer from other sources, except that recoveries from such other sources, taken together with financial assistance for … a Program Year provided pursuant to this section, may not exceed the aggregate amount of the insurer’s insured losses for such period. . . .”Sec. 103(g)(2)

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How Is Reinsurance Different From Insurance?

Not subject to form and rate regulationNo mandatory availabilityNo (direct) TRIA compensationConcentration of risk (e.g., excess of loss)Two-year tail (risks attaching)Less control over risksLess detailed data

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Facultative Easier Than Treaty to Provide

More control More data

Shorter tail

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How Big Can It Be?

NuclearRadioactiveBiologicalChemicalSwarm attacksSerial attacks

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Reporting

PremiumAM BestSurveysClaims

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Premium

Treasury is authorized to use the NAIC to collect information on terrorism risk insurance premium rates

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A.M. Best Supplemental Rating QuestionnaireA.M. Best requires two rating questionnaires to be filled out by P&C companies>A background questionnaire that asks for basic data >The Supplemental Rating Questionnaire (SRQ)

The SRQ asks for information that is not typically available in a company’s financial statements, e.g.,>Operations>Policy coverage>Catastrophe exposures and management>Reinsurance programs

The SRQ typically is submitted by April 1st of each year

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September 13, 2004

Terrorism Section of the SRQ

A.M. Best has added a 4-question Terrorism Section to the SRQ this year.• Question 41 – Terrorism Exposure Management• Questions 42-44 – Quantification of Potential LossVery qualitative – numbers are not used in A.M. Best’s capital model

The ability to answer these questions is at least as important as the actual answers you provide.

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Modeling Analysis You Will Need

Aggregate multiline exposures – 42-44Identify “at risk” locations – 42Maximum possible loss – 42 and 43Modeled losses by event (weapon)

scenario – 44Geocoding and radius analysis - 44

No probabilistic analysis is needed

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Completing the SRQ

If you have questions, contact your A.M. Best analystThis is a research process for A.M. BestNo quantitative benchmarks yetA.M. Best wants to see that management is doing the necessary analysisCan your company measure its exposure?

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Treasury Surveys

Policyholder survey – representative sampleInsurer survey – representative sampleReinsurer survey – all US reinsurers

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TRIP Claims ProcessEffective July 29, 2004Early notification – when losses including IBNR exceed 50% of deductibleInitial certification of loss – after paid losses exceed deducibleSupplementary certification of lossLoss bordereauCompliance certification

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TRIA Status

TRIA expires 12/31/2005

Mandatoryavailability

Governmentreinsurance

Certified actsof terrorism

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Mandatory availability

Treasury announced that it is extending the make available requirement of TRIA through 2005On most US commercial P&C policies incepting through 12/31/2005, the insurer is required to offer coverage for losses from certified acts of terrorismAlthough Treasury has not officially stated how the make available requirement applies to policies incepting before 12/31/2005 but expiring after 12/31/2005, the common assumption is that coverage for acts of terrorism happening after 12/31/2005 can be excludedISO has filed conditional terrorism endorsements to be effective 1/1/2006 if TRIA is not renewed

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Government reinsurance

Under TRIA, the federal government reinsures (for no premium) most P&C insurers for 90% of losses from terrorism in excess of a retentionIn 2005 the retention increases to 15% of the insurer’s 2004 applicable direct earned premiumThere is no federal reinsurance for losses from acts of terrorism after 12/31/2005

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Certified Acts of Terrorism

TRIA applies only to acts of terrorism committed on behalf of a foreign person or foreign interest, generally in the US, with aggregate P&C insurance losses exceeding $5 millionAn act of terrorism is covered under TRIA only if it is certified as such by the Secretary of the Treasury, with no judicial review permittedTreasury does not appear to have the authority to certify an act of terrorism that happens after 12/31/2005

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ImplicationsTRIA extension will not be resolved before the 2005 renewal season begins, and may not be resolved before 1/1 renewalsThe expiration of TRIA affects risks attaching reinsurance treaties incepting after 1/1/2004 and losses occurring treaties incepting after 1/1/2005Treaties and policies that refer to “certified acts of terrorism”, either for coverage or exclusions, and that cover losses in 2006 should contain conditional language in the event TRIA is not extendedCedants with policies in lines where terrorism can be excluded (most property and liability) will have less need for terrorism reinsurance after 1/1/2005Cedants with policies in lines where terrorism cannot be excluded (workers comp, fire following property, states rejecting the ISO conditional terrorism exclusions) will have greater need for terrorism reinsurance after 1/1/2005

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September 13, 2004

Christopher YaureRisk Manager, Terrorism and Emerging Risk

GE Insurance Solutions215-255-6746

1818 Market Street, Suite 2600Philadelphia, PA 19103

Christopher.yaure@ge.com