© 2007 towers perrin may 7, 2007 ed hochberg terrorism reinsurance yesterday and today

May 7, 2007

Ed Hochberg

© 2007 Towers Perrin

TERRORISM REINSURANCE YESTERDAY AND TODAY

2© 2007 Towers Perrin

TERRORISM REINSURANCE

AGENDA:

History of Terrorism Reinsurance USA Europe – UK, France, Germany, Spain

Terrorism Reinsurance Today

Major Categories of Coverage

Major Elements Influencing Pricing and Terms

Emerging Issues


History of Terrorism Reinsurance - USA

Pre-September 11, 2001

(Re)insurance functions well when individual losses are random, uncorrelated and not enormous since risks can be spread over a large population

Terrorism losses pre-9/11were generally small, random and uncorrelated, so private (re)insurance markets were able to cover terrorism risk effectively and without fanfare

Insurance against terrorism risk was included in most commercial lines without extra premium

Stand-alone terrorism market was mainly limited to providing solutions for property owners and trade/investment exposures in countries with elevated terrorism risk (UK, Colombia, Sri Lanka, etc.)



Post-September 11, 2001

The perceived and real potential for enormous and/or a sustained run of smaller correlated terrorism losses meant risk spreading would no longer work as smoothly The correlation of terrorism risk exists on two levels, (1)

multiple lines affected instantaneously and (2) several catastrophic attacks can occur simultaneously

High risk of private (re)insurer insolvency Policyholders suffering losses might not be paid

coverage due under policies

The inability of (re)insurance industry to predict number, scale, frequency or correlation of future terror attacks resulted in widespread imposition of exclusion clauses



Post-September 11, 2001 (continued)

Demand: Commercial insurance customers wanted and needed terror coverage

Supply: Insurers were reluctant to provide terror coverage

Outcome: Urgent need for a solution

After much private and public research and debate, the only immediate way to ensure compensation of terrorism victims was through governmental guarantees Enter Terrorism Risk Insurance Act (TRIA)



Terrorism Risk Insurance Act (TRIA)

Passed by Congress November 19, 2002, signed into law November 26, 2002, to expire December 31, 2005

Acknowledgement by Government that terror risk is too unpredictable, with too severe a loss potential, for (re)insurance industry to safely handle

Provides federal backstop for certain acts of terrorism via temporary federal program for sharing risk of loss from foreign terrorist attacks with insurance industry

Temporary measure to allow time for private markets to stabilize, resume pricing of such insurance and build capacity to absorb future losses while preserving State insurance regulation and consumer protection



Terrorism Risk Insurance Extension Act (TRIEA)

Approved by Congress on December 17, 2005 to expire December 31, 2007 – may not renew

Under the Act(s) carriers are required to: Offer terrorism coverage Retain a (staggering) increasing portion of their prior

year’s DEP for covered lines (20% in 2007) Carry increasing co-participations (15% in 2007)

Growing number of private industry products However, private (re)insurance industry continues to

work with the federal government and policyholders to establish an on-going, viable private-public solution



Alternatives to TRIA or further extensions thereof:

The federal government as a retrocessionaire or a finite reinsurer?

Federal securitization of terrorism loss options?

No role for federal government?

Capital markets – bonds/securitizations?

On-going public/private partnership? Mutual insurance organization similar to UK?


History of Terrorism Reinsurance – UK


1993: Government-backed terrorism reinsurance pool, “Pool Re”, established in response to property losses from bombings by IRA

Mutual insurance organization

HM Treasury acts as reinsurer of last resort

Participating (re)insurers must be properly authorized

(Re)insurer coverage by/participation in pool optional

Coverage generally limited to property policies

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History of Terrorism Reinsurance - UK

Post-September 11, 2001 Coverage expanded to include more risks (e.g., NBC) Premiums, generally based on location and amount of

coverage purchased, doubled due to more participation Annual and per event losses of (re)insurers capped Retentions based on degree of pool participation Industry-wide retentions escalate over time

No surcharge after losses to Pool Re Facets of Pool Re encouraging competition:

Max deductible raised to encourage private reinsurer re-entry into market

Insurers free to set premiums for underlying policies

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History of Terrorism Reinsurance - France

Pre-September 11, 2001 France suffered several waves of deadly terrorist attacks

during the 1980s and 1990s French law does not allow commercial property insurers to

dissociate terrorism coverage from commercial property September 9, 1986: French law obligates insurers to

provide terrorism coverage up to the overall limits of a property policy Post September 11, 2001, in light of the perceived

increased in terrorism risk, many insurers stopped covering terrorism, which meant they had to stop covering commercial property

The French government urgently need to find a solution

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History of Terrorism Reinsurance - France


December 10, 2001: France established temporary terrorism reinsurance pool, “GAREAT”

All property owners must purchase coverage

All insurers must join pool

Premiums set on basis of amount of coverage purchased – rates don’t vary by industry or location

Insurers bear initial losses, private reinsurance bears middle layers of loss, government bears catastrophic losses (without cap)

Government shares in premiums

Extended - in effect until December 31, 2007

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History of Terrorism Reinsurance - Germany


Insurance against terrorism risk included in most commercial lines without extra premium

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History of Terrorism Reinsurance - Germany


September 3, 2002: Germany established temporary terrorism reinsurance pool, “Extremus AG”

Coverage optional


Insurers bear initial losses, private reinsurance bears middle layers of loss, government bears catastrophic losses (with cap)

Government shares in premiums

Extended - in effect until December 31, 2007

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History of Terrorism Reinsurance - Spain


1941-1954 (During Spanish Civil War): State established permanent insurance pool, “Consorcio de Compensacion de Seguros”

Covers natural disaster and terrorism losses

— Property damage only

Integrated into policies issued by private insurers that collect premiums on Consorcio’s behalf

Mandatory insurer participation


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History of Terrorism Reinsurance - Spain


Coverage against complete range of risks expanded to include business interruption

Spain’s pool paid losses from the March 11, 2004 bombings of several train stations in Madrid

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Terrorism Reinsurance Today The market has come a long way since 2001

Many reinsurers in London, Bermuda, and Continental Europe provide terrorism cover on some basis

However, the market for terrorism reinsurance is estimated to have only approximately $6 to $8 billion in global capacity and only $1 to $2 billion for NBCR1

This compares to estimated potential losses in excess of $100 billion

Also by way of comparison, the global property catastrophe market, which excludes terrorism, is in excess of $120 billion of capacity

1 Based upon the testimony of Christopher Nassetta, CEO of Host Hotels and Resorts, on behalf of the Coalition to Insure Against Terrorism, to the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises and the Subcommittee on Oversights and Investigations of the House Committee on Financial Services on September 27, 2006.

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Major Categories of Coverage Property – TRIEA (Certified) and Non-Certified

Property – Stand-alone

Workers’ Compensation/Personal Accident

Other and Miscellaneous Exposures

Personal lines

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Property – TRIEA (Certified) and Non-Certified

Capacity: Substantial, in the hundreds of millions

Markets: Primarily London and Bermuda for stand-alone cover

Sometimes “thrown in” on mainframe treaties, depending upon the nature of the exposure (e.g. “main street” businesses outside of major metro areas), although in this case NBCR is not typically included

Sometimes terrorism is excluded in mainframe treaties, but coverage for the “fire following” exposure is provided

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Property – Stand-Alone

There have been treaties placed for specific terrorism insurance (outside of TRIEA)

Such treaties tend to be E&S situations – trophy properties, etc.

Capacity: More restricted since these tend to be higher risk situations involving somewhat broader cover - tend to be more “clashy” Many entities who reinsure this exposure write it

directly

Markets: Dominated by London, Bermuda, and Berkshire

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Workers’ Compensation/Personal Accident

Issues similar to TRIEA Property

Issues revolve around PML measurement (e.g. how many employees/people are actually in a location at a single time?)

Capacity: Relatively plentiful for non-CBI and non-NBCR exposures

Markets: London market tends to lead in this space

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Other and Miscellaneous Exposures

Aviation – For US carriers, terrorism is presently covered by the Department of Transportation Hull – Aviation War, which is typically reinsured in

the marine market Passenger and Third Parties – Excluded with war

risk via AVN 48, with a “write back” via AVN 52

Marine – typically handled in the marine war market

Contingency, etc. – coverage is available, and is handled various ways…

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Personal Lines

Frequently “thrown in” on mainframe treaties Particularly true outside of CBI’s

Not perceived as a major exposure

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Major Elements Impacting Price and Terms New York, New York

Other CBI’s Outside of NY and other CBI’s, capacity is relatively

plentiful and inexpensive Analogous to peak zone exposures in property, but

without reliable modeling

NBCR Makes PML/RDS evaluation relatively difficult Potential range of exposure much bigger

Contingent Business Interruption

Viruses/Cyber Terror

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Emerging Issues Sunset of TRIEA –

What will the market look like after 12/31/07? More exposure? Even if TRIEA sunsets, what about the run-off?

What about “fire following”? What about workers’ comp?

Rating Agencies – Views are evolving Typically used if larger than property PML’s If rating agencies step up “concern”, it will spur

demand

© 2007 towers perrin may 7, 2007 ed hochberg terrorism reinsurance yesterday and today

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