Harry Shuford, Ph.D. Jonathan Evans, FCAS, MAAA Modeling the Solvency Impact of TRIA on the Workers Compensation Insurance Industry Harry Shuford, Ph.D. Jonathan Evans, FCAS, MAAA

Basic Features of TRIA Covers terrorist attacks of foreign origin Limits total P&L commercial lines direct loss liability to $100b Reinsurance for 90% of annual terrorism losses above a certain percentage (7%, 10%, 15% in 2003, 2004, 2005, respectively) of total commercial lines direct premium within total liability limit.

Solvency Statistics of Interest (with TRIA vs without TRIA) Market share insolvent Number of insurers insolvent Market share impaired (surplus < 1/3 net premium) Number of insurers impaired Expected policyholder deficit (max guarantee fund loss) Total recapitalization cost Years to pay back guarantee fund at 2% assessment

Modeling Objective Transform a loss exceedance curve into distribution curves for industry insolvency statistics.

Available Model Inputs National and Statewide (16 states) workers compensation loss exceedance curves for terrorist attacks produced by EQECAT Financial data (surplus, premium by line of business by state) from Thomson Financial

Modeling Challenges Statewide loss exceedance curves with no more specific geographical detail Insurer premiums by state by line of business with no more specific geographical detail Consistent total surplus available at group level, not company level Reinsurance and alternative risk transfer (ART) details unavailable and impossibly complex to model Model must be relatively simple, minimal resources for development and maintenance

Model Assumptions Exactly 1 event in a year 28% loss reduction from absenteeism, etc. WC is 25% of all commercial loss Losses allocated by group DWP market share Surplus is reduced by loss amount Retention is 10% of group commerical DWP 10% copayment $100b total liability limit Insolvency is 0 group surplus Impairment is group surplus < 1/3 group P&C NWP

Uneven Loss Allocation, Reinsurance, ARTs Proportional most unrealistic model assumption Causes insolvency impact on individual insurers and TRIA recoveries to be underestimated However, insolvency underestimation somewhat offset since reinsurance and ARTs not modeled

Conclusions Model demonstrates TRIA working as intended Extreme terrorist events, as contemplated by catastrophe models, could effectively bankrupt the US workers compensation insurance industry (and similarly the entire P&L insurance industry) without TRIA TRIA generally does not respond to small and medium events TRIA provides greater solvency protection to small regional insurers and state funds